Streetwise for Sunday Sept 14, 2008

Streetwise

Lauren Rudd

Sunday, September 21, 2008

Where Do I Start

Where do I start? The Wall Street I wrote about last week is not the Wall Street of today. Yes, change is inevitable. However, what we have seen this past week is certainly the most disconcerting definition of the word.

Yet, I see no grounds for sadness. What happened to the Street’s mightiest is analogous to “The Emperor’s New Clothes,” by Hans Christian Andersen. Wall Street is finally seen as standing naked and it is not a pretty sight. However, do not say that I did not warn you.

Since last November I have written and talked about the pending implosion resulting from the implementation of the Financial Accounting Standards Board's Rule 157. That rule made it impossible to avoid putting market prices on essentially worthless securities.

Known as Level 3 assets, they were traditionally priced using the holder’s own assumptions. On the Street it was smugly called “mark-to-make-believe,” and applied primarily to your garden variety toxic mortgage based securities with the best AAA credit rating money could buy.

And so began an avalanche of write-downs that destroyed everything in its path. The difficulty was that no one took the problem seriously. By comparison, Nero, the Roman Emperor, was an amateur. The only thing the current administration and Congress lacked over the past 8 years was a violin. (In truth, the Romans did not know about violins. Nero sang on stage while Rome burned.)

It is unlikely that Wall Street or the economy will recover anytime soon. Moreover, speculative bubbles and economic cycles are exogenous parameters over which you have no control (except on Nov. 4). Meanwhile, volatility in the financial markets is likely to continue with sharp periodic downturns. The good news is that you can sift through the carnage looking for investment bargains.

Yes, I still advocate adding to your portfolio despite the fact that Wall Street’s headache is now a migraine moving towards requiring life support. The problems on Wall Street are intertwined with those of the economy and both have been cultivated by the current administration’s philosophy that minimal regulation, cheap money, a depreciating dollar and a laissez-faire attitude towards Wall Street and big business is sound economic policy. Adamantly, it is not.

There is nothing wrong with a quest for profit...until it morphs into unbridled greed. One party’s presidential candidate, (who ludicrously proclaimed that the fundamentals of the economy are sound), has vehemently announced he will, “...reform the way Wall Street does business.” That comment that brings to mind the Latin phrase, “Condemnant quod non intellegunt,” meaning “They condemn what they do not understand.”

Even the Wall Street Journal, a paper that has unabashedly become even more conservative under its new ownership, wrote, “...McCain intoned the words ‘derivatives’ and ‘credit swaps’ as if it’s the first time he’d ever heard of them.”

If you are hesitant about investing given the current turmoil, you shouldn’t be. After all, as a taxpayer you essentially now own or guarantee mortgages equating to about $5.3 trillion, not to mention your $29 billion guarantee of securities relating to the buyout of Bear Stearns. You are also committed to continually buying additional unspecified amounts of Fannie’s and Freddie’s mortgage-backed securities, starting with $5 billion this month. Plus you now own 79.9 percent of the country’s largest insurance company, for which you just paid a paltry $85 billion.