Risk Rap

Rapping About a World at Risk

Bernanke Bonds, Paulson Puts & Cox Calls

Marx made a wry observation in the opening lines to one of his historical tomes, “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like an nightmare on the brains of the living.”

So it is with us. We are experiencing a crisis that is the result of a decades long deconstruction of the United States economic, political and cultural infrastructure. It began with the dismantling of our manufacturing base. It continued with the transformation of our capital markets. The purpose of the stock markets was to facilitate capital formation for the creation of businesses and industries. Today the markets function principally for speculative investment and the enrichment purposes of monied interests. Our deconstruction accelerated with extreme political Rovian partisanship and the fear mongering and self serving righteous divisiveness incessantly screamed by the howling yodelers of Talk Radio. Finally our enlightened republic is threatened with extinction by the intentional dismantling of our public education system and the virulent attack on secular learning and civic participation.

During times like these weird things begin to happen. We need to be prepared for anything and everything. That said it is heartening to see the Fed, Treasury and SEC act with such dispatch to address the US role in the global banking crisis. An economic meltdown serves no one. The long term impact of these swift concerted actions will be profound. Undoubtedly these actions will add to the national debt. Some think it unfair to assign this burden onto the backs of future generations. Indeed this country started a revolution on the idea that taxation without representation is an intolerable injustice that cannot stand. Years from now the yet to be born will curse the long dead for their poor stewardship of our national wealth and resources and how it contributed to an extreme and unfair taxation they are forced to pay. That is of course if America does make good on its debt. Alexander Hamilton may be stirring in his grave. So this is a time out from the heat of a global market implosion. What is happening?

PROHIBITION ON SHORT SELLING: Shorting can now be considered a criminal enterprise. At present it only applies to large financial services firms. Lots of firms are clamoring to get on the you can’t short my stock list.

The new national slogan from the SEC should be “GO LONG ON AMERICA!”

REPO MAN:Global Repo Desk was created to facilitate liquidity amongst the global central banking system. London, Tokyo, Frankfurt and the other G8 central bankers are all counter parties to Bernanke’s $180 B liquidity infusion. Paulson’s putting on his old Goldman Sach’s trading cap and promises to trade us out of this bad position.


GOOD BANK / BAD BANK:Bernanke is using his infinite balance sheet to segregate all the bad debt from the good stuff. Its kind of like what ENRON did as it packaged all its poor debt obligations and parked them in offshore SIVs. Maybe it will work this time because unlike ENRON the Fed can print money. Lots of it.


CORPORATE BAILOUTS: The US taxpayer is now the owner of the worlds largest insurance company. It’s $80 B capital infusion in AIG will keep this company solvent for the time being and keep the credit rating agencies from lowering AIG’s credit condition to junk. Cox has requested a copy of Lloyds of London Names List.


SHOTGUN WEDDINGS: First it was Bear Stearns and JP. Now its Merrill and B of A. Who’s next?


INFINITE BALANCE SHEET: That is what they keep saying. The Fed can do these financial gymnastics do to its access to an infinite balance sheet that can finally match infinite assets to cover infinite liabilities. Sounds like a tall order to me but i must admit it sounds pretty good from where I’m sitting today. Don’t know how it will go down with the future generations. From Bernanke’s lips to Gods ear.


Bailout politics will sure to become a bloodsport. Every once in awhile you see the commentators on CNBC smugly ask about a threat to free markets and contemplating about the evolving form of capitalism. I can also hear Palin’s squeaking voice proclaiming she’s ready and offer some sage advise concerning our current plight. Palin would say that if she were so blessed to take the oath of office with her fellow Maverick John McCain, she would immediately put AIG up for sale on e-bay and return the proceeds of the sale to the American taxpayers.

Music: Temptations, Ball of Confusion

Risk: economy, market, future generations

September 19, 2008 Posted by | banking, Bernanke, Bush, Cox, credit crisis, Paulson, pop, TARP | , , , , , , , , , , , , , , , , | Leave a comment

"Denial is Not a Strategy"

Our optimism from yesterdays post about the rebound in the real estate market was tempered by the sage advice offered to bankers by the Comptroller of the Currency, John Dugan. Said Dugan, “denial is not a strategy.” He encouraged banks to be honest with regulators about the extent of their troubled loan portfolios to blunt the effect of the economic downturn.

As if that weren’t enough we hear on yesterday mornings BBC World Service of the The Bank of England’s plan to inject £50 billion PS ($100 billion) in additional liquidity into the market through an asset swap and repo program that will give troubled banks the ability to strengthen their balance sheets and improve stressed capitalization ratios.

With the ink not yet dry on the contract to bail out Northern Rock the free marketeers rale against the nationalization of banks and are beating warning drums. Some believe that the central banking strategy to prop up troubled banks encourages herd behavior, penalizes financially healthy banks that refrained from engaging in high risk lending and remain financially sound and lastly does nothing to solve the current crisis while planting the seeds to abet similar risky behavior in the future.

The rationalization of the banking industy will be swift and not without pain. The stakes of losing pose great danger and real monetary risks for the central banks. We wish to remind the central bankers of the gargantuan losses the Bank of England suffered at the hands of George Soros when they tried to artificially prop the pound to maintain the pre-euro Exchange Rate Mechanism. Soros made a huge bundle of dosh on that trade and we fear that the speculative sharpies running hedge funds are itching to fleece the less nimble and politically confined central bank trading book again.

This could kill the possibility of Hank selling his house for the next few years. It could also wipe out his entire equity stake that took Hank and Judy 40 years to build.

Risk: Central Banks, Home Equity, Capital Markets,

April 22, 2008 Posted by | banking, Basel II, credit crisis, regulatory | , , , , , | Leave a comment