Tuesday, July 15, 2008
"When the history of this era is written, what will it say about the financial crisis of 2008? ... Contributing to the gloom over the financial sector is something artificial--mark-to-market accounting. The rules say that banks have to value derivatives like swaps and mortgage securities at their current market prices. The rules make no provision for what to do when there is no market. ... These paper writedowns of mortgage-related assets have real consequences. ... The question here and now is how investors can be on the winning side of history. My answer is to buy some of the debt and preferred issues of high-quality, too-big-too-fail financial institutions that are being forced to raise capital to comply with the accounting rules. When was the last time AA- and A-rated institutions had to pay 8% for capital? Would you believe the early 1990s?", my emphasis, Richard Lehman (RL) at Forbes, 30 June 2008.
"Bond-fund king Bill Gross called on the Democratic presidential candidate to double the federal budget deficit to $1 trillion by fiscal 2011 if he becomes president. 'The economy will need an additional jolt of $500 billion or so of government spending real quick,' wrote Mr. Gross, manager of the $128.8 billion-in-assets Pimco Total Return mutual fund, in a letter to 'President' Obama posted on Pimco's Web site. ... Gross noted that this year's budget deficit should be about $500 billion. By doubling that to $1 trillion in three years, that would put the deficit at about 6% of gross domestic product, 'a mere pittance by Japanese standards.' ... 'While the Republicans will blame you for years and label you "Trillion Dollar Obama" in future campaigns, there is in fact not much that you or any other President can do,' Mr. Gross said. 'You've inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years',"my emphasis, WSJ, 1 July 2008.
RL shows he is a fool. He will not buy paper which has "no market". No, RL wants to buy TBTF institution paper on the premise that as TBTFs, RL is buying a "call option" on an expected Fed TBTF bailout like that which facilitated JPMorgan's Bear Stearns purchase. I wouldn't buy Citigroup 8.5% series F perpetual preferreds RL recommends. What accounting problem is RL talking about? If the paper in question is worth more than say Citigroup has it on the books for, someone has a good opportunity. RL, Vikram Pandit (VP) and say Robert Rubin and Robert Steel can each resign his position and form a vulture fund to buy the paper in question and clean up. I'm sure Steve Schwartzman will want a piece of this action too. With thousands of recent Citigroup layoffs, VP's vulture fund could easily assemble a team to create and sell the fund. Hey, there's such a great opportunity, I expect dozens of KPMG partners to want to work for the fund. I wonder if James Suglia called VP already to get the ball rolling. I won't hold my breath.
I am in partial agreement with Gross. There is little the President can do. Imagine, 30-year Treasury bonds yield 4.53% as I write. People still buy them?