Margin Call(ZT)

Margin Call

August 13, 2007
    The seas were a mite choppy off Hedge Fund Island last week afterall when the Federal Reserve started tossing life preservers of readycash to the Big Fund Boyz bobbing and thrashing in the swells. Now,about that "money" -- which is, in essence, a bunch of extended linesof credit at the Fed's artificially-low official interest rate -- whatactually happens to it? The simple answer is: it disappears into the same ocean of financial woe that the Boyz are drowning in.

    The mere $38 billion that the Fed tossed out Friday afternoon, asthe Dow was tanking down a few hundred clicks, will be used by banksand investment houses to cover losses in the synthetic securities theythemselves created, and have been trading, during this psychotic finalblow off of cheap energy capitalism. In essence, the Fed is buyingworthless paper. The trouble is, there is so much more worthless paperout there that all the computers at the Federal Reserve could nevergenerate enough pixelated cash to cover them in the life of thisuniverse or several like it.

     An additional problem:there is a practically inexhaustible supply of "dead" mortgages andcorporate loans washing up on the pebbled beaches of Hedge Fund Island.No matter how bad the mortgage-and-credit-derived racket looks now, itis certain to only get worse as the dead mortgages and loans fester inthe sun and the tropical foliage on Hedge Fund Island starts to wiltfrom the toxic fumes of all that decaying matter. This summer is onlythe beginning of a cycle of adjustable mortgage interest rate re-sets.The numbers go way up in the fall and are scheduled to continue risingwell into the winter of 2008. How long do you think the Big Fund Boyscan tread water?

     What you're seeing now is a simple matterof financial sector players trying desperately to evade theconsequences of their own actions. The fake wealth generated by thesynthetic securities they created is now being recognized for what it is:a swindle. The hallucination is over. The collective denial thatsupported that hallucination is dissolving. The losses are becomemanifest. Even worse, the losses are growing exponentially because thesynthetic securities were used as collateral to leverage far greatermultiples of "positions," bets, and plays in a casino-like globalelectronic trading arena.

      This is what happens wheninvestment gets de-coupled from real productive activity and becomes anend in itself. It has been terrifically enhanced by computerprogramming. But no amount of digital legerdemain --with the"sugar-on-top" of accounting trickery -- can now hide the fact thatthere is no "value" there. What's more, the losses are going to have toshow up somewhere. If you try to suppress them in one area, they'll popup in another. If the Federal Reserve tries to cover the losses rackedup by the Big Fund Boyz by giving "cash" away, they'll only succeed indestroying the value of the cash itself, i.e. the US dollar.

     Now, few reasonable people can really imagine that the Fed wouldblunder into hyper-inflation. But the situation is so desperate thatthe Fed's mission to do what's necessary to rescue drowning banks mayover-ride the prudent deployment of cash life preservers. As thatoccurs, foreign holders of the US Dollar may detect the impending lossof value of the dollar, and there would be a stampede to the redemptionwindows to get rid of them. That would leave the Federal Reserve (andby extension the American Nation) in a position of stark and implacableinsolvency.

     In any case, the US now stands on the brink ofan unprecedented liquidation of assets. The mortgaged title holders toover-priced McHouses will have to liquidate their positions as"home-owners." The over-leveraged holders of credit-card debt will haveto sell their Ford Explorers, bass boats, sports memorabilia (good luckwith that shit) and flat-screen TVs. The retired dentists will have todump their stocks and bonds. The corporations will have to sell offsubsidiary operations, buildings, and corporate jets. Some collegeswill just shutter. The Big Fund Boys will have nothing of value left intheir portfolios to sell. They will just drown. Their heirs and assignswill then have to dispose of the house in Sagaponak, the 10-roomapartment on Central Park West, and the family fleet of SUVs. The BigBoyz will take quite a few institutions with them -- the club-likebanks and investment "houses" that employed them and went along withtheir mendacious shenanigans.

     The upshot is that we aregoing to find ourselves a poorer nation. There will be far fewer peoplewith money. There will be far fewer buyers of repossessed McHouses,bass boats, etc. Even the houses in Sagaponak and the Manhattanapartments will go cheap. The effort to pretend our way out of afinancial crisis will fail. Sooner or later the recognition will set inthat all that "boo-yah" was dreamed up. The United States swindleditself. We became a nation of such greed-crazed clowns that wecommitted financial suicide in an orgy of self-deception.