Looking For Contagion In All The Wrong Places

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Millionaire Now! by Larry Nusbaum

This blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth".

Looking For Contagion In All The Wrong Places

Posted on 06/27/2007 12:28:06 | Link | Post Comment

Bill Gross tees off on Bear Stearns

Colorful is an understatement when describing Bill Gross' use of the English language. Yesterday, the bond king from Newport Beach sounded off on the collapse of two Bear Stearns hedge funds that indirectly invested in subprime mortgages. Can you deduce what his opinion is? (Hint: he's employing sarcasm)

"Shame on you Mr. Stearns, or whoever you were, for scaring us investors like that and moving the Blackstone IPO to the second page of the WSJ. We should have had a week of revelry and celebration of levered risk taking. Instead you forced us to remember Long Term Capital Management and acknowledge once again (although infrequently) that genius, when combined with borrowed money, can fail. But (as the Street would have you believe), this was just a close one. Sure Bear itself had to come up with a $3 billion bailout, but folks, most of these assets are worth 100 cents on the dollar. At least that’s how they have ‘em marked! Didn’t wanna sell any so that someone would think otherwise…no need to yell “fire” in a crowded theater ‘ya know."

It gets more interesting when he attacks ratings on securities backed by mortgages, and the agencies that rated them.

"Well prudence and rating agency standards change with the times, I suppose. What was chaste and AAA years ago may no longer be the case today. Our prim remembrance of Gidget going to Hawaii and hanging out with the beach boys seems to have been replaced in this case with an image of Heidi Fleiss setting up a floating brothel in Beverly Hills. AAA? You were wooed Mr. Moody’s and Mr. Poor’s by the makeup, those six-inch hooker heels, and a “tramp stamp.” Many of these good looking girls are not high-class assets worth 100 cents on the dollar. And sorry Ben, but derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets. Houses anyone?"

Read entire commentary HERE

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