Rolling Thunder

The funny thing about the times we live in, and the institutions that, ahem, serve "us" is that when a stock market turn-around like the one on Wednesday is put down to rumors of a surprise rate cut, it's accepted without the bat of an eyelid. Never mind the train cars full of traders having heard how Europe was trading that day heading to the city early to face an anticipated tidal wave of sell orders. Never mind the tenuous nature of current v-shaped earnings expectations with "back to normal for '08" (as if the last 12 quarters have been anything but normal) looking more and more, well, nuts really. Never mind the chart picture that has PPT conspiracy watchers in a lather.

What should be no surprise is that the housing bubble continues to unwind. What also should be no surprise is that every dip in the market with just a hint of panic (and that's most of them now - since valuation was tossed aside for the greater fools of private equity, followed by shots of rate cut tequila) will be met with calls for more cuts. Soon enough m* thinks, even the existence of the PPT and its "interventions" will simply become accepted as fact, so cynical and so desperate for a bail out has the Street become. Public calls for the necessity of interventions will soon follow.

m* remembers well that Japan actually had a PPT during the unwind of that great bubble which served no one but the politicians who could claim to be "doing something" while owners of real estate and equities saw nominal prices decline 75% over the 90's. There are scant reasons to expect different this time.

But the Rolling Thunder in the title of todays post refers to something even more ominous and was sparked by todays utter meltdown (with tree in the forest effect) of the fantasy that the credit crisis of July and August ended with a 50bp freebie from the Fed and new equity highs.

On the surface, today's rumors of sub-prime write downs at AIG, the further erosion in Merrill Lynch (also on rumors of further writedowns - yes even with yesterdays announced $8bn writedowns), and the long overdue implosions of the "cya" facilitators who previously insured municipal debt and more recently took their thoroughly dubious business model into the structured credit space, are just echoes of the summer's difficulties, nothing much to worry about now that the Fed is on our side and earnings from the global boom will most certainly hold up . Except that developments in the credit space are continuing to unravel. FT: Mortgage bond index declines 30%.

To those former CDO manufacturers and buyers now picketing Moodys and clamoring for more Fed assistance m* asks, if the insurer of your structured CDO deal is levered 100x, is that really insurance? Forget the rating agencies, insuring structured credit deals is (was?) the ultimate "cya" business.

What's important about this, coinciding with the failure of the delaying action formerly known as MLEC - the SIV PPT, is the realisation on the street that while Merrill took an $8bn writedown, it's very likely they, like everyone else, are still holding the stuff. Moreover, to the extent they did sell some, its more likely they sold what they could (the higher quality paper with perhaps some transparency) and are left with a portfolio even heavier (on a relative basis) in the toxic unsellable stuff than before.

The July-August asset backed market crisis was actually very orderly - the market simply closed. The panic was real, the paper markdowns painful, but there was relatively little selling. It was obvious to everyone that selling would only hurt one's own remaining positions more. It was better to wait it out if possible rather than force the issue with prices in a market with no buyers.

However that situation was always going to be temporary, hence the proposed master SIV as a vehicle to delay the day of reckoning indefinitely. That moratorium is now over. Over the last few days, m* has heard of several deals that would "never never" be unwound before maturity now being shut down, their assets liquidated. The lenders need the cash. Debt is finding its way back to banks balance sheets. Asset backed commercial paper is coming due. Not much of it will be re-extended and the forced selling that the market successfully avoided in July-August is quietly spreading.