Kass: Permabulls Blame Credit Crisis on Accounting
03/06/08 - 08:39 AM EST
Recently, I wrote that the "Sunshine Boys" in the media continue to dismiss the credit crisis as pie in the sky, almost as a figment of the (accounting) imagination of the bearish cabal. The permabulls hold fast to their the view that current and prospective default rates are well below the implied levels that underlie the indices, upon which mark-to-market writedowns are being taken by some of the world's largest financial institutions (and some of the smaller ones, too).
In Wednesday's Wall Street Journal, Holman Jenkins Jr., similar to many other permabulls, argues that theoretical mark-to-market accounting conventions are responsible for the credit mess. Unfortunately, like much of Ben Stein's body of work in the New York Times (and other conspirators), there is little substance in the WSJ article. Mr. Jenkins relies on thin-reed quotes (from Sam Zell, John Thain and others) and fails to document his assertions.
It is shocking to me that, in the face of a near total seizure of the credit markets, record mortgage delinquencies and foreclosures, geometrically rising problems in nearly every structured product extant, record credit card losses and other wide-ranging asset quality issues, permabulls, such as Mr. Jenkins, adopt a cavalier "what, me worry?" attitude while the world's credit market teeters on the brink. But maybe I shouldn't be surprised as some of these same folks:
1. dismissed the cracks in the foundations of the housing market three years ago (as they almost universally argued that there was no bubble in housing as interest rates were historically low and employment high); and
2. dismissed the likelihood that the subprime problem would move up the credit ladder (as they almost universally argued that the housing credit issue would be contained).
The WSJ's Holman puts the principal blame of the credit mess on accounting -- much like Ben Stein blamed recent losses in the world's equity markets on, alternatively, the media, Goldman Sachs (GS - Cramer's Take - Stockpickr) and traders.
If Citigroup (C - Cramer's Take - Stockpickr), Merrill Lynch (MER - Cramer's Take - Stockpickr), Ambac (ABK - Cramer's Take - Stockpickr), MBIA (MBI - Cramer's Take - Stockpickr), MGIC Investment (MTG - Cramer's Take - Stockpickr) and PMI Group's (PMI - Cramer's Take - Stockpickr) problems are materially based on faulty accounting convention and not their fundamentals, I would like Mr. Jenkins to answer the following questions:
Why is the Fed, an institution that should understand economic reality, so aggressively easing?
Why did Fed Chairman Bernanke suggest (in Tuesday's Congressional testimony) that the credit crisis in residential real estate is now spreading into commercial real estate, student lending and automobile lending -- and that an entire class of bank loans were overvalued on bank balance sheets and are likely a precursor to more writeoffs, reduced book values and weaker bank profits?
Why are the shares of Citigroup, Merrill Lynch, Ambac, MBIA, MGIC and PMI down 60%, 38%, 88%, 81%, 77% and 88%, respectively?
Why have the above companies been forced to raise over $50 billion of costly and dilutive capital over the last six months?
Why are most of the world's equity markets 15% to 20% below their recent highs?
A figment of our imagination? Hardly.
I have argued that a sustainable recovery in credit and equities is unlikely in the face of a timid and unimaginative Executive Branch, Federal Reserve and Treasury Department. Add Mr. Jenkins to the above band of merry and uncreative men, whom I have christened as the Three Stooges of 21st Century Finance.
The pen might be mightier than the sword, but in the case of Mr. Jenkins' Wall Street Journal editorial, he is wearing a big hat, but has no cattle.
Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.
At time of publication, Kass and/or his funds were short Citigroup and Ambac, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc.
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