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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Madharry who wrote (28646)	10/21/2007 11:17:38 AM
From: Madharry	Respond to of 78705

lifted from another post: WSJ: “The high stakes plan to RESCUE BANKS FROM LOSSES on mortgage securities amounts to a big bet that a consortium of financial giants—AT THE PRODDING OF THE US GOVERNMENT—can PERSUADE INVESTORS TO POUR MORE MONEY INTO THE TROUBLED CREDIT MARKET.” That's right; the Treasury Dept is directly involved in a scam that saves the banks while trying to “persuade” investors to “pour more money” into toxic mortgage-backed sludge. Treasury Dept officials clearly have a different idea of “moral hazard” than the rest of us. The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell—because there are no buyers ---and don't want to take back on their balance sheets because they'll be forced to increase their capital reserves. So they've decided to launch a public relations campaign to promote some goofy-sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage CDOs improves. The WSJ does a good job of disguising the real motive behind the new “Super-Conduit” (aka the Bailout fund) but in the last paragraph, buried in Section C-3, they reveal the truth: “The goal is to reassure investors and make them more willing to buy its short-term debt.” So, the fund is really just a way of rearranging the marketplace until the next crop of gullible investors sprouts up and buys more mortgage-backed garbage. Where are the regulators? The SEC and Treasury should be forcing the banks to be straightforward with the public and let them know about the hanky-panky they've been up to with their risky SIVs (structured investment vehicles) Citigroup alone has nearly $80 billion in off-balance sheets operations which are in distress. The bank accounts for “25% of the global SIV market. As of August, assets held by SIVs totaled $400 billion”. SIVs are set up as a way to make money without taking the risk onto their balance sheets. “They issue their own short-term debt, usually at relatively low rates …then use the proceeds to buy higher yielding assets such as securities tied to mortgages.” (WSJ) Ever since Bear Stearns blew up in late July, investors have been steering clear of any securities connected to real estate, which means the SIVs are getting the Double Whammy---they can't sell their asset-backed commercial paper (because it's mortgage-backed) and they find buyers for their collateralized debt obligations. (CDOs) To a large extent, the market is still frozen despite the upbeat cheerleading on the business pages. Clearly, the worst is yet to come. How bad is it? An article in yesterday's Financial Times said that, “Only $9.9 billion of home equity loan securitizations have come to market since July 1---A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST YEAR.” The banks are in trouble. Big trouble. Main sources of revenue have dried up overnight and they're stuck with hundreds of billions of debt. That's why the papers broke the story on Saturday when there was NO chance of triggering a stock market CRASH. Imagine the horror of investors around the world when they discover that the major investment banks are running these shabby “off-balance sheets” operations while concealing their real financial condition from their investors. Consider the disgust the public feels when they see Treasury officials bailing out the banks instead of ordering them to report their losses and get on with business. Still, Wall Street nonchalantly leaps from one swindle to the next never considering the damage it's doing to the credibility of the market. Susan Pulliam summed it up like this in the Oct 12 edition of The Wall Street Journal: “Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world's most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors.” The poster then goes on to quote a times article saying that the conduit will only purchase AAA rated stuff- thats very reassuring! where do i sign up to invest?

To: Madharry who wrote (28646)	10/21/2007 2:49:06 PM
From: Jurgis Bekepuris	Respond to of 78705

Just because YOU or a savvy investor(s) will not use Moody's ratings in the future, it does not mean that others won't. Like in any situation there are two possibilities: either you do your own DD, or you rely on an outside agency. 90% - perhaps 95% - of people do not have time, interest or acumen to do their own DD and they WILL rely on agency ratings in the future as they did in the past. The only things that you could argue against Moody's and S&P are two: - they will collapse and be sued to the ground. Like Paul said, this is unlikely. Although we know what happened to Andersen and IMHO that company was no more at fault than Moody's/S&P. But I am not a lawyer, etc. - a new agency will appear untainted by past ratings and people will switch to it. This is again very unlikely, but if such agency were to appear, NOW is the time for it to start issuing recommendations. ;) I hold a small position in MCO. I am not sure I will increase it - it will depend on how the situation unfolds.