THE CURMUDGEON CHRONICLE #210

THE CURMUDGEON CHRONICLE ©

AN IRREVERENT VIEW


Time Line: July 31, 2007
Date Line: Flemington New Jersey

The headline says that there is fear abroad due to weak housing markets and debt defaults in sub-prime mortgage obligations. Does that mean that people have finally completed a course in basic vocabulary? Have they learned that “junk” in junk bonds, and “sub-prime” in debt instruments means the debtor will have trouble making payments?

Yes Virginia, junk means just that and sub-prime is a euphemism for bad credit risk. Do the people who are handling our money know the meaning of those words?

Our neighborhood marveled at the institution that granted a 30 year mortgage for $975,000 (the full purchase price) on a house that had been built three years earlier and originally sold for $650,000. If that is being aware of the meaning of junk then I am the Lord of the Ring.

Today’s spin doctor-pirates make Bluebeard look like a juvenile delinquent. At his worst, Bluebeard might have stolen the contents of 3 dozen ships. Compare that to KKR and Blackstone who have manipulated pieces of paper into hundreds of billions without creating any new value.

Their formula is simple. Buy X Company from the public for a price (it doesn’t really matter how much) if we can finance the deal with its own cash and with money borrowed from institutions. We fire some people; juggle the books and sell off some of the assets to raise money and reflect a profit. Then we will resell the company to the public at a substantial mark-up and we all go home with lots of money and new mansions in the Hamptons.

What makes it possible is the money sprinkled freely on the trail to success. Fees and charges are paid at every step of the way. Mr. Kravis needs a financial advisor like flies need Flit; nevertheless Merrill Lynch and UBS get millions for “fairness opinions” and for raising the money for the deal. The banks that provide senior funding get fees, deposits, and related goodies to beef up the quarter’s earnings; the institutional investors have advisors that get sweetheart fees for participating in the mezzanine financing and are “reimbursed” for their investigation costs and expert’s charges. Finally there is a distribution of unvalued goodies like options and promises of participation in the next deal.

When the curtain goes up on the re-offering of the company to the public, Joe Public will pay more for the stock than he sold it for originally and will find the Company is loaded with new debt and substantially less liquidity.

Bluebeard, HAH!

Every so often the vocabulary lesson sinks in and we have a “correction”. Correction is not a cure and sometimes you need surgery to effectuate a cure. It is impossible to cut greed out of humans engaged in the money game and anyway, our country is proud of its leadership in the world of finance. So let them be greedy but let us make sure that the targets are changed.

Acting to acquire an off-limit target would mean imprisonment for 35 years without parole and a loss of all assets owned by yourself and your family. The targets that should be off-limits are: our own economy; the individual investor; institutions that manage pension and retirement funds; companies whose primary functions are the health, safety and security of the nation, and the institutions that have the responsibility for the savings and investment of the funds of citizens and government.

Frankly I don’t care if there is a feeding frenzy in the shark tank just as long as it is confined to that tank and doesn’t spread to the rest of the country. If that were the case we could all sit back and marvel at the shenanigans with a fair chance that we wouldn’t get ripped off by the activity. That of course would depend on one’s own greed penchants.

Howard Stamer