Ignore the Calendar: It's Still 2008

03/16/2012 9:45 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

It seems that of the lessons taught over the past few years, the one most banks (central or otherwise) have taken to heart is “privatize gains, socialize losses,” writes Jack Adamo of Insiders Plus.

With the investment tax credits that expired at the end of the fourth quarter, I think those who are so hot on the tech sector right now may be in for a big disappointment at the end of Q1.

Of course, the companies will guide down estimates a few weeks before they report earnings, then magically somehow beat those estimates on D-day. So it remains to be seen how the market will react. Public sentiment is easily manipulated.

The Greek debt situation was wrapped up last week, at least this chapter of it was. It’s too complex to go into—suffice it to say it’s very far from over, but it’s on the back burner for now, so as far as Wall Street is concerned, it doesn’t exist. Next on the agenda are Portugal, Spain and maybe Italy and Ireland as well, but again, none of that comes up this week, so it’s irrelevant to the market for now.

Frankly, I’m very concerned. Not with what’s going on in the market right now—we’re adequately hedged, and at the moment, that doesn’t seem to be hurting us—but the overall situation has me truly frightened about what’s going to happen to this country, and, indeed, the world.

I often read John Mauldin, who is smart enough on his own, but who also has access to all the best money managers and economists in the world. The data and analysis they provide is copious and convincing. These are the same people who warned about 2008 three years before it happened. They were no better at guessing when it would come down than I was, but they were just as right, and stated their cases eloquently with tons of data.

This same crowd is now talking about the “Endgame,” which, not coincidentally, is the name of Mauldin's latest book.

Central bankers all over the world are doing their best to keep insolvent big banks and entire countries afloat by creating money out of nowhere and manipulating their treasury securities and interest rates. It is all going to end very badly. There are those who think it will make 2008 look like a picnic.

Judgments like that are above my pay grade, but I have to admit that just a few years ago I used to smile at those who bought physical gold and stored it themselves. I’m not smiling anymore. They may turn out to be right.

I’m not even smiling at those buying guns and canned goods for their basement hideaways. I don’t know what it was like to live in the Weimar Republic, but I’ll bet it wasn’t pleasant.

Here are some of the things grinding in my stomach this week:

  • Total European debt is at 443%, well above US debt of 350%.
  • European banks are leveraged over 30:1, at least double that of US banks. The amount of derivatives on their books is staggering, and they are not cleared on exchanges to ensure counterparties can pay—the situation we had in 2008 and still have.
  • You probably heard that Greece got its “negotiated” default. (“Take 53% or nothing, pal.”)
  • Credit default swaps were activated.
  • You probably didn’t hear this: The new Greek bonds are already trading at a 71% to 79% discount, depending on the maturity. Remember, this is after the 53% haircut already taken.

Mauldin provided a number of apropos quotes by Eurozone officials. This one is my favorite: "A Greek default has no real impact on the rest of the Eurozone. No other countries are at risk."

Does this sound familiar? Does it remind you not just of the CEOs of Bear Stearns and Lehman Brothers, but the people at our Fed and Treasury saying these companies were at no risk of default and housing problems would be “contained”?

They were saying this even a week before those companies disappeared, though BS was subsumed by a bigger company (with the help of government guarantees), as were Washington Mutual, Merrill Lynch, Wachovia, Countrywide, and many others.

If you’re wondering what all this has to do with us, ask yourself this question: Did our housing collapse have any effect on Europe or the rest of the world? Now check your memory bank. While you’re there, note that:

  • the EU has largest GDP in the world (about 22%)
  • our banks hold sovereign debt of European countries (on top of all the bad real-estate loans our banks are holding at original face value)
  • our banks and other financial institutions have money market funds invested in short-term European paper, and our government has backed some of that paper to keep the market liquid.

Our “too big to fail” banks are the most vulnerable. And you know who pays the bill when the TBTF folks go under. Can you spell A-I-G?

Which brings me to a somewhat related matter. This week we heard that the US has sealed a deal with Bank of America (BAC) to cut the principal on billions of dollars of mortgages it holds, thereby allowing many thousands of people to stay in the homes they sort of bought. That’s great, isn’t it?


These fat cats at the big banks who got rich securitizing tens of thousands of garbage loans and selling it to income-hungry investors will finally get their comeuppance, or at least their shareholders will, right?

Well, no. All you deluded Democrats (I’m a registered Democrat, but not a deluded one) who think the folks in Washington are working to address the injustices in this country, think again. It isn’t the bank who is taking the hit, it’s the holders of the securitized mortgages sold by Fannie Mae and Freddie Mac. That would be you, me, and mutual funds and pension funds all over America.

The US taxpayer has backed Fannie and Freddie explicitly for a big chunk of this money. So no matter who you are, you get to help in this bailout of hapless home buyers and corrupt, voracious banks. Doesn’t that make you feel all warm inside?

And just so you don’t think that anyone is getting away with anything, remember that Angelo Mozilo of Countrywide Credit really got what was coming to him for his part in all this. He settled civil fraud charges with the SEC for a huge $67.5 million fine.

Oh, yeah, I almost forgot. He made $470 million between 2001 and 2006, which I’m pretty sure does not include the $129 million in stock he sold in 2007, just prior to his company going under. Boy, that SEC is tough.

Actually, compared to the Justice Department, the SEC is draconian. Criminal charges (as opposed to civil charges) in such matters would be filed by the Justice Department. As far as I know, no one at any of these big banks has had charges brought against them for fraud or anything else.

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