Brief Glimmers of Light

by Steven M. Cohen  •  Feb 12, 2008 at 9:44 am

http://www.buyselljump.com/2008/02/brief-glimmers-of-light

The stock markets have a somewhat better tone recently, even in the absence of specific positive economic news.

Corporate earnings continue to be inconsistent against estimates, and the black hole of mortgage-related writedowns keeps getting deeper. It is very unlikely that the major financial institutions holding perhaps hundreds of billions in CDOs are anywhere near the completion of the mark-down process. In fact, with almost no active market in these securities, it is impossible to know whether they are being carried on balance sheets at values anywhere in the ballpark.

And the Fed continues to do its best to reinflate the housing bubble so that the piper will not finally have to be paid by reckless borrowers who were aided and abetted by lenders run by feckless managers, as well as by shareholders in financial institutions that apparently lacked meaningful credit quality controls as the result of abject management failure.

So to what can we attribute this modest dose of optimism that appears to have stabilized the markets, at least for now?

First, there was a report today that several major banks will participate--voluntarily, that is, without congressionally-mandated coercion in the form of a counterproductive law-- in a program to help some borrowers forestall or avoid foreclosure. This represents a sober recognition on the part of the banks that they could soon be in the real estate business on a scale they never imagined, and that everybody benefits--lender and borrower alike--from some reasonable degree of flexibility.

And to think that they came to this point without the benefit of Hillary's suggestion that Congress simply freeze interest rates on ARMs, which would be an unprecedented intrusion by the Feds into private contracts. This could actually be the first sign of rational thinking we have witnessed during this crisis.

It makes far more sense than the original plan by financial institutions to create a super-fund to purchase CDOs as a means to create a market in them, a proposal that was always a non-starter. Instead of merely providing banks with a way out of these tainted securities, the present plan actually benefits borrowers, who may be dissuaded from abandoning their mortgage obligations in droves. It appears to be an idea that the market likes.

A second piece of good news, which at first blush does not appear to have a direct connection to the markets, is the two-year prison sentence handed to corporate class action maven Bill Lerach, late of the now-defunct Milberg Weiss firm, a legal bucket shop that became the bane of American corporations.

Lerach is also required to pay an $8 million fine, a mere pittance for a man who personally made hundreds of millions of dollars fleecing and extorting public companies with ginned-up lawsuits by invented plaintiffs. Just like his fine, two years seems a light sentence for someone who not only damaged companies and shareholder interests, but who also wreaked a lasting loss of confidence in the fairness of our civil jurisprudence.

But at least he has been removed from the equation for good, as his pending disbarment should assure. Good riddance to a true scourge of the legal "profession." The markets like this as well.

Finally, perhaps the markets derive some comfort from the ascension of Barak Obama at the expense of Hillary Clinton, who could shortly be looking at her political demise.

It's not that Obama represents anything particularly healthy for American business--regardless of who ultimately is the Democratic nominee, the platform will be decidedly anti-business. It's more of a case that it has to be taken as a positive that voters could finally be wearying of smarmy Clintonian politics and all that it represents. Perhaps the country can soon wake up from this bad dream. The markets should like this too.

It will be interesting to see whether the markets can continue to stabilize and recover in a period with little directly positive economic news. Right now small rays of hope will have to do.

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