Just for fun, I though I'd hit you with a couple of archival posts this week. Going back and looking over the old "Watchtower" site can be great fun, especially with the assistance of 20/20 hindsight.
But there's also plenty to learn. Let's start with this little gem from almost a year ago. In it I discuss the circumstances that turned regular old me into The Turd. More importantly, this post contains a link to a two-segment "60 Minutes" interview of Michael Lewis, the author of "The Big Short".
First of all, if you haven't yet read "The Big Short", I strongly encourage you to do so. You should also take the time to watch both parts of the full, 23-minute video, too. Comparisons to today are valid. By 2007, 99.9% of "financial experts" thought that the status quo would continue, that AAA-rated MBS were solid investments and that selling credit default swaps was easy money. Oops. Fast forward to today. What percentage of "financial experts" think that the status quo will continue, that dollar hegemony will last forever and that the debt and deficits can be managed indefinitely? Additionally, what percentage fails or neglects to see that none of the excess from 2007 has been wrung out? The banks are still insolvent. Many are indeed worse off than they were then. Just like Michael Burry, one day soon we will all be proven prescient. Facts are facts and truth is truth. Just be patient.
Here's the link to the original but it's also c&p'd below.
SUNDAY, NOVEMBER 28, 2010
The Tipping Point
After twenty years as a participant in the financial services "game", for some reason I began to feel unease with my profession in 2006. The feeling grew through 2008 as the entire world nearly melted down. It became a queasiness in 2009 as I watched Wall Street attempt to spin and deceive it's way back to credibility. It coalesced on 3/14/10 as I watched the following interview. If you have some time today, and if you can endure the Lipitor commercials that precede them, please take time to watch both parts. If you're near a bookstore, pick up a copy of "The Big Short", too. It's a great read.
For me, all the dots finally connected and the mental image I'd created of an "industry" that was, in the end, honest and beneficial came crashing down. The examples of corruption are nearly endless and I'll examine more in the days to come but, for now, let's just choose one, in ten simple steps.
1) Major TBTF bank insolvent due to overwhelming amount of underperforming and/or worthless debt.
2) Congress pressures FASB to change accounting standards thereby allowing said bank to reclassify worthless securities and loans as having some notional value.
3) Bank allowed to borrow unlimited/infinite amount of money at Fed discount window at 0.0025%.
4) Bank takes borrowed dollars and buys US Treasury bonds paying 3.0%.
5) Bank keeps spread from risk-less transaction and books this as profit.
6) Bank employees pay themselves huge bonuses commensurate with their brilliant minds.
7) CNBS begins non-stop parade of sell-side analysts who exclaim that the bank common shares are "undervalued" based upon cash flow and earnings.
8) Unwitting investors bid up shares of the still insolvent bank, perpetuating the illusion of financial health.
9) Bank "insiders" unload millions of personal shares and options to duped public.
10) Responsibility and wealth transferred. Bank executives, management and traders wealth is preserved at the expense (and loss) of the average, regular, hard-working investor.
Oh, and along the way, the Fed/Treasury benefited, too. The insolvent bank participated in a stealth form of quantitative easing. By using borrowed money from the Fed to buy treasuries, the TBTF banks create a synthetic demand for those bonds and notes, thereby keeping rates artificially low, consistent with stated Fed policy. Pretty slick, huh?
I'm sorry to report that, in the year since I wrote that, nothing has changed. The insolvent, TBTF banks continue to borrow at 0% and use the proceeds to prop up the treasury market. They then book the risk-free spread as "profit" and celebrate their great "earnings" with lavish bonuses. Only in America...land of opportunity.
p.s. A friend sent along this link. It might be helpful in your "feast planning".