Saturday, March 15, 2008

Virtual Paper, Part 1

The markets are dead.-- credit strategist, Lehman Brothers.

1.(We're not that lucky)

Woozy and boozy in the waning days of the second four year term of the idiot son of an idiot father, that is to say George W. Bush as sired by Ronald Reagan, US capitalism staggered across the stage of global finance, looking and sounding like Britney Spears at the MTV music awards-- bumping into everything, knocking over food and drink, spraying blood and filth on those conga-lined up to feast, and swap more than spit, at the pig's trough called leverage. The biggest of the big bulls in the China shop, bulked up on steroids, growth hormones, and off balance sheet investment "vehicles," had changed, but not overnight, into a regular bear on the Chinese shopping network, and the Chinese shop floor.

Reeling under its weightless cargo of strips, tips, tranches, zeros, coupons, CDSs, CMOs, CDOs, CLOs, ABCPs, ARMs, SIVs -- in one word junk, but junk packaged in an infinite variety of ways, the bankers carioced their way through that wacked out Minny Mouseketeer's repertoire, beginning and ending the show with their favorite lyric: "Oops, I did it again."

Juiced and jacked, the whole gang, Merrill and Lynch, Bear and Stearns, Morgan and Chase, Citi and Corp, Northern Rock, CIBC and RBS and UBS and Credit Suisse and BNP and Paribas and Commerzbank had proclaimed themselves masters of the Enron universe, earning that right by their conjugal visits paid to Andy Fastow.

"Give us a place to sit, a keyboard, and a broadband connection, and we'll move the earth," they, these new asset-backed Archimedes had proclaimed just before falling flat on their faces; just before bouncing up again like a dead cat.

2. Appearance of the Problem

(Size does matter)

Headlines were made in June 2007 when hedge funds organized and spun off by Bear Stearns reported massive trading losses on their portfolios of mortgage backed securities. The headlines, however, like the hedge funds, were days late and dollars short.

In September 2006, US banks were reporting a marked slowdown in demand for housing loans. The reports were, as reports often are, less than thorough in describing the significance of the slowdown. Residential stakes account for one-third of US banks' nine trillion dollars in assets.

The US mortgage market, valued in 2006 at approximately 11 trillion dollars, containing 1 trillion dollars worth of sub-prime mortgages, had been tapped to collateralize the issuance of 2 trillion dollars worth of securities. The bankers, commercial and investment, ever cognizant of the need, not for compliance with any standards or requirements, but rather for the appearance of compliance, moved these financial instruments, these "conduits," these "vehicles" off their balance sheets into "arms length," "stand alone" status, thus preserving, with a wink and a nod to the heroes of leverages past, Milken, Boesky, Regan, Keating, Knapp, Leeson, Lay, Skilling, and of course, St. Andrew the Martyr, their "compliance" with Tier 1 capital requirements.

Standards, requirements, money, capital requires all these to function, to form a "base" for exchange, and just as it does with money, capitalism succeeds in debasing all. Debasement of financial instruments is part of the devaluation of all values inherent, necessary to the maintenance and advancement of decrepit capitalism.

March 15, 2008 S.Artesian

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