Monday, August 6, 2007

Crocodiles Wept

As the title of this blog implies, things are now moving quickly in the debt world - but in the opposite direction than was previously the case. "Liquidity" - that incredibly misapplied term used to confuse the uninformed about what is simply debt - is drying up faster than a crocodile's tear.

Witness the incredible plunge in the fortunes of American Home Mortgage, which went from near an all-time high of $35 per share in February to bankrupt and worthless today. The company specialized in Alt-A mortgages, the next step up from sub-prime and listed some of the world's largest banks as its main unsecured creditors (Deutsche, JP Morgan, Bank of America, et al), who are on the hook for unspecified amounts, out of a total of $19 billion in debt. Given the nature of the mortgage business and banking in general, there are going to be some serious impairment charges coming up soon for lots of such creditors.

The loss of some 7.000 jobs at AHM in one fell swoop is also characteristic of how suddenly things are happening in our "modern" finance era. When the stool of "high liquidity" is kicked from underneath, there is nothing to hold up the corporate structure but thin air - and gravity is a harsh mistress to the overextended. Finance job security is notoriously cyclical, despite what seemed to be the case in the last few years. "Easy come, easy go - so save for the rainy day because it always rains in the end", is how an aged friend in the business used to put it and he knew darn well what he was talking about: he had started out as lowly office boy in a brokerage office. In August 1929.

The buzz saw is being applied to other, more august companies' shares: Bear Stearns has plunged from $170 to $100, Goldman Sachs from $230 to $175, JP Morgan from $53 to $43, Merrill Lynch from $95 to $70. Yes, they are rebounding today... but is it because their prospects are suddenly much brighter, or is it because the dead crocs are bouncing?

To answer that, answer this simple question: Say you are Archie, the chairman of the investment committee of the Upper Navonia State Teacher's Pension Fund, assets under management $3 billion, of which you had previously agreed to place $300 million in "alternative" investments like hedge funds and such. Your salesman from Upper Bracket and Co. calls you and recommends you add to your positions: "Such a GREAT opportunity, Archie!!" he says, with just a trace of anxiety in his well-trained pitch. "Well, yes Bob... that may be the case, but can you please first explain WHY we're down 12% on the original $300 mio? Just a contained situation, you say? Aha, well let's wait until the situation stops bleeding cash all over the place and THEN I'll put some more in, huh? I have pensioners and employees to answer to and they read the papers, too, Bob....Yeah let's do lunch next week...I'll call you."


  1. It kind of reminds me of what my Grandfather said of the Great Depression. Money just stopped moving.

    It seems that we're seeing non-price rationing in the market for mortgage and corporate debt. Seems like the banks are willing to lend money at attractive rates, but only to people who don't want loans.

  2. H,

    Down 300, up 200. Yes this saw tooth process reminds me of what happens when a person or system is in crisis...wild fluctuations with attempts to resolve something, or simply maneuverings to get into the least unfavorable position.

    I can see it...insiders saying...let's run this up on anyone who is still unsuspecting and then we'll dump it again so we can regain a little of what we lost on the way down.

    It must be both nerve wracking and exciting for some when they are at the peak of their own unbalanced game.

    Multiple sighs.


  3. Yeah, well so what for a bunch whining investment bankers that are wreaking havoc on the real trade economy....Those that play by the sword, get stucketh....Stupid credit bubbles always end in disaster...This is why the Federal Reserve must be dissolved immediately....IMO.