Annex Bulletin 2007-41                             November 8, 2007

Recent...

Miss Temperance Takes on Old Man Greed (An editorial on global financial trends)

Updated 11/08/07, 8:30PM PDT

The Elusive “Free Lunch” Eludes Greedy Bankers Once Again

Miss Temperance Takes on Old Man Greed

Generational Gap Creates Short Memories: Why We Never Seem to Learn

SCOTTSDALE, Nov 8 – If the Dow were in ancient Babylon (that invented the 360-degree circle over 5,000 years ago), it would have gone the full circle yesterday.  It would have plunged 360 degrees and still ended up right where it started.  Unfortunately, this Dow resides in a modern Gotham City on a street called Wall.  And when it dropped 360 points yesterday, wiping out billions of dollars of paper equities from investors’ balance sheets, it stayed down, like a knocked-down boxer. 

Worse, just as the groggy prizefighter struggled to pull himself up off the mat this morning, it got knocked down again by the Big Ben (Fed chairman Ben Bernanke), who set him back another 200 or so points (by mid-day's trading, when this editorial is being written).

So what’s up? (I know, it might have been better to have asked ‘what went down’ today?).

Well, Miss Temperance has returned to her walled abode, looking for her due from the Old Man Greed, a delinquent tenant.  Her presence is reminding the "subprime" freeloaders that it is time to pay the piper again.  So the greedy bankers are scampering like mice looking for the nearest hole in the Wall to hide.  Alas, most of them are already jam-packed with earlier arrivals.  Which means there are a lot of naked butts sticking out in the Street.

Morgan Stanley, for example, said after the markets closed yesterday that it had suffered $3.7 billion in losses over the last two months on its portfolio of mortgage-related investments. Worse yet, the brokerage said its losses may balloon to $6 billion if the markets continue to sour.  Shares of Morgan Stanley plunged 6.1%, or $3.32, to close at $51.19.  

Merrill Lynch also disclosed yesterday that the Securities and Exchange Commission is investigating matters related to its subprime portfolio.  Last month, the company said it would write off $8.4 billion in assets related to subprime losses, which led to the ouster of its CEO.

Over the weekend, Citigroup also announced that its losses may be as large as $11 billion in the current quarter.  

In short, there is a lots red ink, if not a real blood bath, streaming down the Street from those big banker butts stuck in the holes in the Wall.

Closer to home in the IT industry, after the markets closed yesterday, shares of Cisco Systems dropped more than 9% in after-hours trading.  John Chambers, chief executive, said the technology bellwether had "experienced some softness" in orders from big U.S. customers.   Chambers said the world's biggest maker of switches and routers that direct internet traffic, had suffered "dramatic year-on-year decreases in orders" from big US banks, many of which have been left reeling by the subprime woes.   

"We continue to expect US enterprise growth to be very lumpy," Chambers said.  Dennis Powell, Cisco's chief financial officer, added: "Issues with financial services are directly related to what we are seeing with subprime. It's going to take some time for that to work through..."

And today, the Fed chairman Ben Bernanke sounded like the Big Ben tolling out an alarm when he “painted a perilous economic outlook, and as retailers -- including blue chip Wal-Mart Inc. -- reported disappointing sales,” CNN Money reported today.

So that’s what’s up.  And that’s also what went down on the Street called Wall in the last two days.  A river of red ink irrigating a swamp of tears, giving a new meaning to the old saw, "I am up to my ... in alligators."

* * *

“I hate this market; there’s no inventory left,” a real estate agent told me two years ago.

“I hate this market; there is too much inventory,” the same real estate agent told me a few days ago.

Markets… how quickly they can go from feast to famine.  Climbing back up from famine to feast, however, usually takes much longer.  That’s what history teaches us anyway.  And natural laws.  For, that's trip against gravity.

The real estate market slowed down in late 2005, teeter-tottered on the precipice during 2006, and crashed this year.  Its undertow is now also pulling down the principal beneficiaries of the real estate bubble who lighted the incendiaries that inflamed the market two to three years ago – the bankers.  They are the ones who lowered the interest rates down to zero in some cases, and lent billions of dollars in mortgages to borrowers whose credit would not have rated a used car loan, let alone a house.

Yes, these were the very same bankers who have always preached to their clients that there is no such thing as a free lunch.  Yet here they were, serving it to themselves like a Thanksgiving feast.  And these seasoned veterans of past banker follies didn’t think the day of reckoning would eventually come?  That Miss Temperance would knock on their doors again?

Like Love or Hate or any form of Passion, the Old Man Greed has a knack for blinding even people with a 20/20 vision, and obliterating memories even of the smartest gray cells.  That’s why every now and then, Miss Temperance has to come in, restore law and order, and return the people to their old sensibilities.  This is such a time.  She is having to scratch an old banker itch again.  Just like she did 20 years ago when the S&L crisis erupted, or 7.5 years ago, when the dot.com bubble burst.

And it could be a pretty big itch…

“At this juncture, economists say the troubles in the mortgage market could, all told, cost financial firms and investors up to $400 billion,” the New York Times wrote on Oct 25.  “That is far more than the roughly $240 billion cost of the savings and loan crisis" (adjusted for inflation).

The loss in total real estate wealth alone could be in the $2 trillion to $4 trillion