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Mon

13

Aug

2007

The Open Ocean
Monday, 13 August 2007 10:20
by James Kunstler

By now, is there anyone over twelve in the USA who has not seen Jim Cramer's tantrum recorded late Friday afternoon on CNBC as the stock market took a 280 point swan dive off the rocky cliff of Hedge Fund Island?

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Cramer's histrionics were only a few clicks above his normal antics on the "Mad Money" show, but even so, they made a remarkable impression of someone in real, not mock, despair. He mentioned more than once during the tirade that he'd been on the phone all week with other interested parties who were begging him to do something about the rising bloodbath on Wall Street. And by "do something," they clearly meant that Cramer should go on his TV show and make an appeal to Federal Reserve chief Ben Bernanke to drop the prime interest rate at the Fed's meeting this coming Tuesday — the purpose of which would be to make cheaper loan money available to the Wall Street players whose investment houses suddenly found themselves underwater in the churning straits off Hedge Fund Island, weighed down by bagfuls of worthless securitized non-performing mortgages.

Personally, I don't quite get how a financial industry based on bad loans would be helped by borrowing more money to bail out a hopelessly unwinding Ponzi loan racket of the type the industry had engineered for itself — but maybe I'm lacking the gene for financial creativity that the Bear Stearns bonus babies were all born with.

In any case, apropos of Cramer's telephone marathon, one can only imagine the number of cell phone minutes racked up this weekend out in the Hamptons by players trying desperately to finagle their way out of the brutal fact that their firms and funds suddenly lay exposed to the cruel ravages of reality. A lot of catered crab tidbits and mini-quiches must have gone uneaten out along the dunes as weeping men in blazers realized that "marked to market" had come to mean the same thing as "holding a bundle of shit."

I'd be surprised if all these geniuses hadn't managed to rig some kind of a life raft over the weekend, but they'll still be bobbing in the dangerous waters offshore, with plenty of sharks circling, and they'll still be stuck with those wet, bags of mortgage tranches (soon swelling and reeking in the sun), and my guess is that by Tuesday or Wednesday the life raft will be listing in more heavy seas.

At the other end of the storyline are the many sad people who were the initial dupes in the racket: the poor shlubs who signed "creative" mortgage contracts to become notional home-owners and thus achieve their spot on the first landing of the American Dream staircase. I say "notional" home-owners because somebody who "buys" a "product" such as chipboard-and-vinyl McHouse with no money down is not really an owner of anything but rather a kind of glorified renter stuck with the additional burdens of paying property tax and maintenance costs for something really owned by another party (a notional landlord). And, of course, we all know by now that the payment terms for these loan contracts were slippery sliding indexes which uniformly tended to slide upward as interest rates re-set above the ludicrously low levels of 2003 - 2006.

Millions of these unfortunate people are now seeing their lives whirl down the interest rate re-set drain. If this was still the same American Dream nation of It's a Wonderful Life, these contracts might have been re-negotiated by friendly, helpful, upright local bankers who benefited directly from loans favorable to both parties that continued to perform. But the whole racket this time was designed to dissociate the loan contracts as far as possible from their company of origin, and then to slice and dice the liabilities of ownership so finely that all the lawyers theoretically ever producable in the life of this universe, or several like it, may never succeed in patching together a coherent skein of ultimate responsibility. In the meantime, a remorseless chain of mere procedure in the form of default and foreclosure notices issued by computers will be sent through the mail, and sheriff's deputies will fan out through the subdivisions with their rolls of yellow tape, tossing residents out on the street (if they haven't already mailed in their keys to some company that fired all its employees and shuttered its offices back in June). A lot of these unfortunates will prove to be members of racial minority groups — as reported by Gretchen Morganstern in today's New York Times — and that is liable to add some cayenne pepper to the political gumbo cooking on the nation's back burner.

In his CNBC tirade, Cramer barfed up some choice phrases such as, "[the Fed board] has no idea how bad it is out there!" and "this is armageddon for fixed income [markets]!" No doubt a lot of observers, especially in the cheerleader financial media, will discount these utterances as we enter the shark-infested waters of the open markets this week. I really have to wonder if the many little life-rafts out there, rigged desperately over the weekend, bearing the castaway crews of hedge fund boys, are not drifting into the damp winds of a perfect financial storm.
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