Wednesday, January 13, 2010
Pay it Backwards
Caught Fleck on Bubblevision this morning.
Fella is one of my favorite 'set-up' artists. No one knows the future but the great ones can decipher the set-up, that is, knowing why something is going to happen without knowing exactly how it will play out. Generally spot on, with the specifics left to fate.
Fleck's summary : what were they thinking when they allowed such leverage against illiquid assets? Eventually reality will mark the assets regardless of the Federales' efforts.
The Fed is at 43 times assets to capital. WSJ reports that the Fed's equity could be wiped out by just a 2.8% drop in the value of its Treasurys and securities.
So a leveraged hedge fund with a book of derivatives that have a notional value of about 2%, that is not valuing its' collateral at market rates, golly better hope that hedge works. What? There is no hedge?
So for a normal hedgie the risk is 2% but for us 2% is the risk? Ruh-ro.
And that is why ladies and gentleman this humble blogger thinks the venerable Mr. Grant may be as incorrect about his zippy V as he was about his AIG call ... and for exactly the same reasons.
The fundamental question of these times : Were they criminally stupid or stupidly criminal? My gut says both.
At the same time, to channel Chris Rock ... I understand.
When the barbarians are at the door you save the silver first, 'tis an entirely human response.
That reality need be balanced however with another; without prudent regulation Marx was right.
A summation of our 'I Can't Believe It's not Capitalism' plan in response to the 'What just Happened' crisis?
Pay it Backwards.
The next generation is paying us to paper over the inevitable creative destruction that must occur and that will occur.
It is our destiny.
Wait for it.