Credit Crisis, Tip of the Iceberg?
The current market conditions are pushing me to come back to my blog after a long absence.
Folks, make sure you're sitting down before reading this, and I might upset a lot of people with this post but this is my view of things at this point.
First off, I would like to focus your attention on the Carlyle Capital Corporation. This investing firm (mostly Fannie may and Freddy mac mortgages and US government bounds) had at the beginning of 2008 $21.1 Billions in debt principally funded by repurchase agreements ($20.976 Billions) , $129.923 Millions in Liquidity cushion, $16.4 Billions in assets. The drop in the value of the assets held, created margin calls on the Carlyle Capital loans, and the company was unable to make theses calls for lack of sufficient liquidity (cash). The bank traders decided to take advantage of the recent pledge from the Fed and JPMorgan to back up Bear Stearns (Who by the way was the first one to liquidate positions in Carlyle Capital Corporation) and provide them with liquidity. the bankers seized all assets, or whatever was remaining of the bonds and mortgages backed assets. The big wigs with which Rubenstein usually meets with to get the loans, had abandoned the company, their leaders, and the shareholders.The company had just gone public on the Amsterdam Stock Exchange leaving the proud owners of 500 Millions of B, non voting, shares with absolutely nothing or close ($0.71 per share, up 90% on vague comments from founder Rubenstein to somehow try to compensate shareholders).
The lesson to be learned here is to remember that stocks, in the end, are worth nothing. They are just pieces of papers. There will never be enough money, after the bankers get their shares, for the stock holders to get anything back.
I would like to take a moment and take a look at how a corporation run by such a brilliant man as Rubenstein with friends in very high places who were there to start him up by funding his private equity fund (Citi ex CEO Charles Prince), was to fail so miserably.
Lets look at what I think is key in this situation and really in what the credit crisis is about: How does an investment company leverages (borrows) $21 Billions with $130 millions in liquid assests????!!!!! That's an 161:1 ratio!!!! To put it in perspective if you went to the bank with $100 as collateral and ask for a loan the bank would say in return: "Yes! Here is $16,150.00!" I'm not sure what the interest terms were, but do you think this would ever happen to you or me? Why are there no limitations on the amount of money financial institutions can leverage to invest with? Try printing your own money out of your house and see how fast the secret service guys will be knocking on your door, yet this is exactly what is going on and what got Carlyle in this mess.
So when the dividend paying assets, on which the Carlyle Capital guys were trying to get fat on, starting to free fall in value the lenders wanted their money back. Why wouldn't they? It's their money, they need it to pay off their own debt, which for a while was getting called in buy the boss of the banks: The Federal Reserve.
The Federal Reserve who after a few years of record low interest charging, created a monster in the real estate bubble, and then drying out markets of liquidities buy raising interest rates and selling securities to the banks.
As Federal as Federal Express, and holds no reserves whatsoever: the U.S. government only owns 20% of the shares, and all the money they lend out is created out of nothing, but the interests they collect is real.
I will give my 10 shares in the gold ETF GLD to anyone who finds me a list of all the Federal Reserve shareholders.
But you're probably not persuaded, well here is an other prediction Bear Stearn is not going to survive, it will either be absorbed by the mother ship of banking and financial companies JPMorgan Chase, or if enough insiders and friends of privileged get out in time, it will become insolvent, the stock will be worth nothing, employees laid off, pensions and retirements wiped out, lives ruined, and the offices will close. All financial institutions in Europe, specifically in London, have be told to stop doing business with Bear Stearns, all the New York Hedge Funds have pulled out their holdings. This, my friends is a banker's worst nightmare: a run on the bank, and there is no coming back from that.
Plus liquidation continues and the domino effect will soon affect the entire financial sector and will spread to the more credit sensible industries (and already has). Stay away from any investment that demands capital to be readily available in order for the company to profit. All the cash in the market is being sucked into a hole which has no bottom, as all the debt far, far exceeds the available liquidity.
Good luck, we all need it now.
