Thursday, May 22, 2008

The King's Nightmare

Most of my subjects know that I have taken a very bullish approach to investing in this bear market, but two separate items, which the Federal Reserve and the United States Treasury cannot address have me concerned. The first is Citigroups and other big banks creative use of accounting rules regarding collateralized debt obligations (CDO) and mortgaged backed securities (MBS). Over 1.5 trillion dollars in CDO and MBS are kept off-balance sheet in Variable Interest Entities. This lack of transparency, or lack of honesty is the big threat to bank survival. Sooner or later, the Fed has to make a call, allow banks and security firms to keep hiding the losses or allow a super bank to fail.
The second issue are Interest Rate Swaps used by governments like Jefferson County, Alabama, which includes the city of Birmingham, and the skyrocketing interest rates placed on the backs of homeowners. Jefferson County, Alabama used Interest Rate Swaps and are now paying 10% on 5.8 billion dollars in municipal debt. When city and county governments across America start to default on these exotic bond obligations, those losses cannot be hidden as easily.

OK, so what does this high finance stuff mean to the subjects. It means that a second dip is coming to the recession followed by a quick recovery after all of the crappy double dealing banks and security firms go out of business or merge. That you have followed my instructions and moved your money to credit unions and out of the security houses and big banks so that it does not get frozen, and that you are hoarding your cash for the bargains to come.

The King
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