Start with a mortgage. Pool like-yielding mortgages together to be rolled into a mortgage backed security. Slice and dice these mortgage backed securities by apparent risk into derivatives and repackage along with a hedging agreement and a certificate from a ratings agency claiming that the entire package is being considered the equivalent of an "investment grade" instrument. Leverage your purchase of these "investment grade" instruments by borrowing money from another financial institution using the instruments themselves in partial satisfaction of the collateral requirements. If everything goes well, everybody makes money. If things turn south, everybody loses big time and the marketability for these instruments dries up resulting in a "liquidity crisis." Enter the Fed to allow depository institutions to borrow even more money at favorable rates and lend this money to certain of their subsidiaries. Get the Financial Accounting Standards Board to issue a rule that would allow SIVs (Structured Investment Vehicles) and SPEs (Special Purpose Entitites) to remain "off balance sheet" transactions thus reducing the transparency of these financial manipulations and keeping any bad news from being readily visible on the parent entity's balance sheet.

When this fails to completely ameliorate the problem, create a super SIV fund to purchase "good" paper and share the profits with their investors. The public need not apply.

Of course, not all mortgages and CDOs (collateralized debt obligations) are in default. And most of those subject to default still retain a great percentage of their intrinsic value. (Sale price of a home less processing costs = some value). By permitting the super SIV to purchase this paper, the sellers can book some income to offset their losses which have already been declared and loss allowances set aside. And any risk that would appear on the balance sheet has now vanished.

The Wall Street Boys, having made outlandish profits on the creation, packaging and sale of these toxic securities, now pass along any losses to their investors, raise fresh capital from either governmental sources or other investors and the game continues.

By way of illustration of a circle within a circle, let us consider Merrill Lynch, one of the more active participants in the game to the extent that they purchased subprime originator First Franklin for about $1.2 Billion and a 20% interest in the now-bankrupt Ownit Mortgage solutions for 100 Million.

Now from the Wall Street Journal we find that

SIV-Plan Founders to Seek
More Support for Superfund

"The three big banks assembling a plan aimed at thawing credit markets are expected next week to start soliciting their industry brethren to pitch in with the effort, according to people familiar with the situation."

"The move will be a significant step in forming the so-called superfund that has been in the works since September. It is aimed at providing an alternative for off-balance-sheet entities called structured investment vehicles that have run into trouble amid a lack of liquidity in credit markets. The SIVs issue short-term debt to buy other, higher-yielding assets but have been hurt by market upheaval that has left buyers for that debt on the sidelines."

"The fund will create a potential buyer for SIV assets. SIV managers won't be required to sell assets into the fund, which will only buy high-quality assets in an attempt to maintain investor confidence in the fund."

"In another sign of progress, BlackRock Inc. is expected next week to be named the manager for the $75 billion to $100 billion fund, people familiar with the matter said. In that role, BlackRock will be considered a neutral party and will help set pricing for the assets. As of now, it doesn't appear BlackRock would invest in the fund."

BlackRock, I've heard that name before...

"BlackRock Inc. has grown into a money-management powerhouse under Chief Executive Laurence Fink. Now, with Mr. Fink a contender for the top job at Merrill Lynch & Co., his possible departure is raising questions about the effect on BlackRock."

"Mr. Fink has been approached by Merrill as part of a job search that is expected to last as little as a week or two."

"Under Mr. Fink, BlackRock has managed to avoid much of the trouble roiling the markets in recent months. By contrast, the recent departure of Merrill CEO Stanley O'Neal came in the wake of a multibillion-dollar write-down at Merrill tied to the credit crunch. "

Sure, BlackRock's CEO, Larry Fink was mentioned as a possible replacement for Stan O'Neal the guy who was allowed to retire from Merrill with approximately $160 Million after posting an $8 BILLION loss in the third quarter.

No that's not it, there must be something else...

"Mr. Fink's familiarity with Merrill Lynch -- which made a deal to acquire roughly 50% of BlackRock last year -- is among his potential strengths. BlackRock is still working to digest last year's merger with Merrill's former asset-management arm."

Yeah, that's it: Merrill owns roughly 50% of BlackRock...

"On September 29, 2006, closed a transaction, pursuant to which Merrill Lynch contributed its investment management business, MLIM, to BlackRock. Following the closing of the transaction, Merrill Lynch owned 45% of the voting common stock and approximately 49.3% of the total capital stock on a fully diluted basis of the combined company."

Instead of my usual "What can YOU do?" section, I thought I would take this opportunity to entertain you with my little song...  to the tune of  Windmills of My Mind (Theme Song of  The Thomas Crown Affair -  Original Music by Alan Bergman and Michel Jean Legrand)

Circles within circles, wheels within wheels

It all keeps on spinning, with ever increasing deals

Until the model is broken and it reaches some undetermined end

When all the investors are broke and the game begins again.

I hope you enjoyed your Thanksgiving weekend.

-- steve

A reminder from a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

SIV-Plan Founders to Seek More Support for Superfund|

BlackRock Would Face Gap With a CEO Move to Merrill|

BlackRock-Merrill Transaction|Reuters

Above Lyrics (c) 2007 by Steve


“Nullius in verba.”-- take nobody's word for it!

“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw

“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”

“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS

"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius

“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell

“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar

“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS