Thursday, March 05, 2009


"I know you like to think you're shit don't stank, but lean a little bit closer your roses really smell like poo poo poo." - Outkast, Roses

I have a memory seared into my head from my old friend Brian's rehearsal dinner, where his future brother in-law got the karaoke started by ripping through a killer rendition of Roses, by Outkast, featuring the uncensored line above, as grandparents and other relatives looked on with  somewhat bewildered expressions.

Lately, the phrase has come to mind in thinking about JP Morgan.  Back in September, people were saying JP Morgan and Bank of America had been anointed as the survivors amongst the big banks.  I never understood why people thought BAC was invulnerable, which it clearly wasn't, but perhaps JPM's partnership with the Fed in the BSC buyout made people think that JPM was invincible.

This week, Bloomberg published a story about JPM's massive OTC derivatives business, and I was shocked that there wasn't one mention of RISK in the article!  Instead, it focuses on the massive fees JP Morgan earned on it's derivatives business, and notes, "The bank held $87.7 Trillion worth of outstanding OTC contracts as of September 30th, more than the next two banks, Citigroup and Bank of America combined."

Hmmm...  Hey JPM - you think your shit don't stank?  Look folks - when you hold 87 TRILLION in notional over the counter contracts, you have some unhedgable risks - and volatility across asset classes like we've seen makes it virtually impossible to avoid some sort of significant losses.  I'm pretty surprised that no analysts (Hey Meredith Whitney - WHERE ARE YOU?!!?) have torn this apart. 

Then today, I hit up to check on the afternoon's stories, and I find this abomination from Barney Frank:

"Frank, a Massachusetts Democrat, said today he will seek legislation to "make it illegal for anybody to securitize 100 percent of anything."  The "phenomenon of securitization" is a large part of the problem in the housing market, Frank told reporters at a briefing in Washington."

Now here's the real problem:  Barney Frank, Chairman of the House Financial Services Committee, believe it or not, is not an idiot.  So when he spews such asinine comments as the one above, it's really, really scary.  

The problem, Barney, isn't securitization - there is nothing wrong with transferring the risk from those who do not want it to those who do want it.  That's what financial markets are very good at.  If the government wants to be involved, and we've seen recently that the government definitely wants to be involved - they should be regulating the BUYERS of the securitized products - those are the ones who are essentially lending the money to the homeowners (in the mortgage securitization example).  You need to make sure that the LENDER doesn't lend more money than he can afford to.  You need to make sure the BUYER of the securitized product (aka, the lender) doesn't buy $1B of the products with only $50MM of equity.  See, if you did this, then you wouldn't need to bail them out afterwards!  Voila!


1 comment:

The Bracelet said...

Really simple solution with great results.

Reminds me of the day I came up with jerking off lefty. Right arm fatigue was affecting my touch around the greens. I went southpaw for a week and was chipping in from the fringe in no time.

VoilĂ !