Make it a Lowenstein

I recently finished reading Roger Lowenstein’s When Genius Failed. It makes a wonderful companion piece to Liar’s Poker, by Michael Lewis, a classic of modern finance lit.

When Genius Failed documents the implosion of the hedge fund known as Long Term Capital in 1997. Their demise, as it has turns out, is a sort of harbinger of what we face today. Defaults and deriviatives are mixing it up like Ali and Frazier- with the crowd is busily placing lots of side bets with under-funded bookies (I’m looking in your direction Ambac and MGIC). Many of the same players involved in that debacle are still around (it’s only been ten years). Still fictionalizing numbers, still making bonus, still shuffling paper to make it look like work, still believing they have the swingingest dicks.

Liar’s Poker takes us back to those ancient days, way, way back in the 80’s (that makes me feel so old), indeed to the very creation of, the very first mortgage backed secutities at Salomon Brothers. At it’s best it humorously describes the wanton destruction of customers capital by Quotron cowboys and might manage to leave you numb when you realize you, I and practically everyone we know may have entrusted our pensions and 401(k)’s to the Wall Street equivalent of chicken processors at a Tyson plant in Arkanasas.

In addition, Mr. Lowenstein has a very good article in last weekend’s NYT where he is allowed into the abbatoir to witness Moody’s make sausage, i.e. see first hand how mortgage backed paper gets rated before it is sold on from a bank or lender to us suckers investors.

So if you want to learn about the magic that happens everyday which converts a subrpime loan into a high grade investment vehicle (and I don’t mean SUV), you can’t do better.

If like me you can’t get your hands on enough material taking account of our current, seemingly overwhelming, economic predicament (in order to better understand what a mess this country is trying to ignore confronting), stay tuned. I am anxiously anticipating, and indeed have pre-ordered, Mr. Lowenstein’s (he’s one busy boy) new book, While America Aged, which is subtitled How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis and visits San Diego County, Californiato witness the unfolding of a sordid (but true!) tale of shady backroom dealing involving employee pensions and city budgets and might not be so unique. It comes out May 1.

Which gives me just enough time to finish Connie Bruck’s Predator’s Ball, the final volume in this bond(age) troika.

Bottom Line

Housing Panic features a letter written from one friend to another who was considering a house purchase. The result is a succinct summation of who, what, where, why, and how it all went wrong.

What’s generally not been reported is a story in itself, and it has all but been ignored by those who claim to be responsible for covering the news (because that’s their job?), and claim that business, crime, and politics are their beat.

As Richard Hirschhorn points out (below), it’s a story that has been been all but ignored- even, dare I say it, covered up.

The fourth estate exists to tell us when things are getting out of hand. When they don’t do their fucking job, then we all pay.

Steal Ben Stein’s money

… and it is perfectly legal!

Of course, your and my money is also being “absorbed” by an invisible force, one that magically shrinks dollars before we have a chance to spend them.

Amazing! The Fed, Inc.’s Benjy Bukkake really knows how to grind out notes on that FFT organ! [NYT]

“Positive Inflation Is Positively Theft
“Bernanke has a stated goal of theft. He disguises theft under a policy of favoring a 2% rate of inflation. Two percent sounds innocuous until you chart it out.”
[Chart][Mish]

—
“the perfect crime is the one that is legal.” -Richard Hirschhorn

The big cover-up

“The availability of bad mortgages distorted the market for homes by increasing demand. This distortion in demand artificially increased home prices, an increase that provided a smokescreen to the underlying unsound mortgages and a rosy story for the business desk to report. These market distortions cannot be understood by traditional financial analysis because they were predicated on unsound principles, and perpetuated outside the bounds of all normal lending models. Even if the press didn’t, the perps knew these mortgages were no good. The proof of this is how fast they repackaged them and got them off the books. After all, if they were good loans, why the bum’s rush to get rid of them?

“When a sun-glassed coke-head on a used car lot informs a customer (who may be a recent immigrant barely able to comprehend English), that the “good news” is that he has qualified for the special low rate of l6% on that lovely overpriced rust-bucket, we all know what that is about. But when you can no longer distinguish between that used car salesman and the heads of our largest banks; that is a sorry spectacle.

“How can we explain the financial media missing the biggest story of the century?” [Richard Hirschhorn]

Liar’s loans- up close and personal

“But there’s one piece of the mortgage-meltdown tale that virtually every article or television program dances around without ever quite confronting. It’s the simplest aspect of the crisis to understand and also the most troubling, because it’s not about complicated financial dealings and can’t be fixed with bailouts. It’s about an astounding breakdown of social norms.

“It’s the story of the liar’s loan.” [Slate]

Waxing nostalgic

Ah, the good old days of rapidly appreciating perceived equity.

Hat tip.

I did not know that

The Real Culprits?

The people really responsible for the housing boom and bust might just be those very type of people that attended a real estate or wealth building (i.e. “get rich quick”) seminar and decided that this is the way forward. [Minneapolis Star Part 1], [Minneapolis Star Part 2]

On his website, John T. Reed publishes a long list of some of the “no-money down” “cashback at closing” “other people’s money” etc. “real estate guru’s” (is “guru” an official title? can you get a diploma that actually says that from an accredited school?), some of whom might bear an awful lot of the responsibility for setting the fliptards and investards free amongst the mortgage brokers and realtards (who were in turn enabled by lenders and their “new paradigm”). Vince Lombardi couldn’t have designed a better play.

At any rate, You know who you are.

—
“If you look around for a sucker and can’t figure out who it is, then in fact the sucker is you.” -Anonymous

How is that working out fer ye?

Easy come, easy go::

Ambac‘s $1.66 billion loss for the three months ended March 31, announced yesterday, sent the shares tumbling 43 percent and sparked concerns that the company’s AAA credit rating isn’t as safe as investors thought. [Bloomberg]

Ambac in March sold $1.5 billion in stock and equity units after more than $5 billion of charges on its guarantees of mortgage-liked debt. [Bloomberg]

So to recap:capital was raised in March, and istantaneously evaporated. Good job!

But hold on, they say:

Ambac Says It Has No Liquidity Issues, Ratings Solid [Bloomberg]

I don’t care what you call it: hubris, grandiosity, self-deceived, or fraudulent… with this kind of confidence, you want these guys as your bond insurers! Because that’s what the market craves!

Not!

What is left for Ambac but a do-over?! Uh-oh:

But once again, let’s give Ambac the benefit of the doubt. Let’s assume that Ambac can raise $1.9 billion.
At Thursday’s close Ambac had a market cap of $1 billion and a closing price of $3.76. To raise $2 billion at these prices would cause a massive shareholder dilution making each share worth about 1/3 what it is worth today. That would make each share worth about $1.25. There are delisting rules at those prices.

Mish explains it all fer ye in Nothing Left To Lose At Ambac.

—

Long, Downward Slide
Paco‘s Paragraph o’ Da Day is care of Market-Ticker:

Part of this is unfortunately that people have become conditioned to “Vote For A Living” via entitlements, but what those who are doing so don’t realize is that this isn’t a zero-sum game – its a negative amortization game for the voter, in that these promises can’t possibly be kept and what’s worse, the promise and its “attempted” fulfillment winds up picking your pocket in the process.

It doesn’t seem to matter who gets elected, the same behind- the- scenes Bozo’s who have always run things are still, well, running things, making themselves and their rich friends richer in the process, and the poor (i.e. middle class) continue to get pick-pocketed.

—
It was a stroke of brilliance. Wall Street created a way for ordinary people to buy things they do not need, with money they do not have, in order to impress people they do not know.

The Fed, Inc. as pawn shop?

Yeah, pretty much. Since banks are so wary of lending to one another, as evidenced by the increasing-daily spread between LIBOR and the FFT, they’d rather pawn off their marked-to-model junk securities to the fed than go back to their own short term lending. [Mish at gloabaleconomicanalysis]

“Regardless of what the Fed is thinking, a rational person would conclude that banks and broker dealers will pawn off as much garbage on the Fed as the Fed is willing to take. And so the Fed’s own balance sheet is ballooning with garbage.

“The latest H.4.1 Report, Factors Affecting Reserve Balances shows that of the $867 billion in reserve bank credit that is normally treasury bills and notes, approximately $319 billion has been swapped out.

“Today, another $75 billion will be added to the swap-o-rama total. That will make the Fed’s balance sheet look something like this: $394 Billion Garbage to $473 Billion Treasuries. One additional swap will make the Fed’s balance sheet more than 50% garbage.

“Is this supposed to restore confidence in the Fed? In the banking system? In the US dollar? Is this supposed to make institutions want to lend? Is the fact that the Fed is holding garbage instead of the banks supposed to make the securities more valuable?