AmericanGoy analyzes the market - the common man version

After the Bear Stearns fiasco, which I blogged about a few months back, the mood on Wall Street, on CNBC and other propaganda TV networks was upbeat.

The worst was over, and we could go on with making money.

Off of bullshit, as usual.

You, see, market is smoke and mirrors stuff these days.

Here's how it works.

You have heard by now that AIG is in the shit, that it is dying. Why is that so important?

Because AIG, American International Group, is an insurance company. And what they do is that they insure everything - and I do mean everything.

Some of their business - a big chunk of - is AIG insuring banks.

Let me explain, using a BBC blog article - link is here.

The title is "How banks depend on AIG".

Lets get it on!

Ken Lewis, the chief executive of Bank of America, said yesterday that "I don't know of a major bank that doesn't have some significant exposure to AIG".

Every major bank depends on AIG.

Why would banks depend on an insurance company, you ask? Good question.

Light is shed by an insightful bit of research by Sandy Chen of Panmure Gordon.

He has found the following paragraph in AIG's US regulatory filing:

"Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP's super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position."

If you managed to read to the end of that, your reaction is probably "you what?"

Well, I'll tell you what.

AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.

Oh, AIG has its hands in American banks too, don't you worry.

So basically here is how the bullshit works - banks were giving away more and more loans during the bush bubble economy, as Bernanke cut more and more rates to keep the bubble going (interesting that the bubble was timed to puncture when Bush the retard is going away - but this is tinfoil and conspiracy stuff, now, right?).

These bullshit loans could be then made into profit on their accounting books (don't ask me how, that is too much even for me to understand - google "creative accounting" if you must, but be warned, only for the strong of heart and soul).

More profit on the books meant more money pouring in, more people buying your stock, which meant more money to loan out and "invest" which meant more "profit" on the accounting books...

To placate government investigators and regulators, banks started to take out insurance on these shitty loans they gave away, to reassure all and sundry.

Why, lookee here, we got da biggest insurance company insuring our loans! It's all good! It must be, since AIG is insuring it!

Well, a shitty loan is a shitty loan, a bad investment if you will.

But everybody made money - by creative accounting and shuffling of papers, banks invested and loaned 10, 20 or 30 dollars for every dollar that they kept in the safe.

Bear Stearns was an exception to the rule, as I blogged about here; they leveraged their money 167 times.

That is they loaned out and invested $167 to every dollar that they kept in the safe.

That is beyond greedy and irresponsible... that is almost Bush "W" stupidity and failure.

So, going back to the AIG situation:

the downgrades of AIG's credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.

Which means those banks' balance sheets become weaker - and that could mean that they'll be forced by their regulators to raise additional capital.

AIG was downgraded, and by law is now required to raise cash. I mean it - when a company gets downgraded like that, they have to, by law, have more dollars in the safe than they had before.

To reassure the government and investors.

But, you see, this is hard to do when you "invest" 10, 20, 30 dollars to each one you keep in the vault (Bear Stearns is a fucking record, 167 times leverage boggles the mind).

So how does that affect the banks?

The loans that the banks had "insured" at AIG are no longer insured, which might force the government regulators to downgrade these banks (see, they have no insurance now to cover their incredibly stupid loans) and so after AIG dies the banks will have to, after being downgraded, look for cash.

But, you see, this is hard to do when you "invest" 10, 20, 30 dollars to each one you keep in the vault (again, Bear Stearns is a fucking record, 167 times leverage boggles the mind).

Do you see the problem here?

And the article was updated. Re: the American banks not being affected by AIG:

I suspect that Sandy Chen has found only a part of AIG's credit protection business, since I am told that US banks are more exposed to AIG than are European banks (which is not what the regulatory filing spotted by Chen shows).

And here's a compelling wrinkle. AIG writes its credit default swaps contracts (its loan insurance business) through a French banking subsidiary.

Even so, the possible collapse of AIG isn't a French problem. What AIG needs to obtain is financial support from the American taxpayer at the top holding company level in the US - and it would then use these funds to recapitalise the French bank it owns.

What this shows is the fearful complexity of AIG's corporate structure, which just adds to the difficulty in negotiating a rescue.

Good times!

On the even more funny side of the news, the AIG stock had a short, but significant rally today. Turns out CNBC reported that the government would bail out and/or step in to help AIG, and going by that rumor the investors bravely snapped up AIG stock.

Nothing materialized... and reading the CNBC article, the statement "according to sources" is used. Which probably means that the source was Jim Cramer's ass, or perhaps someone at CNBC, or someone who had a stake to pump the stock up for an hour or two so they could sell it at 50% or more profit, fooled this "news" station.

And the herd, so easy to fool, fell into the trap.

Someone made billions in a few seconds.

I just made a few measly hundred. Oh well.

One thing that most professional analysts are missing here is the growth of JP Morgan.

Remember Bear Stearns?
JP Morgan bought them.

And just recently, WaMu, the Washington Mutual?
JP Morgan bought them.

What is JP Morgan?
Another of those smoke and mirrors specialists, aka an investment banking firm.
They also own your credit card (Chase Visa and Mastercard, etc) and by implication, you.

We shall see if the coming credit crunch (not the one happening now, but the one that will happen soon, when people default on their credit card payments en masse) will not bite them in the ass hard... and then, like AIG and Bear Stearns, their strategy will be "We're too big to fall; it will negatively impact American and global economy; so, American taxpayers, please give your work checks directly to us!".

Good times, I say.

One thing that is not mentioned on TV much, and which ties up very nicely with my blog's motto ("can't see the forest for the trees"), is this:

All the investment banks are failing. All of them.

The smoke and mirrors system of bullshit, of shuffling papers and buying and selling papers, where when you finally buy a piece of paper that states that you are entitled to a piece of paper, that then links to another piece of paper that then states that you are tied to a loan insurance paid for AIG...

That era is now gone.

The bullshit. It has exited the market, stage left.

Three out of five.

Bear Stearns, now Lehman and Merrill Lynch.

No more smoke and mirrors.

So, what is left?

Goldman Sachs, which has just seen its quarterly profit drop 70 percent and JP Morgan, which aggressively buys everything in sight.

Again, JP Morgan is the flag bearer of bullshit, because by buying their competitors at fire sale prices they show the following:

1) We are strong enough to afford those billions of dollars we pay which leads to
2) Market and consumer and government confidence that this firm is well managed and is somehow an exception to every other investment bank failing.

News for you: JP Morgan is the same like the four others, it is full of itself, it just recognized that since the whole marketplace operates on perception instead of reality, it operates on bullshit, may the best bullshitter win.

And by boldly bluffing and buying everything, JP Morgan stock price and shareholder confidence did not drop.

That will happen when, as I said before, the REAL credit crunch hits and Americans stop paying their credit card bills.

Good times!

Oh, and it was so easy to predict. If only you stopped to smell the bullshit.

The warning signs were there, and so were actual, real, honest to goodness experts - the ones that are not ever, ever, never, admitted on CNBC and other TV stations.

Experts like Nouriel Roubini, interviewed on MONDAY, AUGUST 4, 2008.

Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?

Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.

Which banks, specifically, will fail?

I don't want to name names, but many, given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven't started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.

Here is that "creative accounting" thing again. And yes, those home equity loans - being worth zero dollars - why, the guy was on the money. For two years before today.

The U.S. consumer is shopped out and saving less. Debt to disposable income has risen to 140% from 100% in 2000. Hit by falling home prices, the consumer no longer can use his house as an ATM machine.

The American Joe Schmoe cannot borrow against his house, which is not paid for anyway, which means... that it is not his house - he is just lending it from the bank , who is the real owner. The days of smoke and mirrors are over. And so no more second and fourth Playstations, no more rims on your truck, no more extra shoes.

But more debt, which you, Joe Schmoe, won't be able to pay.

And finally you will say fuck it, and not pay the credit card (or, smarter Joes, will strike a deal with the lenders, and pay cents on the dollar), which will prove me, AmericanGoy, right about the coming credit crunch, and really fuck up the global system of bullshit.

Good times!

Oh, and about JP Morgan - remember how they are the one investment bank that seems strong when all others are dying?

It seems someone in the America government likes them:

Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?

Because JPMorgan was a counter-party?

Exactly. The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you're not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management.

Again, brilliant strategy by JP Morgan. He who bullshits more, wins. By somehow convincing the US government to buy out the bullshit loans while JP Morgan took control of Bear Stearns, well...

Like I said, the strategy for JP Morgan, the smartest bullshitter, is to become so big they can't be allowed to fail. And you do that by expanding... no matter what.

And The Economist seems to agree with me:

BARRY RITHOLTZ, a prominent financial pundit, writes with tongue not entirely in cheek that the first lesson from the government’s bail-out of Bear Stearns in March was to “Go Big”. “Don’t just risk your company, risk the entire world of finance. Modest incompetence is insufficient—if you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system.”

Interesting.

And now lets go off the deep end.

The brave U.S. Treasury Secretary, the all American Paulson, is making a statement - there will be no help from the FED for AIG.

Oh... Well, there will be something else though.

Here's this something else, from Reuters, Mon Sep 15, 2008:

The U.S. Federal Reserve on Sunday said it would begin accepting equities as collateral for emergency loans for the first time ever, as it laid out a series of steps to calm financial markets and brace for the expected collapse of investment bank Lehman Brothers.

Got that?

No?

The Fed will "lend" money to companies and accept the investment banks'... word that they will repay.

Yes, really.

Wikipedia definition of collateral:

Collateral (finance) in finance means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay.

Do you see what is going on here?

There will be no taxpayer money used to help out AIG and investment banks.

Says the brave, heroic, patriotic U.S. Treasury Secretary chief Paulson.


Even though they were just downgraded (or about to be) to the level that by law they need more money in their vaults or die (literally die - file for bankruptcy because they will become insolvent), let them die, free market, free market, take responsibility for your actions, says the brave, heroic, patriotic U.S. Treasury Secretary chief Paulson.

Meanwhile, take this money for a piece of paper, says the not so heroic, not so brave U.S. Treasury Secretary chief Paulson.

In exchange for a piece of paper stating that "we will repay all this... someday", and probably the words IOU scribbled in a crayon somewhere, here's taxpayer money.

So yes, Joe Schmoe, it is your tax money used to bail out all these banks and other companies, and yes, basically this means that the TV "experts" and the FED and the newspapers are lying to you (again).

And I'll leave it at that - I feel that I rambled on and on, but my aim was just to simplify this whole crisis to you, my readers, and myself, when all is said and done.

Good night.

PS
The world of smoke and mirrors and bullshit just took a tremendous hit. We shall see if the governments of the world put in more common sense rules to safeguard us, the world citizens, from stupidity, greed and venality of the Wall Street (the movie) type ruthless, criminal managers, CEO's and CIO's.

Don't count on it.