Thursday, December 20, 2007

Hear the lonesome whiperwill

Did you ever see a robin weep
When leaves begin to die
That means he's lost the will to live
I'm so lonesome I could cry

-- Hank Williams

Guambat has always thought that song of Hank's was the most forlorn thing he'd ever heard, ... until this poor Minyan's lament:

Never Bet Against the House
Due to my preference for security and prudence, I forgo the opportunity for larger gains and windfalls in exchange for the lower risk and security... yet, my very own government is treating me as a sucker. I mean openly, which is kind of new.

The flogging of the prudent investor has moved from sublime to ridiculous, as government officials blatantly enter a mode of panicked bailout of preferred gamblers and spreading misinformation about the situation.

Not to be too dramatic, but I am left wondering how to explain this to my children.

The net effect of these bailout activities is to reward the people who took wild risk and ignored generations of wisdom about debt and gambling. It leaves me trying to explain why I chose a higher-rate fixed mortgage and a modest house and modest consumer debt, with a higher proportion of my investment in low yield supposedly "safe" mutual funds. I am left now ... watching as my government actively turns the knife in my back.

Dramatic? Perhaps. But I would argue that we are witnessing a very dramatic episode in US economic history. The "end of consequences" and the era of overt elite market socialism?

I don’t know yet what I will tell my kids. Something along the lines of: go ahead and be reckless; someone will save your butt – so long as that butt is aligned with the chosen elite butts.

“Never bet against the house”. I get that now.

I've never seen a night so long
When time goes crawling by
The moon just went behind a cloud
To hide its face and cry

Meanwhile, over at Morgan Stanley's earnings call, as reported by MarketBeat (David Gaffen):
“The results we announced today are embarrassing to me and the firm, and they’re the result of an errant judgement on one desk in our fixed income area and a failure to manage that,” [CEO John Mack] says.

He says the firm had a “large illiquid trade on our books in a deteriorating trading environment,” and the “firm’s hedges did not perform adequately in late October.” Due to this, they decided to take this $7.8 billion writedown instead of the estimated $3.7 billion writedown detailed on Nov. 7.

Mr. Kelleher [CFO] details the subprime trading position that caused the losses, saying the firm elected to short the lowest-rated tranche of subprime to the tune of $2 billion, but decided to “cover the cost of negative carry by going long the $14 billion super-senior tranche.” As the value of these positions declined, the company ended losing a ton.
Sam Jones explains that Morgan Stanley was just having a subprime superbad super senior moment, and was not unique in that regard. He suggests Goldman may be nursing one of those in its 10-Q filing in September.

And MarketWatch added to the Morgan story (detailing in a sidebar the $70 Billion major banks reported losing in the 3rd quarter of the year):
With Wednesday's announcement, Morgan Stanley also became the latest U.S. financial titan to announce a big investment by an investment fund controlled by a foreign government.

China Investment Corp.'s total passive ownership in Morgan Stanley common shares, assuming the conversion of the equity units, amounts to 9.9% or less of total shares outstanding, the company said. The equity units will pay a fixed annual payment rate of 9% and convert into Morgan Stanley common shares in 2010.

"This quarter questions the validity of the increased risk taking efforts put forth by Morgan Stanley when John Mack became CEO," wrote analysts at Wachovia Securities in a research note.

With the write-down, Morgan Stanley's management essentially "kitchen-sinked" the quarter, according to analysts at Banc of America Securities.
"The bull case is that the company now has just $1.8 billion in reported net ... subprime exposure, having taken their medicine, and now it can look forward to a clean 2008," they wrote in a report to clients.
Felix Salmon asks of that Chinese 9.9% "passive" investment, "What Did CIC Know, and When Did They Know It?" because "one has to suspect that Morgan Stanley has been sitting on the news of these losses for much more than four days - and that CIC has, as well", which would be "a prima facie problem here. That's because under SEC regulations, such information must be released on a 'rapid and current basis,' which the courts take to mean four days."

And I'm so lonesome I could cry


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