By Alan Abelson
How worried should you be?
Well, that all depends on whether you're one of those cheerful souls blessed with a perennially sunny outlook or have the misfortune to be a sentient human being.
All we can tell you is that we were so worried about the brewing catastrophe in the credit market that we couldn't concentrate on the truly historic event of the week or perhaps the year or even -- who knows? -- maybe the century: Barry Bonds hitting home run No. 756.
Besides breaking Hank Aaron's record, that unforgettable four-bagger was a ringing testimonial to Barry's talent, unwavering dedication to his craft, clean living and steroids -- not necessarily in order of importance. And in an age when everyone is so concerned about our youths' lack of interest in the sciences, it sent a powerful message to aspiring juvenile sluggers about better hitting through chemistry.
What threw us into such a state of high anxiety was the prospect of the ownership society, George Bush's magnificent conception and prime domestic accomplishment, which any citizen of this fair land worth his salt had to be proud of, being transformed before our horrified eyes into the default society. A prospect that virtually everyone, save for Wall Street's professional optimists, is likely to find pretty bleak.
To be anxious is not, of course, to be devoid of compassion. And as we watched the great unraveling of that tangled web that financial engineering spun, we couldn't help but think of the acute discomfort being felt by that outstanding public servant Alan Greenspan, who, during his celebrated tenure as head of the Federal Reserve, more than anyone deserves credit for nurturing the ownership society. Mr. Greenspan, lest we forget, went far beyond the call to entice people, no matter what their circumstances, into buying a home by whacking the cost of credit to as near zero as you can get and still lay claim to being somewhat rational, and urging them to go for those new-fangled adjustable mortgages with deceptively low initial interest rates.
Beyond even his cleverness at blowing successive "smart bubbles," so that the newest one (for example, housing) was nicely calculated to offset the fallout from its burst predecessor (the stock market), and his adroit ability to please his political masters (his overriding passion has always been to be liked), nothing more distinguished Mr. Greenspan's long stint at the Fed than his timing in departing from that august body.
As his successor, gentle Ben Bernanke, is no doubt becoming ruefully aware, creating a mess is easy. The trick is in knowing when to slip out, leaving someone else with the job of cleaning it up. And here Mr. G has proved himself an undisputed master.
Financial mischief on such a grand scale is not a one-man job, and Mr. Greenspan, needless to say, had a lot of help from Wall Street, Washington and points north, south and west. But there's no diminishing the singular part he played.
And just as the contempt for risk that made possible the gross extravagances in housing and the financial markets was sustained by confidence that Mr. G would always bail out the participants -- the so-called Greenspan put -- so the current collapse in housing and the financial markets merits a special designation, one that similarly recognizes his critical role. How about the Greenspan Kaput?
President Bush, for his part, sought to calm the roiled financial markets and reassure the populace that all's well, which, of course, is what presidents do.
Alas, he seemingly doth profess too much: unequivocally declaring his confidence in the strength of our economic "underpinnings" on Wednesday and, with equal vehemence, repeating the message on Thursday. Which only persuaded the increasingly uneasy citizenry and the clinically jittery markets that Mr. Bush was more fretful about the credit fiasco and its conceivable consequences than he was letting on.
What's more, in addressing the stormy state of the credit markets, Mr. Bush blithely pointed to the sea of liquidity as being more than sufficient to float us comfortably through any pesky eddies of trouble. It was almost as if the president, ever mindful that his term in office would inexorably come to an end next year, was auditioning for a strategist's spot on Wall Street.
Someone apparently was lax in not pointing out to Mr. Bush the manifest nervousness of central banks that liquidity is drying up or threatening to do so everywhere, as the nasty contagion touched off by the subprime collapse here spreads around the globe. The European Central Bank, not ordinarily a chum of speculation, decided to provide roughly $130 billion to help out any deserving banks in need at its normal borrowing rate, and later tossed in another $83.9 billion for good measure. That sparked rumors that a big German or French bank was in trouble. Our own beloved Fed, less dramatically but no less significantly, has also made a couple of hefty infusions into the system.
Despite his avowed determination to keep the focus on constraining inflation, Mr. Bernanke, we suspect, will cut interest rates, perhaps sooner than there was reason to suspect only a few days ago, if, as seem likely, the credit crisis deepens. Apart from getting the lending woes off the front page and providing a fillip to the financial markets, it's by no means certain that waving that particular magic wand will prove more than a temporary fix. For what ails us can be cured only by the kind of astringent fiscal and monetary medicine that none of our pooh-bahs has the slightest inclination to prescribe, much less administer.
Our old friend, investment savant, proprietor of the always informative and insightful commentary with the vaguely doggerel title of Gloom, Boom & Doom Report and, not least, valued Roundtable worthy, Marc Faber, offers some pertinent and pungent comments on the troubled capital markets.
Marc is the nearest thing to a truly global investor we've ever come across and was busily discovering the merits of emerging markets long before either the phrase was invented or the venues became so popular. We're thoroughly convinced that if mankind, out of design or necessity, establishes a colony on Mars, Marc will be among the first to explore its investment possibilities. He's Swiss, but, even so, has a sly and spry sense of humor to go with his considerable erudition and trademark skepticism. And he's a first-rate guy.
In surveying the current investment landscape and the eruptions that are taking place courtesy of the subprime disintegration, he recalls that when Nasdaq began to go south in 2000, most Street pundits were convinced that we were witnessing only a brief correction. In like manner, in 2005 as the home-building stocks, which had been whiz-bang winners, slipped back, the prevailing advice was not to worry, housing was fundamentally sound.
With few exceptions, the same complacency was the reaction when subprime problems began to emerge last year. And, he sighs, the wiseacres who failed to recognize the housing and subprime bubbles are now insisting that problems in collateralized debt obligations -- CDOs, for short -- are piddling. Not so, cautions Marc, who says the problems are anything but insignificant and are apt to cause hurtful losses for "financial institutions and their clients when the underlying securities have to be valued at market prices."
Sharpening his fears of a possible meltdown, he cites estimates that subprime mortgages made up more than half of the $500-odd billion in CDOs sold in '06 and 25% of their face value, or roughly $250 billion, is in jeopardy. That's not exactly small potatoes, he points out, when compared with the $875 billion of capital sported by U.S. commercial banks.
The bottom line, Marc says, is that large losses in the CDO market could have very ugly repercussions, not the least of which would be a pronounced slowdown in financial credit growth, evidences of which are already cropping up. That, quite obviously, holds very unpleasant implications for the economy.
And he soberly ventures that, with the pervasive leverage in every nook and corner of the financial system, including futures and options and all manner of structured products, "the current credit excesses, both in terms of their quantity and low quality" dwarfs those of the Roaring '20s. Comforting thought.
Forgive us for such dirge-like scribblings. But that's the way the cookie crumbles and, man, is it ever crumbling. Thus late Friday, the Bloomberg wire carried the story that Goldman Sachs' $8 billion Global Alpha hedge fund is down 26% so far this year. Any way you cut it, that's a humongous amount.
Global Alpha happens to be Goldman's largest hedge fund (although it's safe to assume that if it continues to lose value at such a breathtaking pace, it won't long enjoy that eminence). That kind of negative performance hurts in two ways. It shrinks fees to Goldman; according to Bloomberg, such fees amounted to an unshabby $700 million last year. At the same time, of course, it's decidedly discouraging to investors, who, not surprisingly, often respond by withdrawing their dough from the fund.
When queried by Bloomberg, a Goldman spokesman declined to comment. Who can blame him? After all, what's to say?
---
For Barron's subscription information call 1-888-BARRONS ext. 685 or inquire online at http://www.barronsmag.com/subscription/subscription.html.
All we can tell you is that we were so worried about the brewing catastrophe in the credit market that we couldn't concentrate on the truly historic event of the week or perhaps the year or even -- who knows? -- maybe the century: Barry Bonds hitting home run No. 756.
Besides breaking Hank Aaron's record, that unforgettable four-bagger was a ringing testimonial to Barry's talent, unwavering dedication to his craft, clean living and steroids -- not necessarily in order of importance. And in an age when everyone is so concerned about our youths' lack of interest in the sciences, it sent a powerful message to aspiring juvenile sluggers about better hitting through chemistry.
What threw us into such a state of high anxiety was the prospect of the ownership society, George Bush's magnificent conception and prime domestic accomplishment, which any citizen of this fair land worth his salt had to be proud of, being transformed before our horrified eyes into the default society. A prospect that virtually everyone, save for Wall Street's professional optimists, is likely to find pretty bleak.
To be anxious is not, of course, to be devoid of compassion. And as we watched the great unraveling of that tangled web that financial engineering spun, we couldn't help but think of the acute discomfort being felt by that outstanding public servant Alan Greenspan, who, during his celebrated tenure as head of the Federal Reserve, more than anyone deserves credit for nurturing the ownership society. Mr. Greenspan, lest we forget, went far beyond the call to entice people, no matter what their circumstances, into buying a home by whacking the cost of credit to as near zero as you can get and still lay claim to being somewhat rational, and urging them to go for those new-fangled adjustable mortgages with deceptively low initial interest rates.
Beyond even his cleverness at blowing successive "smart bubbles," so that the newest one (for example, housing) was nicely calculated to offset the fallout from its burst predecessor (the stock market), and his adroit ability to please his political masters (his overriding passion has always been to be liked), nothing more distinguished Mr. Greenspan's long stint at the Fed than his timing in departing from that august body.
As his successor, gentle Ben Bernanke, is no doubt becoming ruefully aware, creating a mess is easy. The trick is in knowing when to slip out, leaving someone else with the job of cleaning it up. And here Mr. G has proved himself an undisputed master.
Financial mischief on such a grand scale is not a one-man job, and Mr. Greenspan, needless to say, had a lot of help from Wall Street, Washington and points north, south and west. But there's no diminishing the singular part he played.
And just as the contempt for risk that made possible the gross extravagances in housing and the financial markets was sustained by confidence that Mr. G would always bail out the participants -- the so-called Greenspan put -- so the current collapse in housing and the financial markets merits a special designation, one that similarly recognizes his critical role. How about the Greenspan Kaput?
President Bush, for his part, sought to calm the roiled financial markets and reassure the populace that all's well, which, of course, is what presidents do.
Alas, he seemingly doth profess too much: unequivocally declaring his confidence in the strength of our economic "underpinnings" on Wednesday and, with equal vehemence, repeating the message on Thursday. Which only persuaded the increasingly uneasy citizenry and the clinically jittery markets that Mr. Bush was more fretful about the credit fiasco and its conceivable consequences than he was letting on.
What's more, in addressing the stormy state of the credit markets, Mr. Bush blithely pointed to the sea of liquidity as being more than sufficient to float us comfortably through any pesky eddies of trouble. It was almost as if the president, ever mindful that his term in office would inexorably come to an end next year, was auditioning for a strategist's spot on Wall Street.
Someone apparently was lax in not pointing out to Mr. Bush the manifest nervousness of central banks that liquidity is drying up or threatening to do so everywhere, as the nasty contagion touched off by the subprime collapse here spreads around the globe. The European Central Bank, not ordinarily a chum of speculation, decided to provide roughly $130 billion to help out any deserving banks in need at its normal borrowing rate, and later tossed in another $83.9 billion for good measure. That sparked rumors that a big German or French bank was in trouble. Our own beloved Fed, less dramatically but no less significantly, has also made a couple of hefty infusions into the system.
Despite his avowed determination to keep the focus on constraining inflation, Mr. Bernanke, we suspect, will cut interest rates, perhaps sooner than there was reason to suspect only a few days ago, if, as seem likely, the credit crisis deepens. Apart from getting the lending woes off the front page and providing a fillip to the financial markets, it's by no means certain that waving that particular magic wand will prove more than a temporary fix. For what ails us can be cured only by the kind of astringent fiscal and monetary medicine that none of our pooh-bahs has the slightest inclination to prescribe, much less administer.
Our old friend, investment savant, proprietor of the always informative and insightful commentary with the vaguely doggerel title of Gloom, Boom & Doom Report and, not least, valued Roundtable worthy, Marc Faber, offers some pertinent and pungent comments on the troubled capital markets.
Marc is the nearest thing to a truly global investor we've ever come across and was busily discovering the merits of emerging markets long before either the phrase was invented or the venues became so popular. We're thoroughly convinced that if mankind, out of design or necessity, establishes a colony on Mars, Marc will be among the first to explore its investment possibilities. He's Swiss, but, even so, has a sly and spry sense of humor to go with his considerable erudition and trademark skepticism. And he's a first-rate guy.
In surveying the current investment landscape and the eruptions that are taking place courtesy of the subprime disintegration, he recalls that when Nasdaq began to go south in 2000, most Street pundits were convinced that we were witnessing only a brief correction. In like manner, in 2005 as the home-building stocks, which had been whiz-bang winners, slipped back, the prevailing advice was not to worry, housing was fundamentally sound.
With few exceptions, the same complacency was the reaction when subprime problems began to emerge last year. And, he sighs, the wiseacres who failed to recognize the housing and subprime bubbles are now insisting that problems in collateralized debt obligations -- CDOs, for short -- are piddling. Not so, cautions Marc, who says the problems are anything but insignificant and are apt to cause hurtful losses for "financial institutions and their clients when the underlying securities have to be valued at market prices."
Sharpening his fears of a possible meltdown, he cites estimates that subprime mortgages made up more than half of the $500-odd billion in CDOs sold in '06 and 25% of their face value, or roughly $250 billion, is in jeopardy. That's not exactly small potatoes, he points out, when compared with the $875 billion of capital sported by U.S. commercial banks.
The bottom line, Marc says, is that large losses in the CDO market could have very ugly repercussions, not the least of which would be a pronounced slowdown in financial credit growth, evidences of which are already cropping up. That, quite obviously, holds very unpleasant implications for the economy.
And he soberly ventures that, with the pervasive leverage in every nook and corner of the financial system, including futures and options and all manner of structured products, "the current credit excesses, both in terms of their quantity and low quality" dwarfs those of the Roaring '20s. Comforting thought.
Forgive us for such dirge-like scribblings. But that's the way the cookie crumbles and, man, is it ever crumbling. Thus late Friday, the Bloomberg wire carried the story that Goldman Sachs' $8 billion Global Alpha hedge fund is down 26% so far this year. Any way you cut it, that's a humongous amount.
Global Alpha happens to be Goldman's largest hedge fund (although it's safe to assume that if it continues to lose value at such a breathtaking pace, it won't long enjoy that eminence). That kind of negative performance hurts in two ways. It shrinks fees to Goldman; according to Bloomberg, such fees amounted to an unshabby $700 million last year. At the same time, of course, it's decidedly discouraging to investors, who, not surprisingly, often respond by withdrawing their dough from the fund.
When queried by Bloomberg, a Goldman spokesman declined to comment. Who can blame him? After all, what's to say?
---
For Barron's subscription information call 1-888-BARRONS ext. 685 or inquire online at http://www.barronsmag.com/subscription/subscription.html.
No comments:
Post a Comment