Two years ago, the notion that money market mutual funds would “break the buck” was called a ridiculous claim or far reaching fearmongering by many Pollyannaish characters who still dominate thought in the media and government. In the fall of 2007, I wrote about my decision to pull out of all the MMMF under my control and my concerns that “If a lot of people did what I did a few weeks ago, there would be a massive “run on the bank” that would affect multiple asset classes in a way that a traditional deposit crisis would never do.” A year later, the run on money market funds began and rapidly exposed the impending meltdown of the global financial and payment mechanism system that caused Sec. Paulson and Chairman Bernanke to beg for Congressional assistance. In the end, MMMFs were guaranteed by the US Government, “temporarily” through September 18, 2009. Any bets they will let that guaranty expire in less than two months? Regardless, what has changed about the underlying risk other than the government saying they will eat any losses? Have the underlying assets in the MMMF changed so dramatically that the NAV is pristine, or do we just have confidence that no matter how bad things are, that we will be covered by the government?
The MMMF situation is just one example of how long it takes for a situation to go from receiving criticisms from “Permabulls-in-denial” as a “highly improbable event” to something that everyone wishes they had dealt with earlier. Despite the numerous recent experiences, I still am surprised how long it takes for reality to trump the “con game” perceptions being proposed by the stakeholders….politicians, large investors and the media.
How long did it take to debate the risks associated with subprime loans? For over a year we heard from media morons to Sec. Paulson that it was “contained” and many investors wanted to believe that was true so stocks could keep heading higher.
For about the same length of time, we were treated to an endless discussion of the ratings agency fraud with an apparent hope that if we just kept discussing the problem that it would go away. And to a large degree, that “head-in-the-sand” approach worked…..what has really changed about the ratings agencies or the stuff they had previously rated? How many crappy AAA assets (including CDO’s) were sold at pennies on the dollar due to fiduciary rules and booted out of portfolios? Or how many of them are sitting in the same accounts at banks and other institutions after being written down to some ridiculously optimistic interpretation of previous mark-to-market accounting rules? Did they get any more valuable when mark-to-market went away? Seriously, what improved about the underlying economic value of those securities? Not the accounting value, but the economic value.
And for that matter, what ever really changed about the monoline crisis that captured headlines for months? Are Ambac and MBIA sufficiently capitalized now for any risk that we choose to acknowledge or ignore?
Are municipal governments and the bonds they issued any better off financially to reduce the risk of default? I guess I missed the increase in property taxes or sales taxes or income taxes or the reduced government expenditures that would improve local government deficits.
When TARP was rushed into action, we heard that if the government didn’t buy up all those toxic assets immediately the world might come to an end within days. Instead, no assets were purchased in almost a year. As an alternative and what I call the largest “bait-and-switch” in history, we just witnessed Paulson and Bernanke forcing direct government investment into banks and now people are impressed that the money is being paid back or that the warrants have “earned the government money”. Is that more important than an American government forcing nationalization? Are you now hopeful that the long-awaited PPIP will solve a problem that apparently almost no one thinks is a big problem anymore?
After years of people like me complaining about the risks posed by Credit Default Swaps (CDS) and having industry assholes tell me I didn’t understand how wonderful CDS contracts were, are those risks gone now that the government took over Bear Stearns or provided backstops for JPM or Citi and keeps covering the counterparty risk that AIG extended all over the globe?
It’s been a year since Fannie and Freddie went into government conservatorship, do you see definitive signs the housing market, inclusive of housing prices and mortgages(defaults, foreclosures, etc.) are healthy? Do you feel the Fannie and Freddie portfolios are lower now or contain higher quality credits or represent a smaller portion of the US mortgage market?
Now that the government “saved” the automotive industry by dumping tens of billions into what I call the real “Cash for Clunkers” program and in the process, trampled all over creditor rights and bankruptcy laws,…do you believe that the roots of the auto industry problems have been solved? Do you think that taxpayers will recover their “investment”? Do you think that there is no risk that Chrysler/Fiat, or GM or Ford will once again fail?
Consumers…have they been rejuvenated? No more job loss? Wage increases? Reduced consumer debt levels? Sorry, I must have missed all that.
CMBS…. Commercial Real Estate Loans…??????????? Optimists might tell you that vacancies are not increasing or that rent rates are rising or that refinance loans are plentiful and loads of other bullshit.
The only thing that has really changed in my perception is that the government (meaning future taxpayers not yet born) own assets of minimal value and have lent trillions they will not recover.
Stock markets are higher. Credit spreads are better. We are not stressing about the next failure in the financial system a la Bear, Lehman, Fannie, Freddie, AIG et al. Inflation seems in check. I get all that. And if you are a true believer that confidence and perception are more important than reality or that higher portfolio balances are more important than the economic value that is supposed to underpin those asset prices, I am sure this post seems idiotic and overly negative to you. And that too has not changed. I am sure my similar comments in the years and months before the crisis finally became apparent to the rest of the planet also seemed idiotic and overly negative.
Some things never change.
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