A super-duper bad-loan bailout scam

By Bill Fleckenstein

"Gambler Mae" made its debut in my Aug. 13 column. That was my name for the fictional entity I proposed should be created to bail out all losing trades everywhere, be they stock losses, racetrack losses or losing lottery tickets.

I modeled "Gambler Mae" on proposals being floated by our comrades in Congress who seem to think that the entire mortgage and housing sectors are deserving of a bailout -- despite the reckless behavior on display there that has brought us to where we are today.

Recipe for a no-fail subprime soufflé

This week I have another entity of entitlement to add to the list: "SIV Mae" (SIV = structured investment vehicle). That seems a fitting description of the super-duper bailout put together by the Goldman Sachs (GS, news, msgs) subsidiary known as the U.S. Treasury Department. (Goldman itself doesn't appear to be participating in the bailout, which is interesting.)

When I first heard about this, I was outraged, disgusted and slightly depressed. I thought, here we go, another bailout. Barney Frank and friends are trying to bail out the homeowners. Wall Street, the Treasury Department and the Bank of England appear determined to do whatever it takes so that we have absolutely no price discovery on any mortgage-related assets that may have gone bad -- thereby giving a pass to the folks who've made obscene amounts of money conceiving and marketing them. Whether you call this crony capitalism or socialism, the worst of it is what we have become.

Short-lived SIV Mae?

However, with the devil being in the details, this bailout may not get pulled off. For instance, at what price are these dodgy assets going to be moved into the new SIV Mae?

Obviously, the boys planning this scheme might like to make things look like the Treasury is standing behind it. And, for all I know, it might. On the other hand, will arm's-length buyers really be so stupid as to buy an asset that could easily be mismarked?

Keenly motivated to concoct the schlock

To quote a knowledgeable friend of a friend: "How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how 'fixed' the markets' problems are.

"The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora's box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, and investors realized they were getting paid no-risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different."

And, to be filed in the further-reason-to-flee department, the Lord of the Dark Matter writes: "Meanwhile, in the background, Moody's is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things, but until the actual downgrade comes, an investor isn't necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities."

Gordian Knot all tangled up

The latest potential problem child in SIV world is Gordian Knot (which, until last Wednesday, had not appeared in the news). Bloomberg reported that Gordian Knot, a London investment house, completed a small financing of about $20 million, which is a rounding error.

I don't know why they even bothered. Gordian Knot has about $58 billion in SIVs outstanding, and Fidelity has about 4% of its money-market funds invested in Gordian-Knot-generated paper. This explains why Fidelity may be willing to be involved in the super-SIV bailout program.

It seems that Gordian Knot did not have any paper that needed to be rolled until mid-October, which is about where we are now. And, if it doesn't have a solid, enormous back-up liquidity line, life might get very complicated. So, Gordian is a name to keep your eye on.

Treasury-only money funds

Meanwhile, I suggest that readers be extra-careful with money-market funds (as I discussed here). I think that Treasury-only money funds are the way to go, until such time as financial-institution accounting becomes truly legitimate, which may be quite a long while from now, given where we are.

In any case, the level of desperation on the part of players involved in anything SIV-related -- witness their attempts to pull off this anti-capitalistic bailout -- suggests that the situation could be quite dicey.