International Investing

Sometimes the best part of an online article isn’t the article itself, but the comments it generated. Below is an excerpt from a Dealbreaker.com post about the failed auctions. While it’s important to take any thing an anonymous message board poster writes with a grain of salt, this poster seems well informed:

I was on our bank’s hoot yesterday (and garnered a little more information today), so here are some important notes:

1) This really is a shit-show. You could hear fear and confusion in everyone’s voices.

2) These securities were sold as cash-equivilants, but (I swear to god) on the box they actually said to FAs “these should no longer be treated as cash/cash-equiv…they are now fixed income.” This raises a few questions:
a) How many tort lawyers are crafting a class action suit against all the banks right now? 50? 100? This is going to be the next huge securities gold-mine for the legal begals.
b) Since these were expected to be extremely liquid, what happens to HNW clients who get PE capital calls and can’t access their requisit cash? How will the PE firms handle multiple investor defaults?
c) What are firms who use ARCs/ARSs to manage intra-month cash supposed to do? These products haven’t failed in years (if ever). If I am GE and use these products to manage cash *knowing* that they would roll-over every two weeks (say for payroll), how do i access the cash I need? Obviously you can borrow, but they’re only giving you 50-80% release at an (expected) high interest rate. Instead of making money earning interest you are now paying for liquidity you don’t have.

3) Apparently there are HFs out there who are buying this shit up like wild fire. They have excess cash and these products are going to be extremely high yielding so long as the markets won’t clear, so they’re taking their negative liquidity preference and being paid mightily by the banks to take these off their hands. Yet another example of how the “vultures” are actually keeping our system on track…for now.

4) Apparently the banks have been backstopping this market for 3 months now. 80-90% of these auctions would have failed without the underwriter taking on their unsold inventory, yet no one was made aware of this. Lesson: don’t think that liquidity problems will go away if you just wait long enough–history shows they don’t. As Keynes’ said, “the market can remain irrational longer than you can remain solvent.”

There are a plethora of other notes, but those are the main ones we’ve thrown around today. As an aside, even though i am being personally screwed (1/3 of my portfolio was in these for various reasons, none of which had to do with making an effort to enter the securities) I don’t think anyone should be bailed out over this. Why? Because no one thought about the fact they were actually taking on risk; they should have. Heck, even i didn’t read any of the print involving these–and I should have. There is a reason these had a higher yield than tresuries…they weren’t risk-free…nothing is…and that’s a lesson that must be re-learned.