Credit Crisis 101

It is difficult to get a man to understand something when his salary depends upon his not understanding it.  – Upton Sinclair

The following link is worth the time if you want to know what’s going on financially in layman’s terms.

Terry Gross NPR interview with Michael Greenberger of the University of Maryland
http://www.npr.org/templates/story/story.php?storyId=89338743

Highlights

a. Prof. Greenberger compared the major issue right now to banks placing bets on a basketball game and then booking the winnings as assets, even though the game hadn’t even been played yet.

b. Credit Default Swaps are technically insurance but specifically misidentified as NOT insurance to avoid State regulations.  Now I understand why Paulson announced a “federalization” of insurance regulation as part of the “reform” to prevent this in the future.  Sounds like the same tactics as the EPA disallowing California’s regulation of pollution.

c. Problems just starting because the same problems found in sub-prime mortgages also infect credit cards and other debts. Current problem may be the “canary in the coal mine signally and greater problem”.

d. These bets, not only uncertain in their outcome, are not even known because the financial firms are way behind on paperwork. To paraphrase Professor Greenberger, it’s like a bookie taking hundreds of bets but not writing any of them down. Fun huh.

e.  Phil Gramm seems to be at the root of all legislative failures, basically removing regulations, in the late 1990’s that paved the way for these problems (now John McCain’s chief economic advisor’s)

Much much more of course, enjoy and be prepared.

When do the honest become the blind?

Paul O’Neill, the former truth speaking Secretary of the Treasury, had a good analogy to explan why the subprime issue has spread to the rest of the economy (h/t my dad).

To paraphrase: imagine you had ten bottled waters; one of which contained poison.  Without knowing which one, would you take a drink of any?

This would be a good analogy were sub-prime mortgages truly the only issue.  In fact, O’Neill is blind to the reality of much wider problems.

A more accurate analogy would go as follows:

1.  Imagine you have ten bottle waters and you are told by the Federal Water Reserve that one contains poison.

2.  After watching someone pick one of the bottled waters and then promptly die, you then observe another person pick a different bottled water and then promptly die as well.

3.  Would you drink from any other bottles?

All houses are infected with the poison of bubble prices.   Those in the sub-prime category were just the first to become insolvent and the only ones without a PR firm or lobbyists to defend them.

Buffet to the Rescue or Kicking Bond Insurers when they’re Down

Today, Warren Buffet offered to buy part of the business of the three big bond insurer’s books.   He wants the good part only, keeping with his value style of investing.

http://www.cnbc.com/id/23125353

Of course, they have already begun rejecting his offer but they won’t be able to for long.   Either through formal bankruptcy or these type of asset sales, Ambac, FGIC and MBIA don’t have enough funds to meet their insurance obligations. Buffet’s offer, while salting their already damaged egos, is only being rejected because they need a bail-out to remain ongoing businesses.

As Barry Ritholtz (http://bigpicture.typepad.com/) noted on CNBC 2/12, these companies are holding high quality Municipals that they insure as a hostage for the benefit of their toxic Mortgage paper.

If Mr. Buffet, or anyone else, can buy the good paper, these companies will cease to be going concerns as the write downs will continue in earnest. Telling him no just delays the inevitable.