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Tuesday, September 16, 2008

The shape of things to come

"Let the old world make believe
It's blind and deaf and dumb
But nothing can change the shape of things to come"

  • The Ramones

Watching CNBC yesterday was like watching CNN during a hurricane – every report was about the financials – why Bear and not Lehman, why buy Merrill when it was clearly going to get cut in half on the Lehman news, will anyone (please?) rescue AIG… more like an extended plea than reporting. Paulson gets up there and blames it all on housing was perhaps the most chilling and telling moment. He doesn't get it.


When Bank of America can walk into Merrill and 48 hours later decide it's worth paying a massive premium to buy them, it seems the people who really should know if things are stabilizing couldn't possibly. 48 hours is an incredibly short time to do due diligence on so massive a risk proposition. They were afraid to miss it? Seriously? They bought Countrywide a few months ago – could Countrywide really be fully realized? The only thing they've accomplished is they've made themselves too big to fail and the Fed may say they're not backing anyone but they're backing BAC if it gets stuck whether they want to or not.


What we have is not the aftermath of a housing bubble. We have a financial product bubble. This is a big distinction. Housing is a bubble within a larger bubble, a symptom of the deeper problem of newfangled credit products that buyers and sellers alike seemed to not understand. Risk on top of risk on top of risk – in the same way Long Term Capital was leveraged 100:1 and saw it's bet go awry – this is the underlying ailment. What we are looking at will not be solved by saving Bear or by taking the GSE's into receivership. An 11th hour sale of some AIG asset with intangible downside will not rescue the system. We are watching a massive unwind of leverage of unprecedented proportions at all levels of finance. Thar will be blood.


When the internet stocks crashed, there was no big retracement rally. The stocks went down and down and down and ultimately sat there. For years. And no one cared. They were hopeless, doomed, unloved, cast aside like a bad memory. They had gone from the front pages to the pink sheets. They had come off of people's quote screens. Everyone was not watching one stock (AIG) for a green light. They were NOT every single story on CNBC. They were gone.


The truth of the matter is this will take time. And pain. A lot of it.



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