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Calm No More: Beyond Dead Calm
Janet Tavakoli retorts to the posting by Merrill's RateLab with an earlier letter she wrote.
Calm No More: Beyond Dead Calm
By Janet Tavakoli, president of Tavakoli Structured Finance, Inc. – September 20, 2008
I received a self-serving piece of “research” from Merrill Lynch US Rates Strategy. It seems Merrill Lynch would like to give us all a lecture in “value concepts,” and they do a nice job of pointing the finger at everyone else as they use the Capra Defense to explain why an even bigger bailout is necessary (see attached “RateLab Die Once” – September 18, 2008). Merrill Lynch has a lot of bloody nerve. It is waving bull at a red flag. On page one we are told in bold we have a trust problem. Yet they omit the reasons that they (and a few other investment banks) have lost our trust, so allow me to refresh their memories (see also attached “Dead Calm: No One Trusts You” – July 30, 2008). “It is one thing to have documents that disclose risks—many of the documents of death spiral collateralized debt obligations disclosed eye-popping risks—it is quite another to bring deals to market that you knew or should have known were overrated and deeply troubled the day the deal closed.”
Nowhere in this “research” does Merrill Lynch call for heavy regulation of investment banks, banks that purchase investment banks, or a potential return to Glass Steagall (not that it is the answer). Nowhere does it call for consequences for past actions.
Fed bailouts deserve scrutiny. If AIG cannot make a margin call, AIG has less of a problem than its counterparties (Goldman, European banks and others) who cannot get cash (and therefore possibly have liquidity problems of their own). Perhaps a proactive solution would have been to get credit derivatives counterparties together to agree on emergency terms, particularly since like the problem the monolines faced, those buying protection were sometimes architects of the underlying deals getting marked down in value. The main beneficiaries of the AIG bailout seem to be its counterparties. While the outcome may have been the same, when the government looks to AIG’s counterparties for advice, it is not arms-length dispassionate advice, and I could have written every page of the script for how this would go down.
One might argue there was no Fed bailout involved with Bank of America’s purchase of Merrill Lynch, but I am not the one to make that argument. Merrill’s purchase by Bank of America at a premium price seems to only make sense with the huge assist of the Fed’s largesse in suddenly agreeing to accept lower quality collateral for its loans.
The main beneficiaries of the Fed bailouts are not the American consumer, albeit the American consumer has been harmed by this mess and it is a good idea to limit that harm (more on that in 10 days or so).
The main beneficiaries are the insiders who have Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke on speed dial. The Fed has undertaken a massive bailout using U.S. taxpayer dollars.
Now let’s have massive consequences for the key architects of this debacle.
JT Note:
What is the Capra Defense?
Frank Capra directed the movie It’s a Wonderful Life, and it is a holiday favorite in the United States. In one scene, there is a run on the savings and loan managed by the hero (played by Jimmy Stewart, who was also a Brigadier General in the U.S. Air Force during WWII). The small bank survives the run because he is much beloved by the community he has served for many years (and there was no fundamental problem) and he is trusted. Later in the film this honest but rather inept money manager (he entrusts funds to his absent minded uncle, and the funds are misplaced) is bailed out by his friends and depositors. The audience goes all warm and fuzzy and life is wonderful—it is Christmas!
This movie seems to be invoked by every troubled bank today, because they wish they could draw some sort of innocuous parallel to the movie, in what I call the Capra Defense. You see, they would have you believe the problem is that skittish consumers are panicked and do not trust fine upstanding fellows—Jimmy Stewart for goodness sake. If the consumers would just stop panicking and cough up some of their hard earned money to bail Jimmy out of this jam, it would be a wonderful life. See, when you bail them out, you are doing yourself a favor.
It would also be wonderful if you ignore the fact that they do not possess Mr. Stewart’s sterling qualities—just look the other way.
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That is objective honest capitalism speaking right there...
"Objective honest capitalism" was killed, divided into tranches, and sold to the Fed for newly printed bills.
Objective, honest Capitalism? Isn't that a counterdiction in terms?
yes; it is a CONTRADICTION
Well, FWIW Jimmy Stewart was a B-17 pilot in the ARMY Air Force (there was no separate AF until after the war)and did not become a Brigadier General until much later in life, as a Reservist. Still a genuine war hero.
Jimmy Stewart did not become a Brigadier General until long after the War. He was a long time Air Force Reservist. He was a genuine war hero, though, flying many bombing missions over Germany.
"Jimmy Stewart: Bomber Pilot" by Starr Smith was in the "Our Air Force Heritage" section of the 2008 Air Force Chief of Staff reading list. It was removed in the 2009 revision though... ah well.
...and every time the opening bell rings an angel gets his wings.
rofl.......good one ! "Sarcasm of the Day" award.......
criminals in armani suits stealing from widows, orphans & pensioners...evil is alive and well at Merrill/BAC BS
did you get your daily dose of Obium ? markets sure did..
Great article, Janet!
> Yet they omit the reasons that they (and a few other investment banks) have lost our trust,
Well, let me think ...
In my case, it would be because Merrill got subpar returns when the market was rising pre-2007, rode the market down in 2007-2009, and lied about their annual returns ("we were using the wrong formula" they said when I called them on it). Cost me almost half my account value.
Merrill Lynch also has the worst online service imaginable. They've recently "upgraded" Merrill Lynch Online to a new version that fixes one of the bugs and adds about 20 new ones.
For them to say ANYTHING to ANYONE after what they've lost me, the shenanigans they've been involved with, and the lies they told to Bank of America takes oceans full of chutzpah.
Seriously, why did I need a broker to piss away my money on bad trades, charge me a management fee, and support me with a bad website and lackluster research? I'd have done far better just going with eTrade or Ameritrade and buying the SPY ETF.
Life's lessons are learned the hard way. Any other way and they won't make a lasting impression.
As always, Caveat Emptor!
This applies to all products, services, religions, ideologies, financial advice, sex and any other assortments of things that can be used to seperate you from your money.
Try to remember, the time for due diligence is before you pull the money from your wallet, because at any time afterward you bound to never see it again.
Missing link, with all due respect your experience you had at ML could've just as easily have happend at etrade or ameritrade as well. You had an FA who probably was a former shoe salesman (and a good one at that) and nothing more. RH was very close to ML FA's for many many years and it was my experience that more often than not FA's are/were for the most part severly limited in their knowledge of the capital markets. See FA's, the good ones per ML anyway, are the ones who generate the most commisions and fees regardless or their skill or lack thereof in making the client money. Don't get me wrong the vast majority of ML FA's were very focused on their clients well being as blowing up a good account is never any FA's objective. But good intentions aside, ignorance did and still does get in the way, and sooner or later it's arbitration time. The true problem with ML lay not with it's FA's who ironically enough were the best of the bunch (dean witter, morgan stanley, paine webber ubs, banks etc. they all watched what ML did and then copied). The real problem at ML was that in its last years it was run by an egotistical tyrant named E. Stanley O'Neal. Who drove a 95 year firm into oblivion in just a few years. He envisioned ML becomming GS lite, and it blew up in his face. Do not, however,pity Mr. O'Neal for he emerged with a 9 figure welcome home package, and to this day spends many hard hours in the sun trying to lower his golf handicap - I glad he's OK. Because rank and file ML peons got hosed (some FA's included) and were left to deal with the shotgun marriage with BAC and their genius leader Ken Lewis. Google Jeff Kronthal if you want a good chuckle (at the expense of Mr. O'Neal of course) and try not to cry at the same time. Regards.
Well, yeah. You kinda reiterated my point -- ML FA's are clueless chumps, and in fact, most FA's are. I've now written my own trading algorithms and get better trades at lower cost. Terrifying to think that someone like me let someone like that manage my money.
Yes, quite terrifying. Good luck with the trading algorithms I sure they'll work out well.
Regards,
Except this time, we're bailing out Mr. Potter.
Leadership. Morals. "What's my cut?"
All forms of government take advantage of their citizens. W.H. McNeill, in his book "Plauges and Peoples" refers to diseases as "internal parasites" and governments as "external parasites." This parasitism is accepted until the depredations reach a level that exceeds the level that the citizens, in mass, deem reasonable. Then the peasants revolt. Although these revolts almost always result in more suffering for the peasants than the nobility it seems that humans are genetically programmed to desire fairness and will accept personal losses to punish the unfair behavior of others. Our society, with its constant protestations of the importance of "equality" and "fairness," probably has a lower threshold for revolt than most. I fear, for selfish reasons, that our citizens are getting disgusted enough that they will act soon. Certainly, our "elites" deserve what they will get but while I hope a more free and honest society will emerge from the rubble, history does not encourage me to believe that this will happen.
I was sent a nicely packaged invitation today as one of their valued bank accout holders (and implying I should feel priviliged to get the letter by the look of it) to apply for one of their new credit cards they want to offer me...
I have to pay 52% interest if I don't settle in full and pay an annual fee of £250
Synopsis: "A Wonderful Life" is userer's propaganda, regardless of Mr. Stewart's sterling qualities.
http://www.reformation.org/moneychangers.html
That link doesn't work.
Bernanke blamed the savings-glut and nations who bought UST for America's debt conundrum, so Capra or the art of blaming others is nothing new. Regulatory capture will destroy america. It has lost not to axis of evils nations, not to Osama, not to chinese but to a small elite, perhaps no more than 5 thousand americans and some smart foreigners who run our financial ponzi scheme.
Just checking to see if I can post.
It says something about our system when it was obvious even to the most Nancy of Capitalists that truth was subordinated to expediency, but months later the only authorities that assert such matters are lone judges that are probably negatively effecting their future prospects in doing so.
8 flippin months ago..
By DAN FITZPATRICK and SUSANNE CRAIG
January 17th
Wall Street Journal
Bank of America maintains it went back to the government for more support because of larger-than-expected fourth-quarter losses at Merrill Lynch and that the problems came to light after shareholders approved the Bank of America-Merrill combination on Dec. 5. But 25% of the protected asset pool belonged to Bank of America, Chief Financial Officer Joe Price said Friday, a signal that the problems weren't tied strictly to Merrill's disintegration.
Executives at both Bank of America and Merrill have indicated the losses at Merrill ballooned in mid-December, leading to a meeting between Mr. Lewis and Treasury Secretary Henry Paulson on Dec. 17.However,the market for various credit-related products began to deteriorate in mid-November, leaving many Merrill insiders to ask what Merrill CEO John Thain knew, and when.
Nor do we engage in regulatory and political capture.
How about you come on round to 85 Broad and we'll talk this thing out over a beer? (Bring your own, BTW.)
ML Rate Lab is not published by ML research, so it is wrong to categorize it as such. H Bassman is a MD in GMI Mortgages (not a part of ML Research) and as such his desk notes are not considered research avialable to the general public. It is wrong to assume that ML Rate Lab would wind up in the hands of the non-professional except by accident or ZH.