SERIOUS MONEY:The actor Roy Scheider passed away earlier this month and, despite his impressive curriculum vitae, he will forever be remembered for his portrayal of police chief Martin Brody in the 1975 blockbuster Jaws.
The Spielberg film terrified moviegoers everywhere and spawned a generation of cheap imitations, but it is the tagline to the sequel in 1978 - "Just when you thought it was safe to go back in the water" - that is relevant to investors today. The island residents believed all was clear in their enticing blue waters and ignored Brody's warnings that proved correct as another great white shark had found its way into the feeding grounds off Amity's coastline.
The investment elite continues to argue that financial markets are safe and normal service will soon be restored to the world's financial markets, but their shoddy analysis has proved incorrect so far, despite the best efforts of the Federal Reserve and their demonstrations through aggressive monetary easing. Unfortunately, the deflation of the great credit bubble that will forever be synonymous with Alan Greenspan continues to deflate and the availability of money matters far more than its cost as each and every corner of the supposedly clear waters in the world's debt markets succumb to reality.
A legion of investors has spent almost a year getting to grips with the alphabet soup of complex securities such as RMBS, CDO and SIV, but just as the understanding of said products reaches scratch, another financial acronym falls through the cracks.
The latest casualty is ARS or auction-rate securities. The demise of the market has become a headline story as almost 1,000 auctions failed in recent weeks and saw the coupon payments that investors require from the Port Authority of New York and New Jersey soar to 20 per cent, an idiotic cost given that the underlying issuer has an immaterial chance of default.
Investors need to be aware of the mechanics that underlie the market for action-rated securities.
These securities typically have long-term maturities and the coupon attached is determined by auctions, which occur on a regular basis, usually every 28 days. The auctions include buyers, sellers and the issuers have a desirable option to call, ie refinance expensive debt.
The market is plain and simple but has encountered difficulties as buyers tend to be very conservative and depend on the ratings afforded by the mono-line bond insurers, a dubious business at best.
The municipal bond insurance business, which began in 1971, has always been a nonsense - the idea that the stretched balance sheets of Ambac, MBIA and their industry counterparts can rent their triple-A ratings for a fee to supposedly weaker municipal credits defies logic and the rating agencies should be ashamed of themselves for their compliance. In fairness, the industry did prove its worth following the collapse of the Washington Public Power Supply System or Whoops 25 years ago, but low yields in recent years saw the insurers gravitate towards the opaque world of structured finance.
The bond insurers' current travails are fully deserved and the rating agencies should do the right thing and downgrade all and sundry to junk. Indeed, a business that cannot thrive without a pristine credit rating is hardly a viable business at all.
Warren Buffet, the sage of Omaha, has entered the fray offering extremely unfavourable terms for the bond insurers' good book of business while leaving their structured finance travails behind. Needless to say his unwelcome approaches have been rejected but the world's greatest investor has ensured in one fell swoop that a government bailout is not feasible given the availability of private capital. The man who should command respect everywhere despite the admonishment of fly-by-nights ensures that market-based capitalism is the only economic system that seems to work.
The cyclical upswing in stock markets ended last October and more than eight years earlier the greatest bull market in stock market history came to an abrupt halt. Apologies will not be forthcoming from the so-called elite that lost you money as denial remains firmly entrenched.
Against that background, it's hardly surprising that Mr Buffet and compatriot Charlie Munger distrust Wall Street. Most commentators on this island believe that it is "safe to go back in the water" but in shark-infested waters there's no need to be a hero - those who manage your money remain in denial and continue to argue otherwise. Plain sailing has not returned and you and your money should be astute to the novel penned by Fred Schwed many years ago: Where are the Customers' Yachts?
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