More Mass Delusions

The entire credit default swap market is a form of mass delusion. Or simply is a gambling casino for beefers (aka big, evil hedge funds) and their Wall Street equivalents. And seems to encompass some regulatory fraud, too. AIG was a huge writer of credit default swaps, we learn. But it doesn't have the money to make good on its contract obligations. AIG gets a Federal reserve loan to survive as it liquidates in an orderly manner. The government gets 80% of the company via warrants.

A principle of insurance is that one must insure a pool of uncorrelated risks so the variance of expected losses is small compared to the mean. In other words, the gains and losses mostly average out. But the credit market is NOT uncorrelated risks. All the risks are related to the economy and availability for credit. When a major event occurs, all the risks occur at once and hence the insure cannot pay the obligations. So "insurance" of credit risk in inherently vacuous.

We learn that hedge funds wrote credit defaults swaps, too. Were the buyers insane, or just speculators, or perhaps connivers ? A bond buyer effectively can be viewed as buying a riskless bond and writing a credit default swap. BUT the bond buyer has put up CASH to bear the risk of the default. What does a writer of credit default swaps put up ? Now we know it's not even close to 100% cash collateral. So the credit default swap "market" is just a leveraged casino of effectively fraudulent "insurance" policies.

And now we know that many banks bought this "insurance" to permit them to lower regulatory capital requirements. Were the regulators stupid ? Or paid off with the lure of high paying jobs on the Street or in law firms.

Sheesh. Anyone with an MIT Sloan School of Management (B-School) education should have been able to see through this nonsense. My classes there with Fischer Black and Robert Merton covered the principles of behind this almost 30 years ago. Once one knows the facts, it's obvious that "market" is a garbage dump of lies and bets.

Most credit default swaps probably offset in effect, but not in their legal terms. But some participants might have significant net postions, as we now know AIG did. Sheesh. Utter fraud, in my verily humble opinion.

I guess I'll have to write another blog naming new to-be residents of the lower levels of Perdition where those committing false counsel reside in endless torment.

Maybe people should read Dante more to try to understand human moral errors. And governance issues.

Markets

Major league ping pong yesterday, and more early this AM. Yesterday it was AIG. This morning early it is HBOS aka Halifax Bank of Scotland. Sheesh, the successor to the Bank of Scotland has problems ? Mephistopheles sure had no trouble enticing so many formerly staid, reliable bankers to sip from his cup of greed.

This morning, HBOS was attacked by the usual school of piranhas (aka beefers) in a bear raid. Then rumors of talks for its acquisition by Lloyds Bank reversed that big drop into a big gain. Ping pong par excellent

WSJ says that the lending pullbacks will cause many oil market players to exit. That's a good thing, as we all now know the run up to almost $150 was purely speculation by beefers and pension funds overwhelming all natural hedgers. I wrote in this blog early this year that in my verily humble opinion the natural range for oil now is the $90-110 range with seasonal swings in that range. I still think that is true, barring speculative binges.

Why have regulators sanctioned what is now seen as gigantic casinos for these "Masters of the Universe" who are now seen as more like Eric Cartman (of South Park fame) playing video games endlessly ? I guess it's libertarianism run amok.

I sold quite a few stocks in Alpha Fund that I had collected in recent weeks - they seemed like barnacles hindering my Alpha Fund in these rough waters. I had been rather long coming into Monday's debacle and needed to protect my core holdings of BAC, JPM, CVX, DVN, FCX and RIG. So I practiced what I preach: "Protect yourself at all times." I am keeping only the stocks I really like and will add to those as favorable prices occur. I even sold GE, CCJ, AAPL, GOOG and C as being distractions from my favorites. I like those stocks especially at these prices, but they are secondary for me. I am circling the wagons while the savages attack.

I was asked after these sales by a sage commentor, "What will it take to become a buyer again?" I thought this over and what I want to see is proof that my thesis that house prices roughly bottomed this summer is correct, or at least roughly correct. Some signs show that it is correct. But to me, until this becomes more clear, the beefers will be able to make Ms. Market dance to any tune they wish. And their tune is a dirge now.

Alpha Fund is still quite long, about 125%. Mrs. B is still patient - sitting on a mountain of cash.

Word of the Day

"Chimera" - noun [$10]
Chimera means 1. (Greek mythology) a fire-breathing female monster with a lion's head, a goat's body and a serpent's tail; 2. a fantastic or grotesque product of the imagination; 3. any fabulous beast with parts taken from various animals.
Sentence: As the credit default swap market is dissected, we see it's verily a chimera of pseudo-insurance, gambling, speculation and regulatory fraud.