Sunday, February 21, 2010


The market has a mind. It is, after all, a collection of minds. Like any mind, the market mind is capable of losing itself. It becomes deranged by pathologies, such as manias, depressions, irrational exuberances. Three years ago, the securities markets, whether the global stock markets, the high yield bond market, the emerging markets, the derivatives markets, were as cocksure and bloated with a megalomaniac sense of invincibility as Tiger Woods was before he ran his Esplanade into that fire hydrant. We had it all figured out. We had achieved The Great Moderation, a new age of low inflation, low interest rates, steady growth. The globe was deluged by a tsunami of Greenspan liquidity, and we were all getting drunk on it. Banks and bond investors were tripping out, tripping all over themselves to shovel money at borrowers, whether the borrower be some LBO fund or an aspiring homeowner. Forget about a chicken in every pot or a new car in every garage; how about a brand new house with no money down and three percent interest rate. And we didn't even have to prove that we really made $200,000 a year as a dog walker or house painter. All the possible bad events had been hedged away. Dow 36,000! Eureka! Euphoria!

But then reality hit us right between the eyes like a two-by-four lifted from that abandoned, half finished condominium project down the street. (Allow me to pat myself on the back and say that I called for market upheaval on my Jan 16, 2006 post entitled "Post Holiday Hangover.") The Great Recession was upon us. Dow down 5oo points one day, then 600 points, then 700 points...and that was a typical week. The market mind lost all its marbles. We had to acknowledge that inescapable truth that always seems to escape us: prosperity fueled by easy credit is the economic equivalent of the hyperactive buzz fueled by crystal meth. Any meth head can clean his trailer five times over in one night, but before long the twenty pound weight loss and facial lesions set in.

Over the past two years, we have been collectively working our way through the five stages of grief. First denial: Oh, this is just a few hedge funds who got too deep into subprime paper blowing up. Then anger: Hang those Goldman Sach bastards! Then the third stage, bargaining: Look, what if you give me a two year grace period on making my mortgage payments, and then I pay you half of my normal payments for the next ten years? Next, depression: The government is now allowing Prozac to be purchased with food stamps. But before we reached the final stage of grief, which is acceptance, something weird happened. We all went under the spell of mass amnesia.

I should clarify what I mean by "we"; I'm mainly speaking of the denizens of what is called Wall Street, that tribe of investment bankers, traders and salespeople who inhabit the priciest zip codes of the the New York City and LA metropolitan areas. The first tell-tale sign of memory loss was the 70% or greater rally in the domestic stock markets over the past year. Granted there were certainly some fundamentals backing up that big move, but the giddiness that accompanied it certainly reminded me of pre-Armageddon times. Party like it's 2006!

The high yield bond market is what first really got me spooked. In case you didn't know, the high yield bond market was up something like 60% in 2009. Before long, high yield investors were returning to their old bad habits. By the end of 09, deals were getting done that allowed the issuer to put off paying interest in cash and allowed him to pay instead a PIK, i.e, payment-in-kind, which simply added the interest onto the principal amount (albeit at a higher rate than a cash interest payment). The insanity got zanier with the issuance of "dividend"bonds. Dividend bonds allow the owner of the issuer, typically an LBO or private equity firm, to use the bond proceeds to pay itself a nice big fat dividend. One would think that after the hell high yield bond investors went through in 07 and 08, PIK's and dividend bonds would be anathema. But so much money had flowed into the high yield markets that money managers felt a lot of heat from all that money burning holes in their pockets. And besides, it's so easy to slip under the spell of amnesia...forget, relax, forget, all that bad stuff never really happened.

The most blatant, grossest symptom of this mass amnesia is what Wall Street decided to pay itself this year. My alter ego, Nick Goreman, with his usual effrontery gave his thoughts on this two posts previous to this one. But who can blame people for getting pissed when they read that 09 will be a record year for bonuses paid by high finance banks and investment banks. Goldman's bonus pool amounts to something like $365,000 per employee! And Goldman's CEO, Mr. Lloyd Blankfien, has the nerve to publicly state that his firm never really needed government help, our help. And this after Goldman skinned taxpayer owned AIG more ways than a cat. Goldman and the other banks want us to believe that they made all this dough because they are so brilliant and not because they have been able to borrow at close to zero thanks to the Fed's programs along with an assortment basket of other goodies that amount to billions and billions in support. But how brilliant can you be when you evince such tone deafness as to pay yourself that kind of mula less than a year after the citizens bail your ass out, citizens who now suffering through record unemployment. I'm a Reagan Republican but after this display of greed and arrogance, I'm thinking maybe the proposed special tax on big bank/investment bank profits would fix these assholes' wagon just fine. The proceeds from this tax should be set aside in a rainy day fund to protect us from the next category 5 global disaster these geniuses get us into.

Maybe I'm being too harsh in attributing these actions to greed and arrogance; maybe, as I said at the beginning, this is all just a case of collective amnesia. And maybe mass amnesia also explains why our Great Leaders in DC still haven't come up with any reforms of our financial system to prevent this economic hurricane from ever happening again. Even a regulation as sensible and simple as preventing federally-insured bank deposits from being used for speculative investments--the so called "Volker" rule--can't get traction. A lot of this inaction results from a weakling in the White House. But again, maybe it's just the side effect of a lovely, peaceful amnesia.

Forget, relax, forget that it all ever really happened....

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