Financial markets have continued to be hit by some bad news, which has been largely ignored. Meanwhile, key indicators like bond spreads and equity levels have recovered and, in many cases, have improved beyond where they were when Lehman Brothers was forced to say goodbye.
So it looks like we may be entering the greed phase of the fear/greed cycle, but how far does this phase go?
Perhaps more than you think, as long as the Restructuring Dance continues..
Let’s start with the problems of sovereign debt and one of the cradles of civilization, Greece. The problem of getting all the largest economies in Europe (except Great Britain) to agree on a single currency and a single source of monetary policy, but leaving fiscal policy in the hands of each member state has finally arrived… thanks to the Great Deleveraging followed by the Largest Releveraging in World History.
Greece is simply the first of several euro-using states to be faced with the music of debts coming due. The balm of a European/IMF solution is only a temporary solution. And, despite assurances to the contrary from its Finance Minister, the only feasible way out of the problem for Greece is debt restructuring.
With more sovereign credits in Europe set to go the Greek way, there are two unthinkable alternatives to restructuring: get EU countries to agree to having a single governing body for pan-European fiscal policy, or end the single currency experiment.
Oh, actually there is a more unthinkable but possible alternative: let each troubled country go bankrupt and then restructure its debt. It seems that the restructuring at the front would be much better.
Restructuring must also happen on Wall Street.
Although Goldman Sachs is now in the crosshairs of the SEC, don’t think the rest of the Street has clean hands. As noted in last week’s From the Northwest Quadrant (on the Strategic Asset Alliance website), the problem here is one of embedded conflict that needs to be addressed with a heavy dose of warning.
Regardless of what is being talked about in DC, The Street needs to realize that some kind of restructuring needs to happen in the way business is done. Whether this means the Volcker solution, trading all derivatives on one exchange, and/or something else is unknown.
Expect Wall Street to sound like a shakeup once they realize the obvious this time: All the protection money they want to throw at Congress isn’t going to stop our commissioned vendors in DC from being more concerned about getting re-elected (in the midst of a sea of anti-Wall Street angst) than to receive cash payments.
Next on the restructuring list are the rating agencies, lackeys of The Street’s desire to produce more complex and opaque securities. The conflicts involved in raters paying raters are obvious and ripe for congressional discussion. Perhaps the rating agencies will also submit a restructuring proposal of their own; however, it will take more than bloviar for this to happen. Rating agencies are pretty nebulous creatures to the average voter. Big banks have big buildings that make them much easier for the voter to disregard.
And, before leaving the rating agencies, they recently began a restructuring of their municipal bond ratings. The result: Several states now have better ratings, despite the difficulties in municipal finances that generally plague the US.
If you’re trying to level the playing field, should you really be lowering the bar at the same time? Yes, the agencies say, pointing to consistency across their global platform. Demonstrate that consistency can be the goblin in the minds of rating agencies.
Meanwhile, as the Administration tries to push through restructuring of residential mortgages, lenders of large commercial real estate projects are being forced to restructure, otherwise they recognize large unrealized losses, or so they think. Using the old good bank/bad bank approach and applying it to troubled commercial mortgages is one way of ‘solving’ the problem, without solving it at all.
It is certainly starting to feel like we are entering the greed phase of the markets; and the creativity behind the restructuring will certainly allow it to move forward for some time. But, like during the subprime mortgage craze, we have to ask, “How long will this last?”
Or, as the ’70s rock group Ace once presciently bled:
How long has this been going on?
Well your friends with their fancy persuasions
I won’t admit it’s part of a scheme
But I can’t help but have my suspicions
Because I’m not as dumb as I seem.
And you said you never wanted
To break up our scene like this,
But there’s no use pretending
It can happen to us any day.
