February 9, 2009


Treasury Secretary Geitner is expected to publicly reveal tomorrow the government’s intent to purchase troubled assets. You might wonder why I use the word troubled, it being a rather tame adjective to describe what the media keeps telling us is an unredeemable catastrophe. But as with investing the more obscure the facts the more interesting the search for value becomes.
The fact is many of the assets that came under pressure during the early stages of the credit crunch were in many respects not of the same characteristics of the assets that started the big slide. That was mostly due to the collapse of the mutual funds, run by Bear Stearns, which held the investments against which street panic took aim at. But it’s worth noting that the investment those funds held were concentrations of sub prime mortgages. Now I might with a shrug mention those mortgages were more or less prone to risk of default in the first place. But that would suggest that a product that aims to turn millions of mortgages into interest bearing notes (i.e bonds) is a simple process to grasp when in fact it’s pretty abstract even to those folks who securitize bonds for a living.

One view that I’ve held for over a year is that the rise in defaults within the sub prime mortgage market was direct evidence that the FOMC had raised interest rates enough. If you recall interest rate hikes took up most that better part of two years slowly creeping higher to a point where an ocean of adjustable rate loans began to reset with a vengeance. And doing so as well before many of the holders, generally un savvy and un creditworthy consumers, knew what hit them. I also held that the FOMC maintained an aggressive posture in spite of this and directly added to rising investor pessimism. And it was that pessimism that systemically caused the bond market from the lowest credit ‘HAS’ to the highest credit ‘GE’ to seize up regardless of the underlying fundamentals.

I hope you can guess where I’m going here, once the dust settles someone is going to be holding assets that might almost certainly be worth more than they are today. Now this is contingent on whether Secretary Geitner does in fact reveal a plan to buy troubled assets. Or more importantly has he solved the most pressing problem at the banks and that’s what the troubled assets are really worth. I contend that the banks prove this by surprising us every earnings period with enormous write downs after assuring the market that they were done the period before. And while there is little reason to trust banks that are technically insolvent (Nouriel Roubini said so, and I believe him) and don’t have much to hide behind, isn’t it in the best interest of the few to keep the many guessing? Frankly I don’t care who makes money on assets that are most assuredly going to rise in value as long as it’s the government, to hope for it being the taxpayers might be more optimism that I’m capable of on the that subject.

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