Wednesday, September 17, 2008
Having just killed AIG, bloodthirsty media barron CNBC sets its sights on Morgan and Goldman
Have you noticed that CNBC seems to be creating self-fulfilling prophecies with each failure?
It always seems to begin with them quoting some unnamed source with a fairly innocuous statement like, "AIG is contemplating ways to raise capital." Next, CNBC will put that company's ticker symbol in emergency orange at the top of its screen on the rolling bar such that its stock price is highlighted every 30 seconds or so. Then, Charlie Gasparino will breathlessly and angrily tell us about what the rumors being mongered on The Street are about said company. Then the share price starts declining and credit spreads widen out a few hundred basis points. Finally, because all of these companies rely heavily on continuous access to short term funding sources for their daily survival, the death becomes almost self fulfilling as the company's alternatives for raising capital dwindle, its existing capital providers run for the hills, and the broad media becomes like a dog in heat and humps the company until its dead.
The fact that Morgan and Goldman are being attacked is as much a CNBC created problem as a problem created by the bogeyman...I mean, evil short sellers. Let's be clear, this is not a problem caused by short sellers or the media, this is a problem caused by a fundamentally flawed business model. Businesses that require access to short term leverage and invest in assets that may not be saleable at attractive prices in the short term have an inherent mismatch that leaves them constantly at risk. The business models are inherently fragile (particularly when levered as much as the investment banks are/were). Publicly traded guys may be in even more of a risky position since their stock price can work against them if they desperately need to raise capital. It is perfectly rational for capital providers to Morgan and/or Goldman to be nervous. They should be raising their prices, withdrawing their deposits, or moving the brokerage relationships. As I've said many, many times in the past, the basic blocking and tackling of i-banks and commercial banks is a commodity service. No hedge fund manager is getting paid to PB at Morgan. In fact, when Morgan's risk profile rises, the hedge fund manager is kind of getting paid to not PB at Morgan. Where's the upside?
This unwind will continue until financial institutions have delevered and changed their asset/liability mix to such an extent that their soundness is not in question.
If leverage going to be lower, if the asset side needs to be more liquid, and if the liability side needs a longer term-structure, I can assure you the price of money is going to rise. Period. Get ready for it. If you think you're going to need to borrow money in the coming few years, I recommend trying to do it now before the cost catches up with its inevitable future.
Anyway, AIG is dead. Ding dong. As I predicted in my post on AIG when people were talking about potential a "bridge loan" from the Fed but not contemplating brutal dilution/nationalization as a result, AIG got Paulsoned. I am stunned that nobody else saw this outcome coming. This was obviously the new standard. How could they possibly justify giving AIG a better deal than FNM and FRE? They couldn't. It seemed totally obvious to me that if the Feds got involved, the new methodology was nationalization.
Who knew that the US Treasury was really the world's largest LBO fund? Their sourcing edge is fantastic, they never enter a competitive process, and for some reason the targets always take their price. We may get out of this budget deficit yet! Just nationalize a few more world class insurance companies (We The People now own the three largest insurers in the world, since that's what FNM and FRE really are), flip them in five to ten years and...walla! No more deficit!
[as an aside, I'm short GS, LEH, JPM, WFC, WM and MS, so take my opinion with a grain of salt]