Friday, August 10, 2007

I am noticing that “The Market” is making a very serious attempt to bullshit itself collectively again, towards a bear market.

I think I am seeing a pattern, though.

All (investment) banks need to make fees, because if they don’t make fees, their balance sheet eventually goes awry and they go down in credit rating, so they can provide less credit, so their clients will go down, because they can’t feed their respective beasts. All advisors (lawyers, accountants, consultants,…) to banks need to make fees. Investors need to make money. But because credit is a good thing, a sizeable chunk of them effectively aren’t investors, but borrowers. They do not invest, they borrow ever more money against increasingly fewer assets.

So first, some of the smartest guys at the banks come up with something. In the mid nineties it was “on balance hyper leveraged corporate finance”. And everybody agreed for a while that this was a good, new thing. Since effectively that defied the laws of mathematics and a few others, something had to be done after a few years. So the smart guys came up with another smart thing. “Why don’t we put a spin on securitization?” they asked themselves. And spin it they did. Next to the on balance hyper leveraged corporate finance, they found ways to generate funds for off balance financing. To astounding levels.

And then everybody was really surprised that this did not work out. Not for Internet companies and a few years later, because the stakes were a little higher on that and they did possess or professed to possess something vaguely resembling assets, energy and infrastructure companies. And in the wake of it, the stock market saw a massive downturn. Which again, professedly, surprised the shoes off most of the smart guys mentioned earlier.

So for a while, everybody who might have lost his common sense temporarily, went back to what always worked: if you want a healthy economy, at the top, you need governments that keep the budget reasonably in check (think all you like about the Clinton administration, but this they did) and down below, companies that contribute to that economy by making more than they spend with a sane balance sheet and growing at a reasonable rate.

Not so our smart guys. Because the beasts must be fed. So they thought to themselves: “What can we do?” And they moved down the food chain. So over the past few years, they stuck to their deep held belief that credit is a good thing. So they started providing it literally, as one of them proudly described it “to anything that still had the semblance of a heartbeat in it.” No assets? No problem. No credit rating? No problem.

And again, they were somewhat surprised that the failure rate on that type of credit was significantly higher than on traditional consumer credit. “What can we do?” they asked themselves. “Aaah…”, said one of them: “remember the good old days of securitization?” “Yeah!” replied the others. And they went ahead and did it.

And now, they are beginning to see the end of the tenability of that position. Hence they start talking about a bear market. So they can blame the market and look for the next game.

My dad started his career as the deputy chief of the military police in the Royal Dutch Marine Corps. His superior was an old major, who believed in discipline and tough love. Sometimes a marine would get in trouble financially. He’d bail them out, personally. But he would also sit them down and took them through the following legendary standard conversation:


“Yes, Sir, Major, Sir!”

“You smoke roll ups?”

“Yes, Sir.”

“Get out your cigarette paper”

“Yes, Sir”

“Give me one”

“Yes, Sir.”

“Notice there is a fold in the middle?”

“Yes, Sir.”

“That has a purpose. On the left, you scribble what you earn. On the right, you scribble what you spend. There must always be more on the left than on the right.”



“Good. Now get the fuck out of my office and don’t let me see you here again!”