Sunday, June 21, 2009

Papers, Dragons, Tigers, Scissors

1. Reasons To Be Cheerful

Speaking of blockheads, with or without Ian, on April 1, 2009, the US Federal Reserve, the US Treasury, and the US Federal Deposit Insurance Corporation-- that's Ben, Tim, and Sheila-- issued yet another in their line of joint get-happy-feel-good-the-worst-is-over-make-a-wish communiques designed to put the greed back into the fear and greed economy. Like all previous, and subsequent, communiques, this one was designed to prove that Ben, Tim and Sheila were no ordinary Toms, Dicks, or Harrys-- that they, Ben, Tim, and Sheila, knew what to do, how to do it, and when to do it; that they, Ben, Tim, and Sheila, were from the government and they were here to help us.

So standing shoulder to shoulder, the three proclaimed that henceforth now and forever April 1 would no longer be known as "April Fool's Day," but rather "Enlightened Responsible Patriotic Investors' Day," or for the sake of brevity, simply "April Bigger Fool's Day." April 1 would receive an upgrade, a "retention bonus' of a sorts, from a day of small pranks and minor deceptions to a day of gigantic tricks and spectacular deceptions, ranking second only to July 4th in the hierarchy of national holidays, and the refuge of scoundrels.

The announcement was hardly unexpected. More accurately, the announcement was overdue. After the creation of the Primary Dealers' Credit Facility, Maiden Lane LLC 1 and 2, the AIG Residential Mortgage Backed Securities Facility, the Term Security Credit Facility, the Asset Backed Commercial Paper Facility, the Money Market Investment Funding Facility, the Commercial Paper Funding Facility, Maiden Lane LLC 3 [the AIG Collateralized Debt Obligation LLC], the Term Asset Loan Facility...

After the Treasury's creation of the Troubled Asset Relief Program made up of the Capital Purchase Prgram, the Systemically Significangt Financial Institute Program [also known as the AIG program], the Targeted Investment Program, the Automotive Industry Funding Program, the Citigroup Asset Guarantee Program, the Homeowner Affordability and Solvency Program, the Credit for Small Business Program, the Automotive Supplier Support Program, the Capital Assistance Program, and the feather in this floppy-brimmed hat, the Public-Private Investment Program supplemented by the Legacy Loan Program...

After the FDIC's Temporary Liquidity Guarantee Program, and finally, after the ultimate, the program of programs-- the FDIC's quarantee of debt issued by the PPIPs participating in the FRB/UST TARP, TALF, TSCF, ABCPF, CPFF, Maiden Lane, LLP, programs, purchasing the troubled asset, legacy loan, asset backed, special investment vehicles of the banks so that every $1 of equity capital provided by private investors, matched of course by the public dollars, could be leveraged into $6, $12 of publicly guraranteed debt paid to the banks for taking over assets for which there was no market.

After all that, after that blizzard of acronym's that when read aloud sounded like the work of Gertrude Stein as interpreted by the Department of Defense, how else to celebrate the efforts of the few who have taken so much from so many except with a holiday? How else for the Fed, the Treasury, the FDIC to honor themselves as the biggest of the bigger fools? Happy Fools Days were here again, or just around the corner. For sure.

The government's show of holiday spirit was quickly embraced by those non-governmental bodies of standards, measures, weights, and thumbed scales. The Financial Accounting Standards Board revised its once lauded now dreaded mark-to-market rule to allow banks to list their SIVs, CDOs, CLOs, CMOs, ABSs, CMBSs, at notional, face, values rather than market values, thereby avoiding the irritating, exasperating, embarrassing, and troubling aspect of troubled assets-- that is the fact that there was no market, there was no need, no use, for the securities, thus there was no exchange, there was no value.

Bankers, fund managers, financial analysts, breathed a collective sigh of relief, offset of course by a sudden gasp from the bankers, fund managers, financial analysits, who were counterparties with counterpositions in these very same SIVs, CDOs, CLOs. CMOs, ABSs, CMBSs.

In fact, some bankers, fund managers, financial analysts didn't know whetere to breathe in or out, being at one and the same time on the same and different debt instruments, party and counter-party, with positions and counter-positions. Hyperventilation appeared as the only rational option.

The decision of the FASB was not likely to provide much relief to the financial institutions on either side of the debt instruments. Rather, the revised standard merely codifies what has been the market truth for over a year. The relief that the banks will obtain will be, like the assets carried on their books, impaired, and will in fact, work in oppositions to the clearing of troubled assets from the banks' balance sheets; will hinder the liquidation of illiquid instruments.

These debt vehicles are, first and foremost, derivatives, representing not value, but the image of the value of an underlying asset or pool of assets; representing the image of the exchange of property. That image of implied, imputed congealed substantive value of a parcel, a unit of ownership, of property, is debt. That image, that reflection that is a claim on value, allows debt to pose, represent, substitute, as value in the markets, that allows debt to be considered an asset.

All of these sophisticated, complicated, structured, tranched, layered, tiered investments exist only to be traded. Market velocity, the turnover of these instruments either through direct sale and purchase, or through further collateralization, functioning as security for other similar vehicles is the only mechanism for the image of value to achieve even a Mayfly's moment of earthly existence.

These are, after all, collateralized instruments, with terms, restrictions, obligations, covenants attached requiring the posting of specific, and increased, amounts of actual property, should the market value of the instrument, or the ratio of the face amount of the debt instrument to the valuation of the underlying assets, deteriorated. In establishing its non-mark-to-market rule, the FASB enshrined the dis-integration of asset from value and the impossibility of the reproduction of value.

Next: Part 2, China Moon

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