"Parade of denial"

Absent stating the obvious, as you can tell by my less frequent blogs, there is little to add. I could mention AIG's (AIG) revelation today that the insurer had a "material weakness" in its internal controls over financial reporting and oversight of its hedging portfolio resulting in four-times the losses previously reported. But we are now in an era where the cleansing process of the world's financial sphere will continue unabated for some time and should it really be all that surprising? With that said, ironically enough, the prvailing theme here in London and in New York is fear--fear of being left behind when that sure to come rally lifts-off like a rocket!!! Paradoxically, investors remain pretty well entrenched in denial with only a smattering amount of acceptance of the kinf of animal we're up against. But this is miles and miles away from "revulsion;" that final phase of a bear market where investors quite litterally ask to be taken out of their holding, no matter the price and cost.

No sooner had I been podering the above, did I receive a rather poignant chronilogical encaspulation of the unwinding of this credit behomoth from my acquaintance, Stephen Giauque, over in the States. Better than most summaries I've come across, he lets you see how grudgingly the "bulls" have been pulled into even acknowledging the problems at hand. This process of "price discovery" has been exasperated by the very institutions that profess to be the biggest admirerers and proponents of free markets and its solutions for most anything under the sun. Enjoy:

"Parade of denial" (Source: Stephen Giauque, 2/8/08):

• Goldischlocks: “No housing bubble”


• Goldischlocks: “A mere leveling-off” of real estate


• Goldischlocks: “Soft landing” for real estate


• Goldischlocks/ Dots connected: Problems emerge, but “contained” to subprime, commercial real estate still booming


• Dots connected: Two Bear Stearns (BSC) hedge funds collapse due to leveraged bets on mortgage paper


• Treasury Sec., Hank Paulson, rep for Goldischlocks: “I believe this country has very strong economic fundamentals. We are making what I believe to be a successful transition from a rate of growth in this country that wasn't sustainable to one that is sustainable.”


• Goldischlocks: “Tech and a looming cap-ex boom will offset subprime problems”


• Goldischlocks: “Private-equity activity is sustainable (not a bubble) and will supplant the real estate slowdown”


• Goldischlocks: “Problems spread a tad, but contained to Alt-A (low-prime)”


• Goldischlocks: Credit problems are isolated to U.S. shores, international and emerging markets will not be affected. “Decoupling” theory takes hold (foreign markets can thrive even if U.S. slows)


• Ben Bernanke, Nov. 2007, rep for Goldischlocks: “The slowdown primarily reflects a cooling of the housing market. Most other sectors of the economy appear still to be expanding at a solid rate, and the labor market has tightened further.”


• Dots connected: Derivatives such as CDOs and CLOs collapse


• Dots connected: SIVs (structured investment vehicles) are unable to “roll” essential commercial paper


• Dots connected: Commercial paper seizes-up, hedge funds in Australia, Canada and the U.K. collapse


• Dots connected: 100s of subprime and Alt-a mortgage lenders file for bankruptcy


• Bailout I: The Fed and Treasury promote a rescue plan for SIVs—Super SIV


• Bailout II: The U.K. is forced to bailout one of the countries largest mortgage lender, Northern Rock


• Bailout III: Countrywide Financial (CFC) gets emergency funding from Bank of America (BAC)


• Dots connected: “Independent” credit rating agencies come under scrutiny for their apparent reluctance to downgrade billions of derivatives and mortgage backed paper. Questions emerge concerning conflicts of interest between “Independent” rating agencies and their compensation from the very companies being issued a rating


• Bailout IV: The Fed surprises markets with a surprise cut in the discount rate


• Bailout V: Fed cuts its Fed funds rate from 5% to 4.75%


• Bailout VI: Fed cuts its Fed funds rate from 4.75% to 4.5%


• Dots connected: SIV bailout plan collapses. Banks balk at committing capital to definite money losing endeavor


• Dots connected: LIBOR rates continue to rise even after Fed’s rate cut as banks cling to capital reserves, causing costs of adjustable loans linked to LIBOR to also increase


• Dots connected/ Bailout VII: Countrywide Financial appears to be on verge of collapse, Bank of America (BAC) announces buyout


• Bailout VIII: The Federal Reserve along with the Bank of Canada, the Bank of England, the European Central Bank, the, and the Swiss National Bank announce the establishment of a temporary Term Auction Facility (TAF) as a means to temper liquidity constraints among banks


• Dots connected: Rating agencies downgrade billions worth of derivatives and mortgage paper, long after everyone and grandma already know said securities are actually junk


• Bailout IX: The ECB injects the equivalent of $½-trillion into the European banking system


• Bailout X: Fed cuts its Fed funds rate from 4.5% to 4.25%


• Bailout XI: White House and Treasury announce “Hope Now” plan as a life raft for current subprime borrowers


• Dots connected: Citigroup (C), Merrill Lynch (MER), UBS AG (UBS), Morgan Stanley, et al., announce massive write-offs


• Bailout XII: Dubai, Singapore, China and Kuwait sink billions into U.S. financials to plug holes, take equity stakes


• Goldischlocks: Bulls promote foreign sovereign wealth funds as willing investors (saviors) of struggling U.S. banks and brokers


• Dots connected: Monoline insurers of CDOs, mortgage paper and municipal bonds suffer massive price drops on credit scare


• Dots connected: Stocks sell-off, tech and international are among the hardest hit. “Decoupling” theory in doubt


• Dots connected: 31-year old trader for Societe Generale blamed for massive $7.2-billion trading hit


• Bailout XIII: Fed panics, slashes Fed funds twice in eight days


• Bailout XIV: White House and Congress agree on tentative $155-billion stimulus package including $600-$1200 tax rebates


• Dots connected: Research reveals “Hope Now” mortgage bailout plan has helped as few as 100 borrowers


• Dots connected: FBI raids 14 mortgage companies investigating fraud and insider selling


• Bailout XV: New York Attorney General holds closed-door meetings with banks, hopes emerge for a monoline bailout


• Goldischlocks: Stocks recover over 1000-points on hopes of Ambac (ABK) and MBIA (MBI) bailout


• Dots connected: Non-farm jobs report shows first monthly loss since 2003


• Goldischlocks: “If we do have a recession, it will be short and mild”


• Dots connected: Bailout of monoline insurers is DOA, stocks crumble


• Dots connected: Rating agencies threatened with class action lawsuits


• Bailout XVI: Reportedly, discussions on bailout of monoline insurers tentatively back-on
  TO BE CONTINUED…………………..