Monday, March 3, 2008

the fed must wake up

the fed must wake up regarding this slow-motion crisis that is underway: the fed must buy aaa paper; take rates low enough where the banks can invest in the two-year and make money; and urge the president to allow the fha to guarantee mortgages for people who can't get refinanced because the banks don't want them to be refinanced.

even though i don't think it will happen, i think it could happen to the likes of bac, wb, c, dsl and the like that which has happened to tma, with its margin call situation.

getting back to the issue of marking securities to market, right now we're in an environment where there are no realistic bids due to lack of liquidity. it simply requires the lost art of balance sheet analysis. the current situation reminds me of something experienced over and over again in the early 90s. in countless meetings with accountants, regulators and management, the accountants would present their view to the mark to market issue of that particular company. their solution oftentimes was to take five appraisals on each property,take the lowest and then arbitrarily take another 10% off just to be conservative. needless to say, that approach rendered many an institution not viable even though it was cash flow positive. this resulted in many seemingly - and most likely - healthy institutions changing hands. the shareholders and board could have averted this outcome but at the end of the day none of them understood balance sheet analysis.

so, back to today, and let's take a look at the monoline insurers. while i agree with kass on real money that they are surely not truly aaa, on the other hand i do believe they are solvent. at the end of the day that is all that matters if you are holding paper they have guaranteed. this whole issue of aaa ratings is about them staying as a going concern. i have yet to hear one insurance commisioner question their solvency. again, i reiterate my posture that these monolines should be getting their hands on as much of the lousy CDO paper that they insured as they can. after all, if one is guaranteeing something at 100 cents on the dollar and can buy it in at 60 or 70 cents why would you not do that? the first rule of crisis management is to get rid of the cats and dogs first. in the case of a financial institution you do that by defeasing these kind of liabilities.

the bottom line is those institutions that confront reality are going to be better off; meaning illuminating your balance sheet in ways that make it clear that your institution is solvent. on the other hand, that generally comes at a short-term cost to the common shareholder via dilution or balance sheet shrinkage and associated earnings declines. this is what owning a common stock is all about: bearing balance sheet risk and trying to look out a bit into the future.

disclosure: long c and bac

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