S.S. Paulson Rick Ackerman

S.S. Paulson
Iceberg-Bound

For edition of December 04, 2007

We always expected the Fed to pull out all the stops when the U.S. economy began to slip into the void, but we never could have imagined the spinmeisters would invent “mortgage welfare” even before recession had been officially declared. Treasury’s latest plan is designed to make it easier for certain ARMs borrowers to temporarily freeze their starter rates to avoid foreclosure. We know the situation is dire because the big lenders are signing on without even having their arms twisted.

It is of course inconceivable that loosening their grip on their least creditworthy borrowers is going to be a big money maker for companies like Countrywide and Washington Mutual. But profit it most surely not the point. It is appearances that count, and if the inevitable collapse of the U.S. mortgage market can appear to have been pushed back to a later date, that is reason enough for Uncle Sam to waive the daunting regulatory hurdles that might otherwise have impeded this salvage job for years. Paulson’s plan is not merely being fast-tracked, it is being shot out of a legislative cannon.

$100 Billion Pisher Fund

It is so urgent, in fact, that another jerry-rigged relief package, Citigroup’s $100 billion superfund, seems to have been relegated to the back burner. However, we expect that that measure too will be fast-tracked once the ARMs Chanukah present has been bestowed on beleaguered home-“owners.” Morgan Chase and Bank of America are co-sponsors of the superfund, which, like mortgage welfare, is at best a cynical ploy designed to forestall the inevitable. But whereas the ARMs giveaway may buy lenders an extra month or two to rearrange the deck chairs on the S.S. Paulson, the $100 billion superfund is going to get vaporized in, oh, maybe eight minutes.

You can consider that a prediction -- one that follows the old trader’s axiom that “opportunity moves to size.” What this implies is that when you dangle $100 billion of real money in front of securities traders, they will arbitrage it down to nothing faster than you can say “piranha.” Once enacted in to law, that is $100 billion they can count on to be there, and as long the $100 billion offer remains on the tote board, the hedgers will find something to sell short against it.

You can be certain the banks pulled that number out of thin air as an answer to the question, “What kind of figure would impress the public as a ‘serious’ reserve?” A hundred billion dollars may sound like an awful lot of money, but relative to a financial shell game that has put into play more than $500 trillion worth of leveraged financial instruments, it is probably not enough, even, to survive the eight-minute strafing we predicted above.