JR Snell Capital Management, LLC

Just when we thought the credit rating agencies might have learned their lesson, this little tidbit popped up earlier this year, very low on the radar, “Standard & Poor’s Triple A Ratings Collapse Again. The Question is Why?” wherein it refers to a recent press release, quietly put out by S&P, that it was about to downgrade nearly 1200 mortgage securities that it had recently assigned a AAA rating due to a faulty analysis.

It may have escaped the short memory of the investment world that the credit rating agencies were one of the key pillars that crumbled under the weight of the financial debacle that they helped create. You will recall that it was their admitted ignorance or understatement of the risks associated with securitized mortgages that led to a mass downgrade of billions of dollars of mortgage securities and triggered the collapse.

Expertise we can count On?

The subject of this recent mis-analysis were re-remics, a securitized mortgage instrument (here we go again) comprised of repackaged mortgaged back securities that managed to survive the latest rounds of defaults. This re-rating comes right on the heels of another one that occurred just 3 months ago with aother batch of 224 re-remics.

Most disturbing is the fresh light this casts on the questionable objectivity of the rating agencies which are highly compensated for their ratings, but only after winning the business by outbidding each other. Apparently, rating re-remics commands a much higher fee and the banks are willing to pay it to get the ratings they need to be able to market the securities.

Lessons for the Taking

Individual investors can, hopefully, take away some lessons from the lessons that weren’t learned by the ratings agencies and the banks.

• First, we have no business investing in financial instruments that we don’t completely understand, especially ones that require some sort of engineering by backroom financial geeks. Seriously? When the rating agencies don’t understand them enough to develop the right methods for analyzing them, it’s time to run; run far away.

• Second, even though the loss that the banks that are holding these re-remics won’t amount to more than a blip on their balance sheets, it’s a reminder to the rest of us “sophisticated” investors that proper diversification is key in the face of these human-caused flare-ups that could possibly trigger the next calamity.

• Third, unless you have some sort of twisted financial death wish, stick to the fundamental tools. The “next big thing” in investments is usually a re-hashed, raked over financial product loaded with fees and back-door profits intended to enrich the promoters with little regard for your financial future.

None other than the notorious stock trader, Jesse Livermore, stated it the best, “Another lesson I learned early is that there is nothing new in Wall Street…Whatever happens in the stock market today has happened before and will happen again.”

The big takeaway here  is that in successful investing, there are no crutches, no models, no experts, and there are no short cuts.  With experts like S & P, it’s more important than ever to be able to think for yourself and move deliberately along your own course.

bailout, bummer, credit crisis, s&p 500, safety, scheme

This is fairly succint and seems to sum up pretty well what my big-picture concerns are about not just the economy, but society… at present. (I am an optimist/realist.)

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Dr. Adrian Rogers, 1931

bailout, ponzi, rescue, scheme

A couple of months before I started writing blog entries, I “looked into the abyss” on my own personal trading screens here at the office.  It was mid-September or so, right after the Fed let Lehman fail and before the significance of what just happened was really felt by anyone but a few… yet.

Early the morning of the 15th of September as I look at my screens, I’m thinking that I’m seeing a “blip”… you know, a data error, an internet outage, the ghost in the machine… whatever.

Specifically, what’s confusing is that the couple of trust preferreds that I follow (like bonds, but traded on exchanges in $25 hunks rather than the off-Broadway $1000 chunks that a regular bond trades), traded at around $15.00 or so a minute ago and now many of them are now being “bid” at an odd $.50 or so. For a few minutes, I thought the system totally freaked. After a while the 50 cent bids finally were replaced by 3 to 5 dollar bids… then up to about 7 to 8 bucks… finally settling in at about two-thirds of what was bid the day before.

Of course today, I now know it wasn’t the ghost in the machine… it was the abyss. I had looked “over the edge”. I had seen the financial “white light”.

And apparently Hank had seen it too. He met with Congress, made the talk show rounds (white as a ghost, btw) and said SOMETHING to Congress and they gave him the money. So, what was the SOMETHING that scared him so badly?

OK, so thanks to Representative Kanjorski of Pennsylvania (maybe he was talking out of school??), we’ve got a pretty decent idea what happened that day. He says that…

“On Thursday, September 15, 2008 at roughly 11 a.m., the Federal Reserve noticed a tremendous draw-down of  money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two. Money was being removed electronically.

The treasury tried to help with $150 billion. But could not stem the tide. It was an electronic run on the banks The Treasury intervened, but, had they not closed down the accounts, they estimated that by 2 p.m. that afternoon. Within 3 hours. $5.5 trillion would have been withdrawn and collapsed within 24 hours the world economy.”

Watch the video, his explanation starts at about 2 minutes and 20 seconds into it. I also double-checked some additional congressional testimony tapes where Rep. Kanjorski questions Mr. Paulson about this very thing because I didn’t want to foist some “conspiracy theory” crap off on my loyal readers. In the tapes, Mr. Paulson does not deny what happened.

[[He also mentions that there was only the 'lone gunman' and there was no alien autopsy.... Sorry gang.]]

Now we know.

bailout, bank failures, credit crisis, fed, investments, rescue, safety, scheme, treasuries, treasury

Mug Shot of Charles Ponzi

Mug Shot of Arthur Fonzie

As the Madoff situation continues to ripple through the investing world, I’m absolutely personally incredulous that some VERY sophisticated investors simply put on the blinders to another investment that was “too good to be true”… and probably definitely was.

This investing “thing” is difficult… very difficult… I mean VERY VERY VERY DIFFICULT. This idea that someone, somewhere has a “secret”, or a magic touch, or the ability to defy the odds… well, it’s not possible, never has been possible and never will be possible. If someone is showing you an investment that can’t lose, or has never lost, or will never lose… they are telling you that they have defied the laws of physics. Be smart and know this isn’t possible.

Mug Shot of Bernie Madoff?

Ripping Off Investors

When you read in the paper about investors getting ripped off by a scam artist running a Ponzi scheme and you wonder about how it happened and how anyone could be so “gullible”, here’s your answer: Promises of outsized returns and impossibly unsustainable income projections should immediately sound off all kinds of alarms and warnings in the head of any investor with at least a little tertiary knowledge of what is real and realistic in the investment arena. Those who get ripped off are usually those that refuse to do their homework.

The old adage, “If it seems to good to be true, it probably is”, is more true in the investment business than in any other situation you are likely to come across. Trust me when I tell you that nobody cares about your money more than you do.

automakers, big three, fonzie, madoff, markets, ponzi, scheme, stocks