Thrusting Thursday (The Week of "Boo!")

Ok, ok, you get your weekend Ticker early.

Maybe I'll do another one....

Let's start with the entire concept of mortgages, debt obligations, and credit ratings.

We've all heard about how there are supposedly "AAA" credit mortgages and synthetics (CDOs, etc) made from them.

That is a lie.

There may well be AAA municipal bonds, or close to AAA. Let's not forget what "AAA" is - its credit that's as good as the United States Federal Government's (in terms of risk of default.)

Moody's, Fitch, and S&P all claim their opinions are "mere publishing", alleging that they have a First Amendment protection for them, and no liability for when they get it wrong.

But then these same guys demanded and got an exemption to "Reg-FD", so they have information on the deals they "rate" that nobody else has. Therefore, how does someone else take a look at the same data and come to their own conclusions, when the data is intentionally hidden from everyone but them?

In reality all of this boils down to one thing - intentional mispricing of risk, and the blame rests firmly on Wall Street.

"Intentional", you say?

Absolutely. Municipal governments who really do have "AAA" credit end up paying for credit "insurance" that they have no real need for, others pay for risk insurance they need but at artificially low prices, and in the end none of it is real but its all very profitable - until something goes wrong.

If you look at the default rates of allegedly "AAA" mortgage bonds, municipal bonds, and corporate bonds, you will find that "AAA" doesn't in fact mean the same thing! But when you have legal requirements on bond portfolio holders (e.g. pension funds), that's yet another layer of fraud. After all, if the legal requirement is "AAA", then "AAA" must mean "AAA". Anything else is just an organized arbitrage system set up so certain people can profit while everyone else (that's you and I!) loses.

Take a look at the credit insurers - the amount of money they have on their balance sheets .vs. how much they allegedly insured - then tell me how they pay if more than a minuscule amount of actual defaults occur.


Now add to this that there is in fact no such thing as a "AAA" mortgage written to an individual - unless you're Bill Gates - and you start to have the hair on the back of your head stand up a bit, no?

And now its going wrong.

The CDOs and CDO squareds will blow up. It cannot be helped no matter what The Fed does. They could cut rates to 0% and it wouldn't change a thing. These models were broken at their inception and they're still broken - they can't be put back together, as they were based on intentionally-bad data.

They had to be in order for the "deal" to be profitable for everyone in the chain.

Let's look at this from a simple pricing model.

Let's say you have some form of debt which, on a risk-adjusted basis, should "price" at 2% higher in interest rate than the 10 year treasury bond - both 10 year obligations.

Well, if it should price at 2% higher, then that's where it does price if its honestly rated, right?

But if I'm an investment banker, and the risk is really priced at 2% over the 10, then there's no money for me to make. The market insures this; if the price is too high (return too low) then nobody will buy, and if the price is too low (return too high) then the originator of the debt doesn't need me; they'll take the extra return directly from the market.

In point of fact, this is how banks for years made mortgages! They priced their risk according to your risk of not paying them back, and then held the loan on their own books. The risk of "getting it wrong" was theirs - the free market prevented them from raping you, because you could always shop around. If they overpriced your risk, you simply would not buy. If they under priced, they lost money. Thus the price of money tended to reasonably approximate the actual risk of you not making the payments.

All this has now changed, but the efficient market has not.

So how does Mr. Investment Banker make money, if the efficient market prohibits it?

He has to find a way to misprice the risk on purpose!

If he can get someone to claim that the risk over the 10 is only 1%, when in fact it is 2%, he can pocket the extra 100 bips. Of course the people who make that happen want some of the "cheese", so perhaps he only gets 50 bips, with the rest spread around the other guys who help him out.

But unfortunately the risk-adjusted price really is 2% over Treasuries. The "bad results" don't come for months or even years later, but when they do, they are relentless - and punishing.

Once that happens we find out that in fact the risk was mispriced. The default rates are in fact higher than the claimed risk "grade" said they would be.

This is not an "unanticipated event" for those who priced the risk. In fact it is not only an expected event, it is the only way those who priced the risk could have made money from the process!

Now I ain't a lawyer, and I don't play one on the Internet, but I did run a business for more than 10 years.

When you intentionally misrepresent something in order to make a profit this nasty word that starts with "F" comes to mind.

Actually, a bunch of "F words" come to mind, depending on how genteel we're being today.

So why is it that we hear howls of outrage from Congress about how we "must protect homeowners"? Oh, we want to hang every mortgage broker int he nation from a noose, but in fact the brokers aren't the problem.

Brokers can't sell something that Wall Street doesn't provide. They're intermediaries; they don't have "money" to loan out!

One quick look at Wall Street's list of campaign contributions tells us why those folks aren't under federal - including Congressional - investigation. You get the best government in this nation you can buy, including law enforcement.

Some of us - myself included - think it sucks that 2 million homeowners will be forced into bankruptcy so that a handful of Wall Street "fat cats" can have their vacation home in The Hamptons.

But the real outrage doesn't lie there. The real outrage lies in the 10% real inflation that these "vacationers" have imposed on all of us. Of course they don't care - with a few billion in their pockets who cares if their grocery bill doubles.

You and I, on the other hand, are not so fortunate.

In fact this is nothing more than a tax that has been assessed BY WALL STREET on everyone else!

Heh Barak! Heh Hillary! Heh Dodd! Heh Edwards! Yeah, you Democrats who claim to be "for the little people." REALLY? You're lying - you take HUGE campaign contributions from these Wall Street firms and they're ripping off the entire American Population!

Those of you who are black or of some other minority, who are on fixed income, who are in the middle class or "poor", working or not. YOU ARE VOTING FOR YOUR OWN DESTRUCTION IF YOU SUPPORT THESE CLOWNS!

The fact of the matter is that the entire "Subprime" thing is a chimera. A diversion. A fraud. A lie. The truth is that money will always be available to "less than great credit risks" - at some price which appropriately reflects the risk of default.

The second truth is that the lower and middle classes have had the cross of this fraud put squarely upon their shoulders, and there it will remain until you wake the fuck up and stop voting for these clowns!

I watched the Democrat Debate on the 30th. One question was about high oil prices. Did I hear any of the candidates tell the truth about why oil is so expensive? Why real inflation is running north of 10%? Why the current housing disaster is upon us? Why we are likely to find ourselves with an inflationary spiral?

Absolutely NOT. What we heard instead was how "we need to find alternative energy sources." Yeah, we've heard that before guys.

Psst - when you get your heat bill this winter, its not because "we haven't done enough on alternative energy."

You are going to pay more to heat your house because Bernanke and Paulson have refused to regulate and call for prosecution of fraudulent conduct on Wall Street, and then have fed the fire further with dollar devaluation as a consequence of inappropriate monetary policy in an attempt to "paper over" the fraud.

So what's the prescription to fix this? Well, you could go sign the petition. Of course out of 30,000+ monthly readers here, we've garnered what - 1400 signatures? I'm not impressed, even though 10,000 of you did at least go read it.

The second-level fix will not come until after the elections, unless the market hands out some spankings first. But here's the script, if anyone cares to listen:

• If you want the exemption from Reg-FD, you can't have a First Amendment defense to liability. Pick one. Either you are legally responsible for your ratings, OR all the data must be released so that anyone can run their own independent analysis and make up their own mind. Pick a position and which you choose must be published along with your rating.


• All derivatives must be traded on an exchange with posted prices. Ditto for debt instruments. No more OTC swaps and contracts.


• Any "no bid" instrument must be carried on your book as having a value of zero. If that improves in the future, bully for you! But.... it might not, right?


• No more SIVs, Conduits, or other nonsense off-balance-sheet. That was one of the lessons of ENRON and we better stop ignoring it before we have a massive rash of bank failures!

Second, let's tell the truth about home ownership. I understand that home ownership is considered part of "The American Dream", and with good cause. But we should not permit the fraudsters to push "ownership at any price", as if being a debt slave is some sort of badge of honor.

It is not.

Indeed, for those who claim to promote "home ownership", if there is no reasonable expectation that the mortgage will be paid on its original amortization schedule then it is not promoting "ownership." Those who claim something that is false must be prosecuted for consumer fraud.

30 years ago home ownership meant getting to the end of your original 30 year mortgage and having a "mortgage burning party." Really. They were neighborhood events; your friends all got invited over for a night around the fireplace, where your mortgage documents (minus the "paid in full" page, of course) were reduced to ash. Thus it must be once again.

Here's The Fed statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman;
Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S.
Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M.
Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the
federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco. "

Yep.

Too bad Hoenig didn't carry the day, but heh, you can't have everything. Still a mistake, but a smaller mistake.

Oh, and note that "some of the adverse effects". Uh, does that mean they expect that adverse effects are indeed coming? It sure looks that way.... no kidding?

This statement pretty much says "don't expect further cuts" too. In other words, "quit acting like we're your bitch!"

Not that the market will do so.

Oh, the 10 spiked BIG, nearly 2%. Double bottom appears to be in - and holding. That ain't good.

Gold and Silver did not sell off, neither did oil. In fact, oil did the opposite.

Today was amusing; suddenly "reality" intruded back into the market. What was reality? Someone finally woke up and saw that Citibank wouldn't be able to hold it together without either a big asset sale, raising more capital in the equity or debt markets, or doing bad things to their dividend. That was all that had been holding up Citibank's stock price up until this point, then the floor dissappeared.</P>

Couple that with the fact that traders finally actually read the Fed statement, which pretty loudly proclaimed that there wasn't going to be a continuing "Bernanke PUT" under the market every meeting, and most specifically, there wouldn't be one in December - unless the economy goes straight in the crapper. Either way its not good news - you get a cut now its because the economy has gone in the toilet; if not, you don't get one.

Either way with slowing profits the market is radically overvalued.

CROX "momo players" got their heads handed to them last night when one of the "darlings" had nearly 25% of its market value lopped off in seconds when it announced earnings. See, their P/E suggested 100%+ profit growth over the next year, and oops - they forecast "only" 30%.

Again, the floor disappeared.

That's going to start happening with more and more regularity guys.

540 more signatures were faxed out to lawmakers this morning. If you've signed the petition but haven't canvassed your friends and neighbors - by hand if necessary - please do so. Realize this folks - some of these "boys" on Wall Street have gone so far with their hubris that they have, effectively, shorted your house! That'd be Goldman, who actually shorted subprime mortgage bonds (so they said) to make their quarter. The amazing part of this of course is that Goldman (along with all the other investment banks) are the very people who set up these structured finance vehicles in the first place.

That's kind of like repping out your company for an IPO and then shorting into the IPO!&nbsp; Oh, and it has another parallel - like an IPO underwriter they have more information than you do - CDOs and such are exempt from "Reg FD", or "Fair Disclosure." So if an investor wanted to buy a CDO, they'd not have access to the same information that the guys who put it together (and the guys who rated it) do - that'd be Goldman, Moody's, etc.

Isn't it nice that the guys who put this stuff together thought it was of such high quality that while they were selling it to you with one hand they were shorting it with the other?

Arrogance knows no boundaries on Wall Street, and I wouldn't have a problem with it (after all, I short stocks too you know!) if it wasn't for the fact that Goldman was doing it while in possession of information that nobody else in the marketplace had, except perhaps for other investment banks who had done similar deals and the ratings agencies.

This sort of thing smells and is why Reg-FD was passed after the 2000 tech wreck - of course it doesn't apply to this part of the market. Isn't it amazing how the "Wall Street Boyz" found a loophole in the rules and exploited it for a big fat wad of cash - at the expense of their customers?

Oh, and last night Cramer was out pimping stocks that were overvalued! The worst part of it is that he even had the balls to tell people to buy stocks that are overvalued because they're going to go up anyway!

"Investors should set aside negative economic news and concerns about overvalued stocks and just concentrate on buying stocks and making money, Jim Cramer told viewers of his "Mad Money" TV show Wednesday.

Right now there is one problem facing investors: "they are overthinking this stock market," he said.

The market is not working the way the professionals think it should and thus the people who know more about investing are making less and the people who know less are making more, he said.

"There is a huge wall of money rolling at us courtesy of the Fed and it doesn't pay to over think it," Cramer said. "In fact it pays to not to over-think it." When money comes in, it drives stocks higher and that's all people should be looking at."

For those who don't remember, Cramer has a history of calling tops like this - unfortunately he does so by sucking people into the market to buy just before the floor falls out! In fact, his call in 2000 was HISTORIC in terms of being very bad advice, with a huge percentage of those calls going out of business entirely within the next couple of years!

Never mind that in the closer-in term he got you positively murdered with his recent calls on CROX......

Consumer spending came in "in line with consensus" but on balance it was pretty anemic. This will continue. The consumer is hitting the wall, exactly as I have predicted. The rotation to credit cards started in the first quarter and was clearly visible in the earnings results; if you go back through The Ticker you will see that I was shouting about this after first quarter earnings.

Foreclosure numbers were horrifyingly bad. As in nearly 34% higher than in the second quarter, which itself was horrifyingly bad. Nevada, 1 filing for every 61 homes, California, 1 in 88, Florida, 1 in 95.

Oh, ISM was weak too. Barely hanging on to the neutral line.

Heh, the Mainstream Media is finally getting it on the credit fraud! Today we had Rick Santelli calling for the banking regulators to come in and examine all of the bullshit, mark it properly, and clean it up!

Its about damn time!

What have I been saying now for how long? Ever since first quarter earnings when I opined about WaMu's practice of paying dividends with money they didn't actually earn, since half of their "earnings" were in fact Negative Amortization "booked" money!

Well now that its become a REAL mess suddenly the media is interested in seeing it fixed.

Gee, that's nice.

This should have been done back in late spring or early summer, we'd have had a nasty selloff this summer, and by now we'd be looking for a bottom in the markets and likely be "ok" going forward. But no! We can't have transparent markets and true earnings releases!

At least its finally being talked about. Not that "the sheep" are going to find this amusing when their 401k accounts get SHREDDED over the next couple of months.

And.... here come the lawsuits! I'm not even going to try to name 'em all at this point - CountrySlide, something connected to WaMu (but not WaMu itself - yet), State Street and more. Is there a way to go long landsharks - that'd be the best trade of all!

The selloff today was big - sanity appears to be returning. We shall see....

Here's the technical!

Oh, and if you haven't signed The Petition - DO SO!