Compare the following two statements:
- “It is undeniable that the combination of excessively low interest rates maintained for a protracted period of time, and a steady, multi-year decline in market-determined volatility, was the recipe that enabled Wall Street Firms to leverage their balance sheets to levels that were several standard deviations from historical norms. The deleveraging of these balance sheets will be a slow gradual process of indeterminable duration. It is unlikely that Wall Street Firms will be in a position to structure products based on complex financial innovations until the deleveraging is completed.”
- “There is no question about it… Wall Street got drunk…and it’s got a hangover…the question is how long it will sober up and not try to do all these fancy financial instruments…”
The second statement was made by President Bush at a private Fund-Raiser. Television cameras were not permitted. But, some one made a tape and it was soon on YouTube. American Media treated these comments with derision.
The first statement is what a Wall Street Strategist would have said on Television. The TV Anchor would have agreed with the speaker and thanked the Wall Street Strategist for sagacity and insight.
Read the statements again. The two statements say exactly the same thing.
- The first is couched in traditional Wall Street language which is crafted to confuse and engender respect from ignorant TV Anchors. Mr. Greenspan perfected this art. The awestruck media called it “Greenspeak”.
- The second statement is plainspeak, easy to understand and therefore easy to ridicule.
The reality is that Wall Street got drunk, period.
- When rates are as low as 1% (where Greenspan took them and kept them for a long time), Wall Street and Investors are supposed to increase leverage.
- If, in addition, the VIX (market’s measure of volatility) is low, the leverage is supposed to be increased to even higher levels. Look how low VIX went from its inception in 2004 to June 2006. Those who did not leverage their capital in this period were probably fired for not taking enough risk
(VIX since its inception – Look how low it got) (Chart of XBD – Look at the rise)
Mr. Greenspan began raising rates gingerly in 2004. He raised rates at a totally predictable pace of 25 basis points (0.25%) at every Fed meeting. Predictability is another name for stability and lower volatility. Look how low VIX got in 2006.
This was the Doctor Greenspan telling Wall Street to get drunk and Wall Street obliged. In addition to leveraging its own balance sheets, Wall Street advised investors to leverage their own portfolios. It created highly innovative products with fancy acronyms CDOs (Collaterized Loan Obligations), CDO-Squared (CDOs of CDOs) and packed them with subprime mortgages. It encouraged creation and underwriting of loans with low credit protection and called them Covenant-Lite.
Those were great times. Look at the chart (above right) of XBD, the Wall Street Broker-Dealer Index. Leverage leads to high short term profits and XBD soared. As we all know, we tend to fly when we are drunk.
A few firms like Goldman Sachs were smart and they got off this train in time. Other Firms, who began drinking later than Goldman, kept on drinking more and more until they (& their shareholders) passed out. Today, the balance sheets of major banks and brokerages are in tatters. No CEO, Strategist or Market Guru can tell us when the balance sheets will be cleaned up or in street language, when the deleveraging process will be completed.
President Bush was absolutely correct in saying Wall Street got drunk and now it has a hangover. The question is how long will it take for Wall Street to sober up? This is what Mr. Bush asked. If you check, you will find out that Wall Street is not creating financial innovations these days. It is busy trying to understand how to value the innovative products it created in the drunken years of 2003-2006.
We have not been fans of President Bush. But, we recognize extreme unfairness by the media when we see it.
We write this piece to show that today’s TV Anchors and Reporters are both ignorant and biased. Listen closely to the anchors on ABC, CBS, CNN, Fox, NBC, and you will realize that these extremely, well-paid anchors know very little about the economy or the markets. But, they have their biases and the freedom to exercise their bias.
Today, it is Network and Cable Television Media that is ‘Drunk’.
We hold market professionals and financial anchors to a higher standard. That is why we were particularly disturbed by the reaction of CNBC’s “Fast Money”.
Dylan Ratigan, the anchor of the show, joked “When markets get crazy, you know, every body becomes a market analyst, the President included..”. All his traders chimed in with their assent.
Then Mr. Ratigan told the audience his “three ways to know you are drunk on Wall Street“:
- No. 3 – Every time Wachovia cuts its dividend, You do a shot of Jager
- No. 2 – You keep picturing Hank Paulson (Treasury Secretary) in a Toga
- No. 1 – You stumble out of the Bar at 2 pm and Tap the Fed’s Discount Window to Buy One More Round
The nicest comment we can make is that David Letterman’s job seems safe. Watch Dylan’s performance near the end of this Fast Money Video Clip at http://www.cnbc.com/id/15840232?video=801844367&play=1
Those of you who watch “Fast Money”, think back to July 2007 and ask yourself whether the Fast Money Gurus were either fast enough or insightful enough to get you out of Brokerage Stocks before the steep decline began in August 2007. Our recollection is that they were not.
We think there is a much simpler indicator for “drunk”. When the “Fast Money” traders seem too full of themselves, you know people on Wall Street are Drunk!
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