Thursday, September 25, 2008

Making a Market: Trigger and CMO's

I am a huge Willie Nelson fan.  His music has a classic sound that can't be duplicated or effectively described.  Just as impressive as the lyrics (Willie wrote Crazy for Patsy Cline, for example) are the instrument solos.  Like in this one, in "Angel Flying Too Close to the Ground."     
The acoustic guitar he plays has been the same for 39 years.  It is old, and worn, and imperfect, and awesome.  The large hole in the wooden body below the sound hole adds to its unique sound.  Willie named it Trigger, and it is as priceless a piece of Americana as there exists in modern pop culture.   Certainly, when Willie chooses to stop using it, it will be escorted with great care to the Smithsonian.  It will live there in perpetuity in the museum's humidity- and light-controlled glory.   If Michelangelo had used only one brush to paint the Sistine Chapel, that brush would be similarly revered.  

If Willie chose, instead, to auction it off to charity it would certainly fetch a handsome sum.  How much?  I have no idea - but folks are willing to pay lots of money for a one-of-a-kind piece of Americana (like a Honus Wagner baseball card).  But the auction would have to be held at Southeby's or Christies or some other top shelf auction house - and it would have to be marketed to folks that had interest in Trigger and the balance sheet to pay, right?  I mean, Willie pay an unannounced visit to the Kansas City Independent Auto Auction (, but he probably wouldn't find the type of qualified buyer that could be found somewhere in the worldwide network Southeby's and Christies have created.

I was thinking about the value of things today, and how values are contingent upon "interest" and "funds." There is a strong parallel between the story of Trigger and the toxic credit paper that are affecting the economy today.   During the early 2000's, most every global bank and large insurance company was writing CMO/CDO paper.  And they were trading that paper between one another, laying-off and taking-on risks as permitted by their own risk tolerance and needs.  The market was big in size (trillions of dollars), and the biggest banks had immense positions on both the buy and the sell side.  As some of the loans underlying these instruments began to go bad,  the banks incurred losses - some manageable, and some large.  

But this is where the story takes a stem the losses, these same banks (all nipped by initial derivative losses) simultaneously said "let's get these things off out books."  Suddenly, no one in the market had the "interest" nor the "funds" to take on additional credit derivative exposure, and the value for the paper plummeted. (When everyone is a seller and there are no buyers...price adjusts.)  This would be similar to Trigger being set out at a church rummage sale. Sure, lots of folks have the interest, but the most the guitar would bring would still be far less than it would bring in other - more appropriate - venues. 

There are two folks that have "interest" and "funds" these days.  The first is Warren Buffett, who pulled the trigger yesterday, spending $5 billion on a stake in Goldman.  The other is the US Government.  They are going to help the CDO/CMO market regain liquidity and traction by demonstrating that they have the "interest" and they have the "funds" to be a qualified buyer.  In theory, once Ben and Henry stabilize the bid-side of the market and the global banks control their internal hemorrhaging, the government can sell off the purchased securities into a liquid and functioning market at (at worst) an insignificant loss.  Maybe they will make enough profit that Ben will have the "funds" to purchase Trigger!  

Naah, I don't think he has the "interest." 

1 comment:

  1. My heros have always been cowboys, and they still are today.