Friday, January 30, 2009

Insolvent

Why don't we get it ? Is it too complicated to understand ? Are we just not bright enough to comprehend ?

Do the words good bank, bad bank, bailout, TARP, TALF, aggregator bank, too big to fail, systemic risk, confuse us?

Now finally, some in the mainstream financial media are getting it and starting to use the "I" word. No, not illiquid as has been the case for the past year and a half but the other "I" word, insolvent. This might be a good time to look at the definition of this word.

in⋅sol⋅vent

[in-sol-vuh-nt]

–adjective
1. not solvent; unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature.
2. pertaining to bankrupt persons or bankruptcy.
–noun
3. a person who is insolvent.


In the real world that you and I live in, when you cannot pay what you owe, or cannot meet required liquidity measures in your affairs, lets say your brokerage account, you rectify the situation by raising cash. This is accomplished by selling assets in the account, period. You do it any way you can. On the street you would sell assets that you own. No you don't get to keep the rolex , or the beach house, or the club membership as it all goes until all your obligations are satisfied. In your brokerage account this is known as a margin call and either you sell or they sell you out but either way it gets done ! I have mentioned before that I was counselled by a very wise man, early in my career to 'never, ever, ever meet a margin call as it is the market's way of telling you that you are wrong.' Sell the position out and move on. Do not under any circumstances throw good money after bad.

When the liabilities exceed the assets in the account or the institution it is insolvent. I realize that saying this is heresy on CNBC, the Fed and the Treasury and treasonous on Capitol Hill, but common stockholders in insolvent companies get nothing, zero, zilch, nada. Banks included !

Worthless stock is their punishment for investing in and not selling a poorly run company. Yes I know about the too big to fail and systemic risk fear mongering. Problem is, there are plenty of banks in this great country, with plenty of capital adequacy, with plenty of performing assets, with plenty of good management.

Keeping insolvent banks alive via life support with taxpayer funds penalizes these prudent banks, is perverse, immoral and just plain ol' wrong. I don't care how many Nobel prize winners in economics, Fed governors and global economic gurus tell me to the contrary.

The other evening while channel surfing and caught some of Larry Kudlow's evening show. I stopped in to listen as he had on Bill Isaac, the former chair of the FDIC and Bob McTeer, the former Dallas Fed president. In what is becoming more and more unfunny, both of these expert boobs were recommending a form of regulatory accounting forbearance for the banks. They see mark to market accounting as what is killing the banks as every time the assets on the bank's books drop, the banks then must set aside more capital in reserve against them in a never ending death spiral.

Now I was never a Fed governor and never will be, nor will I ever run the FDIC but I do know a few things and what I am about to say is highly technical and some may need a financial encyclopedia to understand it if you have never worked on Wall St., the Fed or the Treasury and that is.....

SELL IT !

I repeat, JUST SELL out the asset that is dropping in value !

See, I told you what I was gonna say was highly technical and quite complex. It really is not rocket science but rather an issue of manning up and taking your medicine. Now I don't care if you don't want to sell, I don't care if you think it's not fetching what it's worth and is depressed. That is inconsequential and is now a moot point. That time is past. You sell and either survive to trade/do business another day or go bankrupt. It truly is that simple.


I rail on lots of those at the top for their ignorance but today I want to give Jamie Dimon, CEO of JP Morgan some credit this morning. In his interview this morning on CNBC, he at least was candid enough to admit that mark to market accounting is not the reason for the problems at the bank. If only McTeer and Isaac would put down the Kool-Aid so many at the top seem to be drinking.



Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 2 units Ultrashort MSCI EAFE ticker EFU @ $89.80 stop at $89.80
Long 2 units Ultrashort S&P500 ticker SDS @ $69.80 stop @ $66.15
Long 1 unit Ultrashort Real Estate ticker SRS @ $51.30 stop @ $47.18
Long 1 unit Ultra Crude ticker UCO @ $10.60 stop @ $9.38
Short 1 unit Darden ticker DRI @ $27.70 stop @ $28.70
Short 1 unit Wells Fargo ticker WFC @ $20.20 stop @ $22.43
Short 1 unit JP Morgan ticker JPM @ $27.35 stop @ $29.54
Short 2 units of Apollo ticker APOL @ $83.40 stop @ $86.31
Short 2 units Morgan Stanley ticker MS @ $21.30 stop @ $23.82

2 comments:

Becky said...

I really love your blog and getting your emails. Thank you very much!

Raj said...

Hey, there's a quote I read somewhere , "He who panics first, panics best". They all seem to be panicking now, at the same time.

Keep up the commentary. Love reading it.