Stranger than Fictional Balance Sheets

"I am curious as to what 'lowering assumptions' means to these S&P people, as I have recently been told by my family that they have 'lowered' their assumptions again, too, and that they now collectively assume that I have hit bottom…"

by The Mogambo Guru

If you are watching all of this subprime, Alt-A, CDO derivatives crap lose money by the ton and wonder how badly you are going to be hurt since that toxic crap is seemingly everywhere, then you will be interested in Junior Mogambo Ranger (JMR) George P. sending me the news from Bloomberg.com that "Standard & Poor's lowered its assumptions for how much money investors will recover after defaults of mortgage-tied collateralized debt obligations."

Naturally, I am curious as to what "lowering assumptions" means to these S&P people, as I have recently been told by my family that they have "lowered" their assumptions again, too, and that they now collectively assume that I have hit bottom, and am now "the worst husband and father in the whole world", and that they have decided that they will all be forced to live out their stupid little, pathetic lives in "anger, hate and misery", which sounded about right to me, too, as in "welcome to my world, chumps!"

But this is not about me and my family - who have so discerningly figured me out - but about how people are going to be losing their butts with the stupid idea that they can "invest for the long-term" by letting "investment professionals" invest their money for them in things that pay high commissions. Now it has turned out that "The most-senior bonds from the CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing, S&P said." Yikes! Nothing! What in the hell kind of long-term investing is that? Hahaha!

People in the office started complaining about the disgusting way I sat there, apparently paralyzed but perversely drooling and humming the theme from Gilligan's Island, as I tried and tried in vain to fathom how much money that is, but it is measured in trillions of dollars! Trillions!

And getting back a measly 60 cents on the dollar for some CDO assets, and zero cents on the dollar on others, is a lot of money, measured in untold numbers of trillions of dollars (with knock-on effects), too, which means a LOT of money, which I will further emphasize by using several exclamation points, as in "that's a freaking lot of money to lose!!!"

And these hotshot S&P analysts are not through dispensing terrifying news, as they go on, "Investors should recover 35 percent of principal after defaults on securities from the CDOs junior to their so-called super-senior classes but also originally rated AAA."

And, even more, "Recoveries on the most-senior originally AAA rated securities backed by Alt-A, subprime, or home-equity loans or tax liens will likely be 80 percent, while for junior AAA securities they should be 65 percent. Alt A bonds initially rated A should recover 35 percent, while similar securities backed by the other types of loans will recover 10 percent."

By this time, all these numbers add up to, as I previously indicated, "a freaking lot of money to lose!!!", with three glorious exclamation points for emphasis which, now that I think about it, is entirely too few to convey the true horrific, cataclysmic impact, and it should more correctly read "a freaking lot of money to lose!!!!!"

And where is a lot of this soon-to-be-worthless CDO stuff going? Well, Junior Mogambo Ranger (JMR) George asks, "Isn't the Fed taking in some of this so-called AAA CDO crapola as security" against Treasury bonds as a blatant attempt to shore up banks' balance sheets and other nefarious purposes? I sagely nod my head "yes", and he asks "at what valuation?" Hahaha!

Laughing too hard to reply, and being too stupid to know even if I weren't, I extend one Long Bony Mogambo Finger (LBMF) to point to the S&P analysis (above), and then (to win both the prize for Understatement Of The Week (UOTW) and Mogambo Dry Humor Award (MDHA)), he says with a deadpan look on his face, "The Bernanke balance sheet may be an even bigger fiction than we think."

I laugh, and I realize that all the rest of that economic crap is thus a fiction, too. I tried to keep laughing, but I could not. Fortunately, I tried to eat a cheeseburger, and I could. Fries, too! And then I felt better.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.

The Daily Reckoning is FREE!
Click below…

The Daily Reckoning is FREE! Click below…