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The Best of the Exchange: Bond Bailout, Optimism, Depression Lesson


Highlights of Minyan commentary on a volatile week!

With the launch of The Exchange, Minyans now have a forum in which to express their viewpoints, comment on articles and meet other like-minded financial souls. Minyanville publishes a "A Best of the Exchange" each Friday to highlight the many insightful posts and discussions going on behind the scenes.

Become part of The Exchange and let your voice be heard!

(Editor's Note: Some of the following posts have been modified slightly from their original form.)

Rumors swirled this week about bailouts for the struggling bond insurers Ambac (ABK) and MBIA (MBI). Pep offered his thoughts and a useful analogy on the business of insuring bonds ... or bets.

Minyan Barry:


You are the best "analogist" on the web, at least for degenerate gamblers.

Minyan Cad:

I'm certainly no bond insurance expert, but wouldn't the investment banks involved in these bailout talks need to be completely free of any bonds, CDOs, CDSs, etc insured by the monoliners in order to be free of any conflict of interest? I know I would look at it and say, wait a minute, you're infusing capital into these insurers to prevent yourself from having to write down further bad debt? or am I missing something?

Pep responds:

You are right. Absolutely it's a conflict of interest, which is precisely why in the twisted logic of Wall Street it should work.

Great questions. My take is that the risk going forward is not so much the ability to operate, but that the more stringent ratings environment still has the unintended effect of slowing the velocity of money. A key reason the AAA ratings are so important is not so much the raw ability to pay any potential claims, but the ability to continue insuring bonds going forward in the same free-wheeling environment that existed prior to July. This also goes to the question of what happens to the stocks. MBI and ABK were beginning to get closer to being priced to bankruptcy by the market before Tuesday as word of a bailout began circulating (no doubt allowing some shorts to cover). But apart from being repriced away from disaster, the ability to continue operating as profitably as before will likely be impaired for years. This makes the stocks difficult plays in my opinion.

Minyan Curtis:

Your article is right on the money on the bond insurers. Perhaps, someone should provide a copy of your article to Eric Danillo. More equity to Joe, Sally, and Frank is not the answer to the problem, and I doubt you will get anyone to re-insure their entire portfolios.

I think that the Federal or State governments should start their own insurance fund where a portion of the money raised from the bond offerings would be used to purchase reinsurance, bypassing ABK and MBI, which now lack the ability to pay any claims.

In Hawaii we have the Hurricane Insurance Fund, where the State runs it. Over a decade ago insurance companies folded, were unable to pay claims, or refused to pay them. Danillo should start something now, and every time a NY municipality refinances or issues debt they will know that their bonds are insured.

Always looking for the other side if the trade, Toddo found Five Reasons for Optimism despite the long-term struggles ahead.

Minyan Michael:

I respect Todd's thought process, particularly his attempt to see both sides of the tape. He is one of the best there is on Wall Street.

I also agree that an upward leg is in order and coming within days. But I don't agree that we have seen worse than this and thus, we will get through this.

How can Todd (as well as many others) say on the one hand that huge imbalances have built up for years, decades even, and then say that we have seen worse. While I agree that it will take time for perception to catch up to fact, I don't know if Todd or anyone else on Wall Street truly wishes to see the "facts." Or even if they can see them, given their point of view.

While this web site is the best I've seen from a clear eyed point of view, that view is from the trader's point of view. And a trader sees greater chance for profit during times of turbulence. But, he or she still believes things will get better, that "normal" times will come back.

What I would like to see is a discussion on how these imbalances will be corrected (exactly what needs to be done by whom) and the effect the correction will have on the markets, the world and our culture. How many years will this take? How will the worlds markets adjust to this shake up? Why does no one believe we could have a world wide depression lasting 5-10 years?

I understand that there are many variables, so many in fact that there is no way to know what will happen. But given the fact that our political leaders will refuse to deal with reality as long as we act like 3 year old children asking mommy to tell us everything will be OK, things will not get better.

So many investors and traders have been conditioned to believe that things will work out in the end. While Todd warns against this kind of thinking, he is guilty of it himself if he continues to believe that it's been worse before.

No, it hasn't been worse before. It is worse now. And it will get much worse later than it is now. We are in denial about the extent of this problem. It's human nature to hope for the best. Otherwise, why get out of bed in the morning.

If these imbalances have been building for decades and are part of our very culture, how will they be fixed in a matter of months or even a year or two? Are we not talking about fundamental change rather than a major tune up and a shine?

Minyan Charles:

Michael: These are some big, big, BIG questions! First, these imbalances (i.e. distribution of wealth, debt load, etc) have accumulated to historic proportions--we are at or near the levels of wealth inequality that we were in 1920s whereas debt levels are unprecedented. I think you are already seeing a swing in people's mindsets to getting out of debt and consuming less, which can only be a positive as "the debtor is the *slave* to the lender." Much like the company towns of a century ago where the whole concept was to keep the workers indebted so that they could not afford to risk losing their job by standing up for rights, it seems that maybe the same thing has been at work in our culture especially the last 25-30 years (i.e. "Life takes Visa").

After the crash of 1929, it took basically a decade for the US to recover so I think that is a reasonable time line. Of course, it also took a major world war to pull us out too. Well, we have been trying war for the last 5 years to stave it off and also in 1991, so maybe that won't be a big help this time around?

I completely agree our "leaders" have been asleep at the wheel, but you get what you vote for--especially if you vote against you own economic interests repeatedly. Obviously, some of those in power are afraid of some sort of rebellion (French Rev American style? we do have a lot of similar problems to those faced by the French then i.e. fiat currency, wealth inequality, etc), which I guess is not completely out of the question..or else why get rid of posse comitatus? Why build massive detention centers? Fascism has been creeping stealthily into our country.

I think no one ponders a huge Depression because it is bad for all (at least short-term) and bad for viewers/listeners/readers, but it seems very shortsighted to believe it is impossible...things are cyclical no matter how we try to control them.

The true way out would be to stop spending more than we as a country can afford and actually get our country out of debt, but that requires we give up the Empire and I can't think of one instance where that was willingly given up before the circumstances forced it to occur. Power is intoxicating and will not be given up easily..hence the legions of lobbyists to buy influence and the keep it. So, I think best case scenario the markets go down for 2-3 years and then start up as the country has a culture change from consumption to saving. Thoughts?

Todd responds:

I am not discounting the big picture--not at all. I have long said--and I said in the article--that this will be a long, hard road. The "other side" is for a trade, such as what we're seeing in the financials the last few days. I don't profess to be any smarter than the next guy; I am simply sharing my opinion with hopes that it has utility.

Finally, and most importantly, I wanna thank you all for taking the time to communicate. I've long offered that the friction between opinions is where true education lies and this is proof positive of that.

Always level-headed, Mr. Practical offered his thoughts on The Great Moderation Of Debt, and its implications for the economy, and indeed the country.

Minyan Dan:

This is the description of the Fed's actions - in 1929.

When my son asked "What happened to the money when the stock market crashed before the Depression?" I told him: "It was never there to start with. Everyone was trying to get rich just because they had a little money, or they borrowed money to gamble. It was a matter of blind faith in the Rich; the common investors were betting that the Rich 'knew what they were doing'. The Rich did know what they were doing: they were selling worthless stocks to people who couldn't afford to buy them."

The current market is only different because the common folk are buying the worthless stocks through forced or misinformed Systems called 'Retirement Plans' or 'Investment Plans', but it's still the same game. The Rich will sell all of their major holdings to the 'Plans' before the complete crash, leaving the common investors staring with disbelief at their empty balances and pink slips.

Minyan Tom:

Thank you, thank you, thank you, Creators and Editors of Minyanville! Visiting your site has been one of the most enlightening experiences of my life. Keep up the great reporting.

We appreciate all the comments on The Exchange and look forward to the Best Of Next Week!

Have a great weekend, Minyans!
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