GAZUMPED

Look, I know you're not going to believe this, but so help me it's true. I was working on a follow-up to yesterday's post and had it pretty well worked out when I sat down to read the Wall Street Journal and there it was, right at the top of the op-ed page some damned COLLEGE PROFESSOR for cryin' out loud gazumped me! Now it's not often you find a college professor writing about the real world who has a clue as to what is going on but this guy apparently does. So here's to you Mr. Jeffrey Friedman of the University of Texas for getting it right.

Anyway, I'll be damned if at this late hour I'm going to wing it so here's what I was going to say, cut down a bit because of good ol' Jeff.

Our contributor, Anonymous, pointed out that banks were on both sides of the CDO market both selling the things to market but in many cases holding vast amounts of double rated obligations for their own book. Now one might ask why in heavens name would a bank engage in such a strategy knowing full well that the stuff, like some high-class street skag had been stepped on numerous times having had most of the kick (profit) taken out of it? Well, it really is a function of banks performing the age old task of "maturity transformation" as a central banker friend of mine likes to describe it which in the parlance of we who breath less rarified air call "borrowing short and lending long." Now, if this stuff is 'Triple,Triple" carrying the imprimaturs of both Moody's AND MBIA most normal humans would consider it 99.44% without risk so even if the yield was tiny, free money could be made if one purchased A LOT of the product...without assuming any risk...or so the thinking went.

But wait, it gets better. Remember the Basel Agreement of which I have spoken? Sure you do. Among other things it classified risk and set capital requirements for various types of risk taken by banking institutions. Triple A rated securities under Basel II attracted very little by way of capital whereas the underlying assets--home mortgages --attracted a hell of a lot more. Cowabunga! No risk, no use of capital! Back up the truck and load it up boys! And that's what they did save for a few. In this case those who by every measurement were dead right turned out to be just dead. There are no sure things.

The plane has landed and The Leader is now in Pittsburgh. The game, as the detective would have said, is now afoot. I hope the dear...wait, that's the other guy...The Leader is given Mr Friedman's article to read and dare I hope that a few of my better efforts a slipped in among the pages of the WSJ. The road to you-know-where is paved with good intentions and regulation, unless carefully considered by those who actually know the business and have participated in it usually walks in lock-step. The corollary is the biggest mouths usually have the least knowledge. So here's to you, Mr. Friedman. Hook 'em Horns!

Oh yeah, forgot. Gazumped comes out of the British property business. It's when you bid on a house, have your bid accepted, and just before you close, the seller accepts a higher bid and you are Gazumped. I have no idea of the derivation of the word but one must remember that in many things, Britannia waves the rules...wait, did I get that right?

See you on Monday. By then all will be known.