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     Nov 21, 2007
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."

In a 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.

J Wellington Wimpy
(From Wikipedia)

J 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.

Wimpy is 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 times.

Wimpy loves to eat hamburgers, and is usually seen with one but is usually too cheap to pay for them.

A recurring 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 ducks!"
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 minimum wage!

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!

The numbers 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 contributed, too!

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!

The 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! Hahaha!

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." Yikes!

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 trillion."

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."

Everyone 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 - an avocational exercise to heap disrespect on those who desperately deserve it.

Republished with permission from The Daily Reckoning. Copyright 2007, The Daily Reckoning.


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2. US tripped up over Iranian captives

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4. Crunch time

5. Japan, US and the North Korea dilemma

6. Tokyo has a mission in the Iraqi desert

7. Playing South Asia's World War III game

8. Lack of oil troubles Cambodia's waters

(24 hours to 11:59 pm ET, Nov 19, 2007)



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