More than 'sheets' hitting the
fan By The Mogambo Guru
People want to know why things in the
financial markets are so damned weird, and I
answer that there are many reasons, all of them
concerned with greed. And it may also have
something to do with "making hay while the sun
shines", as Jim Sinclair of jsmineset.com reminds
us that "November 15th is a day when a nuclear
accounting bomb will be dropped on establishment
financial entities. This accounting requirement
demands truth on the value of their structured
products, also known as derivatives."
nutshell, "Level 3" assets are those financial
assets on the
balance sheet that do not have
a value based on price discovery in the free
market. They only have the value that they
originally thought they would have, as calculated
by the guys who dreamed them up, and the money
paid to the guys who dreamed them up.
Wellington Wimpy, or just Wimpy, is one of the
characters in the long-running comic strip
Thimble Theater, and in the Popeye
cartoons based upon the strip.
Popeye's friend. In the cartoons he mainly plays
the role of the "straight man" to Popeye's
outbursts and wild antics. Wimpy is very
intelligent, and well educated, but very lazy
and gluttonous. Wimpy is also something of a
scam artist and (especially in the newspaper
cartoons) can be shockingly underhanded at
Wimpy loves to eat hamburgers,
and is usually seen with one but is usually
too cheap to pay for them.
joke is Wimpy's attempts to con other patrons of
the diner into buying him his lunch. Wimpy often
tries to outwit fellow patrons with his
convoluted logic. His famous line is "I'd gladly
pay you Tuesday for a hamburger today."
Wimpy had other frequently used lines in
the original comic strip, usually invoked to
someone or a group of people who are after him
for some shenanigan he's pulled. On some
occasions, Wimpy tries to placate the angry
person or mob by saying "I'd like to invite you
over to my house for a duck dinner." The angry
person or persons are usually satisfied with
that line and Wimpy moves away quickly to a safe
distance and yells, "You bring the
problem is that, like the promise of Wimpy (see
box) to "gladly pay you Tuesday for a hamburger
today", they aren't really worth squat, and
everybody has ended up as unwitting owners of
zillions of dollars' worth of these worthless
collateralized things, colloquially known as
"toxic waste". Hahahaha!
Perhaps this has something to
do with John Crudele at the New York Post saying
that he confidently predicts that the worst of all
worlds (from the perspective of the Federal
Reserve, Congress, Wall Street and everybody else
who even dimly comprehends how the banks are the
epicenter of the whole economy) will arrive early
next year as "Banks' Balance Sheets Will Hit Fan
In January". I like the
subtle way that "sheets" are deemed to be hitting
the fan, which sounds sort of like what is usually
referred to as hitting a fan when things really
start to fall apart, and the fact that I keep
paying strict attention to the joke is symptomatic
of my brain refusing to accept the reality of the
banks having their balance sheets hit, meaning
that the numbers seem so horrific that we are
suddenly talking about banks going bankrupt.
But somebody is going to have to take the
hit; and like the song says, "ain't nobody in here
but us chickens", and we chickens will have to pay
for every instance of greed, the entire cost of
every problem, and every bail-out, either in the
form of higher taxes paid to the government, or in
the form of higher prices/lower returns.
For an example of the former (greed), from
Bloomberg.com we get John F Wasik reporting that
the Government Accountability Office found that
Wall Street sharpies and that whole "financial
services industry", the same industry that reports
70% of all the profits in America, has been
screwing us all royally, and that The Mogambo was
right: We should descend upon the guys "managing"
our retirement plans and squeeze them roughly by
the throat until they give us our money back.
I mean, these losers perform portfolio
management so badly that over half of them,
because of sheer mathematical necessity, do not
perform as well as the underlying indexes, and
they all perform equally well over the long term,
which is such a degree of incompetence that it is
astonishing that they get paid more than the
Well, Mr Wasik doesn't go so
far as to say that, exactly, but he does reveal
that these "financial services" charging a lousy
l% annual deduction for the management fees of,
for example, a 401(k) plan, "will reduce your
retirement fund total by 17% after 20 years and
30% over 30 years". Yikes!
This means that
almost a third of my money is sucked away by the
guys doing a lousy job of managing my money, and
then another chunk will be taken from me in taxes
by a government doing a lousy job of governing.
Yow! We're being screwed!
themselves are unassailable: If I put a dollar
into the fund and these mutual funds take out a
penny every year, then after 20 years I will have
had 20 cents deducted from that dollar! After 33
years, they will have, literally, taken a third of
that first dollar, and an average of about 17
cents for every other dollar that I have
We're freaking doomed!
Perhaps the most terrifying, and easily
predicted, thing about all of this is the
incredible amount of stuff that is going to be
dumped on the taxpayers and, indeed, everyone,
which connects to the recent Bernanke testimony
that, according to the Financial Times, he has
"put forward a plan to help revive the secondary
market for jumbo (large denomination) mortgages
was that would involve Fannie Mae and Freddie Mac,
as well as guarantees from the federal
government", by allowing the "raising [of] the
limit on the size of the individual loans eligible
for securitization by the government-sponsored
mortgage finance entities from $417,000 to $1
million on a temporary basis". Yikes!
obvious scam here is that all that all this
money-losing stuff is getting set to be dumped
onto the taxpayer, as is revealed when it is
explained that "Fannie and Freddie could pay
insurance premiums on these loans to the federal
government which would 'act as guarantor' by
taking on some of the credit risk". Hahahaha! All
the risk, which is 100%, because these things are
100% guaranteed to fail, which is why they were
dumped onto Fannie and Freddie in the first place!
And if you want a feel for how
much losses will be eventually transferred to us
taxpaying public/final consumer chickens, Bill
Bonner at The Daily Reckoning hints at it when he
notes that, "The Wilshire index is helpfully
quoted in dollars. So you can see immediately how
much money people are losing. From the top around
15,900 to last week - when the index bounced
around 14,600 - is a loss of $1.3 trillion."
He goes on "That's in US dollars.
But the US dollar has lost about 10% of its value
this year. So, the real world loss to investors is
more than twice that amount … or around $3
I am totaling this up, but he
is getting ahead of me when he goes on, "Add to
that the loss in housing values - probably about
another $1 trillion, so far. And then, there are
the losses, both announced and still hidden, in
subprime debt and derivatives, which could tote up
to another $0.5 trillion or so."
stops as they wait for me to add it all up, but I
think I accidentally hit the wrong key, so I blurt
out "$4.5 billion?"
Mr Bonner says "Hey …
we're starting to talk about some real money here
- a combined loss of wealth equal to $4.5 trillion
… or nearly 10% of the entire net worth of the
United States of America."
I am happy to
report that I did not make a stinky mess in my
pants at that startling and completely unnerving
revelation. Well, not a big one, anyway.
Richard Daughty is general
partner and COO for Smith Consultant Group,
serving the financial and medical communities, and
the editor of The Mogambo Guru economic newsletter
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