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2 Soothing words for panicky
markets By Julian Delasantellis
There's an old story about a guy who jumps
off the top of the 102-story Empire State Building
in New York City. At the 90th story, a man calls
out to him from an office window. "How ya doing?"
"Just fine," as he falls further.
He is asked the same question repeatedly
as he keeps falling, and he always responds the
same way. He is doing fine. All the
way
down to the second floor, he's doing fine. After
that, he's not doing fine.
The US stock
markets close for the day just when what passes as
Fox News' daily business program Your World
with Neil Cavuto commences. This Tuesday,
after the US stock market threw in a sharp,
148-point late-day selloff, Cavuto and the show's
producers knew what had to be done: they had to
reassure average Americans that their lives and
destinies were still secure under the dominion of
the nation's corporate elite - the exact same
message delivered by all Rupert Murdoch media
outlets.
The point that Cavuto and his
guests were flogging on Tuesday was that the stock
markets were wrong that day - everything is fine
for the US economy. As proof, one of the guests
added that, in the 1970s, all he got were three
television channels.
What a good point.
You know, when I invest in a corporate bond or
note, and then see half the value of this
supposedly safe investment suddenly evaporate,
much as what has happened to the bonds represented
by the subprime ABX-HE-BBB- index, nothing perks
this camper up more than being able to sit in my
comfy chair for an evening of Home and Garden TV.
In three articles this year [1] where I go
into detail explaining the significance of the ABX
indices, I have explored the issue of the
challenge being posed to the US economy by what is
called subprime lending, the practice of extending
mortgage finance to Americans with less than
perfect histories of credit usage and payback.
It was this phenomenon, bringing millions
of buyers who had previously been denied the
funding ability to own houses, into the market
that stoked the madly, irrationally bullish US
housing markets of 2005-06. As it has been proved
that these buyers really couldn't afford either
the houses or the mortgages that put them in the
houses, the process is going into reverse. Buyers
are defaulting, homes are being foreclosed upon,
and the excess demand that inexorably pushed
prices up is being converted into excess supply
that is now just as predictably pushing them down.
But even as the storm clouds darken and
deepen, never is heard a discouraging word from
the inner party elite at the economy's
public/private control nexus.
On July 2,
US Treasury Secretary Hank Paulson spoke these
soothing bromides on the state of housing and the
subprime market: "In terms of looking at housing,
most of us believe that it's at or near the
bottom. It's had a significant impact on the
economy. No one is forecasting when, with any
degree of clarity, that the upturn is going to
come other than it's at or near the bottom."
He said this although current statistical
data from US housing continue to be uniformly
bleak, with most private forecasters not looking
for any real bottom in housing until at least the
middle of 2008.
In May, US Federal Reserve
chairman Ben Bernanke opined his own soothing
party-line boilerplate: "We have spent a bit of
time evaluating the financial implications of the
subprime issues, tried to assess the magnitude of
losses, and tried to determine how concentrated
they are. There is a sense that although there is
always a possibility for some kind of disruption
... the financial system will absorb the losses
from the subprime mortgage problems without
serious problems."
The proximate cause,
the "serious problems", that engendered the late
Tuesday selloff was the news that Standard and
Poor's was downgrading the ratings of US$12
billion of subprime-mortgage-backed bonds, with
the Moody's agency looking to do the same for $5.7
billion of similar securities it covers. Bad news
from the subprime sector is not a new factor
pressuring stock prices; since late winter it has
been the main factor behind all the bad days the
US, and to a certain extent the world's, stock
markets have suffered.
There is an
inherent conflict of interest, what economists
call a "moral hazard", in the operation of Wall
Street's ratings agencies. Their stated function
is to provide advice to investors, to consumers of
investment products such as stocks and bonds, but
it is Wall Street brokerages, the producers of
these products, that actually pay the bills. Thus
the ratings agencies are, to put it mildly, slow
and reluctant to provide investors with
unfavorable information on companies that the
brokerages have, either as owners of the companies
or as the clients of the investment banks,
financial interests in.
Many wags have
noted how slow the ratings agencies were to
downgrade the shares of the dot-coms after the
2000-01 tech-stock bust. It almost seemed that the
agencies would wait until every Silicon Valley
dot-com business had folded, with their corporate
space subsequently reoccupied by tanning parlors,
before the stock would be downgraded.
This
year, of course, stock investors in the shares of
subprime mortgage brokers such as New Century
Financial and Fremont General must have found it
very helpful to learn that the ratings agencies
had downgraded the companies only after their
shares had suffered falls in their prices of 80%
or more.
Thus on Tuesday Wall Street saw
the downgrades, figured that if Standard and
Poor's and Moody's were saying things were bad,
what it really meant was that things were really,
really, really bad.
In the late 1980s, the
US cable Financial News Network, which would be
bought out in 1991 by General Electric and folded
into CNBC, employed a craggy old coot of a
financial analyst named Ed Hart. I learned more
listening to him than I did from all my
highfalutin graduate-school economics professors.
One thing I learned was what was really
happening when it was said that a ratings or
brokerage house had downgraded a stock from "buy"
to "hold." What, according to Ed Hart, the
brokerage's raters were really telling the public
was, "You hold, we're selling."
It's
called the "subprime mortgage crisis", but what is
going on now has moved well past the stage where
the primary concern is over those poor mortgage
borrowers watching Jerry Springer on their rented
TVs as the value of their overpriced homes
collapses around them. Wall Street never really
cared about them; as far as the Masters of the
Universe are concerned, as long as these borrowers
keep mowing their lawns and minding their kids,
everything is all right with the world.
The overriding concern now is what has
happened to all those mortgage bonds consisting of
subprime mortgages bundled together and sold as
standard coupon-paying corporate bonds called
collateralized debt obligations (CDOs). The
speeches of Paulson and Bernanke are intended to
be sort of public relations anti-anxiety remedy.
It is hoped that investors will feel reassured by
the lyrics of their lullaby, namely that these
securities now, as indicated by the crashing ABX
indices, rapidly declining in value, do not make
up so central a position in the portfolios of
US
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