Send in the clowns

[Joanne98]

….the title of the Stephen Sondheim song from “A Little Nightmusic” has always been a favorite of TB’s for it’s imagery and sung beautifully by Judy Collins. The play itself was a play on Mozart’s “Eine Kleine Nachtmusick,” translated it means “A little Serenade,” but Sondheim played of the literal translation. See what taking German did for TB? Jawohl! After listening to two days of testimony by Bernanke and Paulson (one by Cox who was rendered redundant due to is idolization of Cheney’s neo-con objectives), TB couldn’t help but think that in arguably the worst US and global financial crisis in history…certainly in magnitude if not effect, of these lyrics from the song:

Don’t you love farce?
My fault I fear.
I thought that you’d want what I want.
Sorry, my dear.
But where are the clowns?
Quick, send in the clowns.
Don’t bother, they’re here.

That is the most accurate description of the situation. As TB has frequently remarked, it is a true “perfect storm”…even if it is a cliche…speaking of which “drilling down” has now become one along with the even cruder “bring a bazooka.” Since TB’s forecast of what is to be in the markets this week has been off…albeit on at some point in the session most days…he spent the day reading volumes of papers on what is wrong.

TB knows what is wrong…capitalism has gone awry…just as it did 80 or so years ago…and since capitalism relies on greed (why else would anyone risk their money and spend valuable time if it were otherwise?)…and the blame lies at the feet of Ayn Rand and her disciples including Milton Friedman, and the neo-cons. What kind of moron believes that powerful people with money can put aside their greed and for the common good and think about the long run, rather than short run gains. Look at the robber barons and you have the answer. This led to an enormous wealth gap and if you are a true capitalist doesn’t putting money in the pockets of those who work for you mean more sales of your product? Not at Walmart for sure who even brags that their employees are their customer base. So unless we are to subscribe to Ivan Boesky’s “greed is good” theory…in the end though was it…or for those on Wall Street who are now seeing their fortunes decimated…much more so than in the dotcom bust.

Robber baron’s aside, one need only to look at corporate America’s fighting environmental issues for years and now suddenly becoming ‘green.’ Think if they had thought of the long run…instead the CEO’s who have gone from 10x or less the wages of the average employee when TB started in this business 36 years ago to 400 or 500 times or even more. Furthermore, as the stock tanks the company falters and they are out the door they have their platinum parachute to protect them while investors, employees, etc. all get punished for their sins.

TB read and article form Bloomberg from 2006 that explained how we got here. Starting in 2003, derivatives began to move to the top spot and “quants” were hired at two to three times what corporate traders were paid as Wall Street went from commission and trading driven to product driven. Also in 2003, the SEC made the decision to allow only the big five firms (thankfully) to expand their leverage to 40x instead of the regulatory 11x…which is really a joke as they drive it down into compliance at the end of each quarter. Now, with three of the big five gone and two having been made banks which do not allow that latitude…other than JPM which is running 50x…how do they do that??? What happened to Lehman is illustrative here and though TB has commented on credit default swaps it is important to know that there is no such thing as a “hedged” CDS position…unless they were to enter into the offsetting trade with the same counterparty. This plagued Bear Stearns also as the swaps just pile up on one another until the hedge becomes meaningless…except in value at risk (VaR) models that are used by everyone thus further increasing the chances of disaster. So Wall Streets derivatives fees far offset the commission on securities sales something that had never happened in the past…and the worst part is there is no transparency…you have no idea who owns what. Not only that but the sheer size of the trades means that even a small percentage can be billions and when you are that highly leveraged and the floor falls out you get a double…triple?…whammy. The best guess is the leverage at the two remaining big five investment banks…oops, now commercial banks is 25x…more than double the regulatory limit for a bank…but rather than sell assets they are raising capital to reduce the leverage…last TB looked this also lowers earning per share which are already being decimated by those profitable derivatives becoming toxic waste…yet they need not be if only excessive leverage had not been employed…more greed. Even LTCM founder John Meriwether who learned the sins of 100x leverage is effectively out of business with his new, improved hedge fund JWM…at 40x and imploding…they learn nothing from experience.

Enough of this blather that is being hashed and rehashed and not understood by 99% of the populace, let alone that percentage of Congress. Especially the GOP who believes in free markets who says “let them fail…so we will suffer a little pain but then things will go back to normal.” Not only is that statement inane but it forgets that there is a difference between not over-regulating and benign neglect and a cancer. By eliminating Glass-Steagall…the brainchild of Sen. Phil Gramm…who along with his wife Wendy (director and on the audit committee of Enron), believe that no regulation is the best regulation and then he had the audacity to refer to the American people as a “nation of whiners.”

One of TB’s wife’s favorite TV shows was The Gilmore Girls. Coincidentally, “his contractor for life” has a brother, a thinking economist (rather than those who have mentioned here who are really “political economists” and slant their views to support ‘free market goals’, and the wannabe Larry Kudlow who is delusional), who TB has followed for more than a decade, David Gilmore. David forwards his commentary to his ‘big’ brother and when he sees something he thinks TB would be interested in he forwards it to TB. Here are two from September 23rd, morning and evening:
“It’s an Archie Bunker World. Congress and Paulson Have an Agreement: Don’t Confuse Theater with Done Deals.” What he says makes sense. There is no way that the Administration would have proposed their audacious socialist plan unless the fix was in. Huh?, you say. Think about it, the more outlandish the proposal the more wiggle room you get to run it past the morons on the hill (TB’s words). So you hash out a deal…give them two days to show how they are not in the Administration’s pockets and then come up with a compromise that makes everyone look good…did Karl Rove have a hand in this? Think about it as it is so logical…and the stock market has been held hostage…but you saw yesterday that we had the least volatility in more than a week as people just refused to try to trade on the soundbites. Now, as David suggests, if an announcement is made, bingo! you have the makings of a rally…especially with the shortselling bans that expire Oct. 2 in place. TB loves this comment: “Congress doesn’t know the difference between a CDO and a UFO”, yet they will decide our fate…God Bless the United States of America.”…please! The point is don’t let fear make you a seller here…buyer? You decide but nothing feels worse than to sell at the bottom.
The second piece “Don’t Just Do Something, Stand there!” is an expression TB thought was his from decades ago but may have come from the pages of Mad Magazine. He refers to this as the mantra for the world’s central bankers…and then goes on to imply that whatever solution is proposed the devil is in the details as it always is. Don’t let your fears overcome your common sense. The upside to this is that if you take out all of your money and hide it…what can you do with if in fact the global financial system implodes?…or your Krugerrands which at $900 or so are a bit unwieldy for paying for groceries…unless you will take the change in…uh…dollars?
TB went to Berkeley last night for dinner with friends (Corso which if you want a restaurant that takes you to a trendy restaurant in Florence is the place for you), and he watched as a woman in an electric wheelchair, well into her 80’s or even 90’s transited the ramp to the bus…on the back of her chair was this bumper sticker: “Impeach the Son of a Bush”…a bit late for that, eh, what? Then he heard a not so funny comment that “Cheney will go down as the worst President in US history.” Signs of the times.

How anyone with a mind can feel better after Bush’s speech…when the man himself has no clue of the seriousness of the problem…and the people can smell it…or is that just fear? Worse yet, after two days of hearings with politicians all preening for re-election while taking the valuable time of the two key players in a solution…makes TB wonder who’s running the store?

Months ago TB said you cannot solve a problem until you admit there is one…we are still in denial and even Paulson who says “there will be plenty of blame to go around,” isn’t saying who will pay for it, other than the taxpayers who have already been disadvantaged…wonder if the GOP still wants those permanent tax cuts? Equal time: Obama…you can stop talking about a windfall profits tax on the oil companies as even Exxon Mobil has had a negative return since before the price of oil fell!

http://traderbill.wordpress.com/2008/09/25/92508send-in-the-clowns/