Peter if I could I'd like to post her what you sent me from Barron's. Thank you for drawing it to my attention and for other's who might be interested.
For Private Use Only
(C) Dow Jones & Co.
"A friend of ours, who may be the canniest investor we've come across,
man and boy, and who runs a tidy $3-$4 billion (not a little of it his),
has bought and sold just about anything you can think of and just about
anywhere you can think of. Despite an innately venturesome disposition,
he prides himself on a conservative portfolio approach that features a
neat blend of disciplined daring, hedging, intellectual rigor and great
investment reflexes. Lo and behold, he relates, poring over his varied
and shifting holdings, he discovered that one of his less-restrained
traders had snuck in millions of dollars worth of swaps on mortgages in
some remote corner of the earth.
"Jeez," our man moaned, "I didn't even know the place existed, I still
can't pronounce its name, but -- damn! -- the swaps are sitting there on
my balance sheet, and they're not worth diddly." The hit to his
portfolio was mean but scarcely life-threatening, and he shrugged it off
as one of those things. Anyway, the fellow who put on the trade, he
explained, was a "junior guy" (who may or may not still be on the
payroll but who doubtless has aged considerably in just a wink of time).
What really shook our friend up was not that the trade had cost him
millions of bucks but that, five days after the hit, he's still waiting
for a margin call. The counterparty (read: bank) involved in the trade,
our friend marveled, remains blissfully unaware that its collateral is
history.
Sound chap that he is, our man lost no time in issuing a diktat
prohibiting anyone in his firm from doing banking business with the
extraordinarily lax lender. Any bank that neglects to send him a margin
call when he deserves one is not to be trusted with his firm's
hard-earned money.
But the bank's casual approach toward risk also furnished fresh
confirmation of our friend's belief that the real damage inflicted by
the global swoon is much, much greater than the people suffering the
damage yet realize. Far from an unusual incident, he contends, it's
typical: Most banks haven't the faintest notion how to price the
bewildering variety and volume of exotica on which they've lent billions
and billions.
It all reminds him, he says, of being run over by a motorboat while
water skiing when he was 21. "I got caught in the propeller. I jumped
back into the boat and thought, gosh darn it, it feels like I bruised my
ankle. There were two girls sitting in the boat. I looked at their
faces, their mouths were wide open, but no sound was coming out. I
looked down -- and my legs were shredded. I didn't even know it."
After a pause for silent rumination, he continued: "I think that's
what's going on in the financial system. The pain, inflicted by the
global credit contraction now in force, won't really hit home until
later."
And he has no doubt as to what will vastly aggravate the pain: the $50
trillion mountain of derivatives so eagerly built up over the past eight
years. This formidable pile represents enormous, if not completely
visible, leverage in our financial system, a huge credit bubble. "A
bubble," he warns "that has now been pierced," with potential
consequences too terrible to dwell on during a long holiday weekend.
In case you wondered, our friend has been loading up on two-year
Treasuries and selling stocks short." |
