Monday, March 24, 2008

Open letter to Ben

No humor in this post. This is a full page ad that I missed that ran in the WSJ March 18 page A5. As a personal note, this ad cost the user $90,000. Some people do put their money where their mouth is. I tip my hat to this man. He didn't have to do it, but he did it anyways. Thank you Sir!

To: Mr. Ben Bernanke



“Dear Mr. Bernanke:

I was afraid that if simply wrote you this letter you might never see it. I thought this message was important and worthy of effort to attract your attention.

I am sure that you are hearing from the Wall Street crowd about how stupid the marketplace is because the market won’t buy all the great loans that Wall Street has produced and how stupid or illiquid the market is because AAA RMBS are being offered at 60 cents on the dollar with no takers. First mortgage syndicated bank loans are offered for 70 cents on the dollar and Wall Street simply cannot believe buyers aren’t standing in line to buy.

Consider for a moment that many corporate bonds are trading at premiums above par value. How can this be? If the market is so stupid and there is no liquidity, who is buying those good corporate bonds at 105 cents on the dollar??

Many AAA mortgage bonds are actually extremely high risk because of little-considered nuances in the hundreds of pages of trust indentures and servicing agreements. In addition to widely understood mortgage default and other concerns, these contracts permit the loan servicers to advance payments on behalf of defaulted homeowners for years and years and years at interest rates of 12% and more. These “servicer advancements” put funds back into the trust to be paid out to junior security holders. The “servicer advances” are subsequently repaid FIRST from foreclosed home sales. Therefore, foreclosed home sales may result in little or no proceeds, or even a liability, to the AAAs. This mechanism effectively transfers funds that really should belong to the AAA securities to junior securities. Servicers that own junior securities are incredibly motivated to drag their feet resolving defaulted loans, which results in great loss to the AAA holders. This is not a misprint: Defaulted first mortgage home loans may become a net liability, not an asset, to some of the AAAs. This is still not widely understood.

Similarly, “first mortgage syndicated bank loans” issued since about 2004 are routinely garbage and not traditional first mortgages on anything determinable at all. Many, if not most, of these loans permit the borrowers to sell the collateral, keep the money, and reinvest in almost anything they want to, including stock, junk bonds, defaulted loans, or perhaps ice cream cones. Many, if not most, of these syndicated bank loans also permit UNLIMITED amounts of additional swap debt that is either senior to or of equal priority with the syndicated loan. These provisions are also not widely understood and are sometimes even disguised in the loan documents.

Falling prices for these type assets reflect people finally reading the hundreds of pages of fine print, not a problem with the marketplace. Prices should continue to fall as people wake up to the true nature of these assets. Many “last out” AAA RMBS are still overvalued at 60% of par. Many first mortgage syndicated bank loans are overvalued at 70% of par. Smart buyers won’t touch any of this garbage at any price remotely close to what it originally sold for.

The Fed may be walking on very slippery ground. My fear is that the Fed has little more understanding of the stench of the garbage than many of the current owners who bought all these debt instruments issued about 2004.

Is the US Government taking some of this garbage on its balance sheet as collateral for Federal Reserve loans? The AAA rating means absolutely nothing. Garbage is garbage even in a fancy wrapper that the ratings agencies love.

I do not pretend to know how the Fed is collateralizing loans. Perhaps I am naive in underestimating the insightfulness of the Fed, but many intelligent people were caught up in complacent decisions involving these assets. I know nothing more than what I read in the media about collateral for these Fed loans, but it sure sounds troubling.


Andy Beal
6000 Legacy Drive
Dallas, Texas 75024


Sackerson said...

I can't remember a rich Brit doing something like this; maybe it's evidence that we're not a govt of the people, for & by etc.

Anonymous said...

I doubt he even read the letter. Bernanke is in a vacuum.

Anonymous said...

Bernanke didnt read the letter or if he did he ignored its contents. He's a crooked hoss that must be forced out. He is about saving the banks and cares not about the laws he breaks. But then, neither does the stinking President.

JimAtLaw said...

You can bet that Ben is thinking about his post-Fed "consulting" options when making these obviously fatally flawed decisions. How else could he decide to devalue the U.S. currency and cause massive price but not wage inflation (and then straight-up LIE about it by rejiggering inflation measures to exclude what the majority of Americans spend the majority of their money on) for the benefit of Wall Street investment houses?

The American people have been sold out, utterly. Sold out by the Realtors, the banks, and the politicians who those groups put in office with their campaign contributions. (The NAR and NAHB were the #1 and #3 contributing PACs in the 2006 election, yep, you read that right, that's 2 of the top 3, and the American Bankers Association, one of the bank PACs, was also in the top 10.)

Kudos Mr. Beal.

Jim in San Marcos said...

Hi Everyone

I think JimAtLaw said it best, we have been sold out!

This Author was nice enough to tell us that we have hit the iceberg and it's time to get to the lifeboats.

You are on your own from here.

Anonymous said...

Hi there!

I happened upon your blogs trying to find the the inflated value of a movie ticket, just wondering how movies would relate to today's economic situation with that of the Golden Age. I still don't have the exact answer to that, but I've learned a lot of other things.

I'm not exactly economically inclined, and while I only truly understand about half the things I've read in the last hour and a half, I realize the total importance.

For a long time I've been unhappy with this country. What can be expected, though, from a nation founded with great help from bootleggers, tax evaders, and general opportunists. I'd be surprised to say that a few well connected people weren't drinking free tea after the party. Throughout our history I've seen very little of that change; of, for and by indeed.

We are going the way of Rome, where political parties are divided by nothing more than income. When did The Republicans become plebians and the Democrats proletariats? What happened to the emphasis on control? I'll tell you what happened. The civil war killed democracy.

As I find our country heading towards certain dictatorship (you know, eventually) and economic ruin, of which I have just started to really understand, I wonder were a poor, hopeless romantic like myself should go to in these times. Australia? India?

any suggestions?

As I have noticed two of the last three cities I've lived in become increasingly more violent, while the area in which I chose to live actually improved in quality, I've been thinking it's time to get a move on. I have no savings; I have no plans. I am dependent on a thriving nation in order to compete for survival. The luxury of academics is the sweetest fruit of a stable civilization. I like fruits.

But in all seriousness, thanks for caring, and for sharing. Best of Luck to us all, America-you are majestic, but you ain't my kind of lady.

Jim in San Marcos said...

Anon 2:16

I would suggest staying put. The rest of the world is going to blame us for this mess, so you won't be too popular as a visitor.

As for a place that may be better off, I would pick New Zealand or Australia, both have democracy's that haven't promised the world to their retiree's.