As default rates rose, the alchemist’s products became a nightmare for those who bought them: Namely, banks, insurance companies, mutual funds, hedge funds, money managers - all the usual suspects stretching for yield and trying to beat their benchmark. Some companies -- like Ambac (ABK), MBIA (MBI) and AIG (AIG) -- went so far as to issue CDS (credit default swaps) against this esoteric garbage, but the stress tests they used in their models failed miserably.

As the real-estate defaults piled up, the owners of the nuclear waste started to write down the value of the assets. This is what resulted in the demise of firms like Lehman Brothers and Bear Stearns, and the near-death of many others - not to mention the nationalization of Fannie Mae (FNM) and Freddie Mac (FRE), et al. All these assets had to go somewhere eventually. And they did - into the Blob.

The Blob is no more than a SIV (structured investment vehicle) that sits in the middle of the investment landscape absorbing all in its path, including our money. Yes, “We the People” own the Blob: The creature that’s engulfed trillions of dollars of assets that should never have been created in the first place.

Thank you, Wall Street alchemists!

Alphabet Soup Is Served

Here’s a chart, courtesy of www.nowandfutures.com, that shows all of the federal interventions implemented to stem the credit crisis that began with the unwinding of 2 Bear Stearns hedge funds last summer. Even before the creation of the Alphabet Soup of Intervention, the Fed had already begun to try to shock the market into shape with changes in the discount rate along with other actions. Each action seems to have been executed in a way to have the greatest impact on the financial markets.

Despite all of this, the real economy is contracting on a worldwide basis. I can’t say if these programs will work in the long term - but so far, the markets and economy have responded with a resounding thumbs-down.


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The poster child for Alphabet Soup is TARP, or the Troubled Assets Relief Program, the definition of which can be found below:

"TARP allows the United States Department of the Treasury to purchase illiquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets… TARP is intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses."

At first, I was aghast that the Treasury would take my hard-earned cash and actually buy the “esoteric securities” to bail out the financial alchemists whose experiments had gone bad.