Money Sage (archive)

We detect a new wave of that familiar, happy-happy feeling again. Every manner of "good news" and sunny forecasts are surfacing, seemingly at around the same time.

The current wavelet of optimism -- "structured optimism," shall we ever-so-nastily say -- are comprised of the latest "new" plan to save sinking mortgagees, Mr. Buffett's magnanimous offer to reinsure certain obligations of the drowning muni bond insurers, and intensified Administration reiterations that the economy will avert recession. The topper, we think, is the President's proud assertion that "long-term" the economy is just dandy.

Let us consider first the president's happy long-run prognostication.

We presume that he has forgotten Lord Keynes' celebrated dictum:

"In the long run we're all dead."

As for Mr. Buffett's offer, it is important to read the small print. Mr. Buffett, while grandly asserting that it provides the solution "at the stroke of a pen," did not emphasize that his offer to reinsure certain obligations of the muni bond insurers DOES NOT EXTEND TO THE MORTGAGE-BACKEDS these companies have insured. The mortgage-backeds, of course, are the source of the insurers' distress.

The lack of a positive response thus far from the insurers derives, we would guess, from the fact, as we have noted in prior posts, that insuring municipal bonds is akin to insuring against ice storms in the Sahara. It is a business in which the premiums flow in endlessly, and there is virtually no outflow, since defaulting municipalities are as rare as hens' teeth. The business of muni bond insurance is truly akin to owning the golden goose. Mr. Buffett, the most astute businessman in America, would love to charge the insurers for re-insuring obligations which no one will ever be called upon to meet. He is offering, in other words, to share the golden goose the muni insurers now possess all to themselves, and THEY MUST PAY HIM FOR THIS PRIVILEGE, RATHER THAN VICE-VERSA. This, clearly, is a deal with a guaranteed upside for Berkshire and no downside. Nice, if you can get it.

In looking at this deal, one understands how Mr. Buffett has been such a super-successful investor. If, indeed, the desperate bond insurers were to take the offer in a panicky attempt to momentarily avoid a ratings downgrade by rating agencies which would be temporarily blinded by the brilliance of the Berkshire sun, the reality that the Berkshire offer does not reduce the precariousness of the insurers' position by one iota would undoubtedly lead to the inevitable downgrade a few months later.

Well, business is business. It is not philanthropy. Businessmen do not seek sainthood -- unless same can be attained by a very small expenditure.

As for the latest scheme to rescue mortgagees, reportedly being prepared by the Treasury and several major mortgage lenders, what can we do but give this scheme the short shrift it deserves. The issue, it seems to us, is that the banks are attempting TO RESCUE THEMSELVES, in the guise of magnanimously rescuing those they have lured, over the years, to what is proving to be a watery grave. The government is trying to do what it always tries to do -- achieve its objectives ON THE CHEAP. Hello Iraq.

Oh, and by the way. The reason that bear market rallies are called sucker's rallies is just this: they suck in the suckers, who are then sucked into the downward vortex.