FSU Editorial: "Understanding the Great Disconnect" by Rob Kirby 07/26/2007

UNDERSTANDING THE GREAT DISCONNECT
by Rob Kirby
KirbyAnalytics.com
July 26, 2007

Over the past several weeks and months, we’ve heard some of the financial industry’s most respected experts/commentators weigh in on the developing sub-prime/CDO debt debacle. This week it was PIMCO’s Bill Gross:

NEW YORK (CNNMoney.com) -- Woes plaguing the subprime mortgage market are spreading to junk bonds, according Bill Gross, manager of the world's largest bond fund.

Credit markets are facing a "sudden liquidity crisis" in the high-yield bond sector as a growing lack of confidence has frozen future lending, the PIMCO bond manager wrote in an August investment newsletter posted on the PIMCO Web site.

"Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole -- Nathan's Famous Coney Island style -- are having a serious bout of indigestion," he wrote.

The Hat Trick Letter’s Dr. Jim Willie is perhaps a little more cuttingly concise in his assessment of the ‘unraveling’ situation:

An unusual chart is presented, since the Broker Dealers sit at the nexus of the massive asset-backed bond ‘con game’ perpetrated upon the nation and the world. The extent of possible fraud will be sure to be unraveled. They sold acidic bonds, over-rated, misrepresented, opaque as a stone in their fundamentals and inner workings. REVENGE IS BEING DOLED OUT TO THIS DEEPLY CORRUPT GROUP, which boldly write in covenants to obstruct lawsuits by limiting legal liability. As the Broker Dealer XBD stock index suffers deep wounds, the USFed will be compelled to rescue them, since their components are INSIDERS on Wall Street.

Now, let’s compare the comment above with the sanguine remarks of his immenseness – the esteemed Chairman of the Federal Reserve, Mr. Benjamin Bernanke:

WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke said Thursday that there will be "significant losses" associated with subprime mortgages but that these losses should be regarded as "bumps" along the road of market innovation.

It would appear that Treasury Secretary, Hank Paulson – with his steely-calm reserve, more-or-less agrees with the Bernake-Panky:

WASHINGTON, July 23 (Reuters) - U.S. Treasury Secretary Henry Paulson said on Monday that problems in the subprime mortgage loan sector could be contained and would not hurt the overall economy.

"There has been a very significant housing correction. I think we're at or near a bottom there," Paulson said on CNBC television. "I don't deny there's a problem with subprime mortgages but...it's quite containable."

Paulson said the economy was "very, very healthy" despite the problems in the subprime mortgage lending sector.

So what are we all to make of it? Someone[s] isn’t giving us a straight line on what’s really going on, ehhh?

The answer, my friends, isn’t blowing in the wind. Instead, it lies [unintended pun] in the illumination offered to us by none other than Sir Robert of Rubin fame as he reveals the motivation or drivers of crisis management in the interaction between himself, Lawrence Summers, the ESF [exchange stabilization fund], the IMF and presumably the Maestro at the Fed – during the Clinton administration. On pages 290 - 291 of his book, In an Uncertain World, referencing the Brazilian financial crisis of the late 1990s, Rubin outlines how very expensive “bad decisions” can buy time. Sometimes, he asserts, these bad decisions have a great deal of merit because they can,

“..Probably defer the impact of the collapse for six or eight months,
and that will more than justify the effort.”

Very expensive “bad decisions”, hmmmmm, I wonder how bad and at whose expense?

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.