MUCH ABU ABOUT NOTHING

Ok, really cheesy as my daughter-in -law would say. But this thing in the Gulf is a real kick. Right out of Arabian Nights.

Once upon a time there were two Sheiks who were cousins from the marriage of convenience of two families why the heck back when. One sheik wound up growing up and eventually becoming the ruler of a sheikdom which has more oil and gas than any 10 square mile place on the face of the earth, The other guy, though just a hop, skip and a jump away would up with sand. Sheik #2 was a fun-loving guy, however--none of that stay away from booze stuff for him (three wives were ok and a bit on the side worked)--and he had big ideas. You see, he figured out that there was in fact a sucker born every minute and when you couple that revelation with the fact of many of those suckers had access to more money that they ever dreamed possible, you could have more fun than a herd of camels...assuming camels have fun which given the way they look and smell is hard to believe.

#2 was a pretty shrewd guy when it came to politics as well and he also figured out than unless you lived in the neighborhood he and the other sheiks looked pretty much alike to those people who were known as bankers and investors and who had all this money, but more importantly they also believed that the mutual interests of he and his cousin and all the other sheiks in the area were the same and when it came down to the good and dirty it would be all for one and one for all.

He was also a pretty good salesman. Now a while back I had wise old banker say to me, "Charlie, one day you're going to meet a guy who will tell you he can put 2 pounds of crap into a 1 pound bag and if you believe him, you are going to have 2 pounds of crap all over your boots." #2 was that guy, and sure enough, a lot of people believed him, and to be honest he probably believed himself. Anyway, he talked these bankers and investors (let's call them yield whores...oh hell, whores will do) into lending his little plot of land (called Dubai by the way) more money that Allah ever had to build a dream world to include a snow-ski jump in a place where the average temperature is about 92F. on the theory that build it and they will come. And come they did, fueled by the most incredible increase in world-wide liquidity anyone had ever seen and they kept coming until...the money stopped in far off places like New York and London and Zurich.

At this stage the whores had a problem 'cause Bernie Madoff had nothing on #2 and his boys. This was a Ponzi scheme to end all Ponzi schemes 'cause if the people stopped coming to fill up all the space #2 had built there was Zip there to service what the whores had lent. At first, there was little worry because the conventional wisdom was that the entire region was interconnected and the guys with the REAL assets wouldn't dare let one of their own collapse. Problem was no one took account of human nature, and as I keep saying in the end it is all about people, and in this case the other people--especially #1--had been quietly seething at the antics of # 2, so when a few of the whores asked #1 and his boys whether they were standing behind #2, jolly good show, brothers in arms, blood is blood and all of that, turns out #1 said, "Think again."

Horror and disbelief. One shakes one head and asks one's self, "Will they never learn?" The answer is apparently not. The good news for The Suit and Helicopter Ben is this one isn't on their watch; it is very much a European banking problem with the Brits having a substantial part of the action. But as we have all learned, oceans do not protect us from actions in some far away place and the repercussions of this in Europe may well affect us at some later date. Do I believe that this will be the case. Actually, no. Folks who know a lot more about this than I say it's really #1 trying to teach #2 a lesson and that some accommodation will be reached. Me, I'm more of a cynic. I suspect the fact that #1 and his buddies have all of their PRIVATE money with the folks who are the creditors of #2 may influence them to be of some assistance before bad things begin to happen to them. Then again, it's the Middle East. Inshalla.

GOOD CHRISTIAN DISCOURSE...

...which we will all see tomorrow in the annual leading article in the WSJ repeating another journal written in 1620 just before the sailing of the Mayflower. It is a wonderful piece that I used to read to my sons every year. Imagine, sailing across the ocean to God knows where on a leaky bucket not much larger than the one owned by Bernie Madoff for a dream to be free. Every year, I love the Journal for printing that article.

Last week, however, I hated it. My Friday's posting was to be a follow-up on TheSuit's testimony or to be precise, one little nugget of the same. Of course, the buggers at Dow Jones had to get to it before me but I came to the conclusion that I should cover it BECAUSE IT WAS MY IDEA IN THE FIRST PLACE (they print earlier than I do) and it is important.

What everyone overlooked except for the Journal and me was The Suit rather blandly stating that Credit Default Swaps (CDSs) in the case of AIG really didn't matter. As the Journal said, "Hello?" Well if credit default swaps didn't matter in the great scheme of things, what the hell is all the excitement about these awful things called derivatives? With all of this regulatory nonsense going on might we be looking at the wrong tree in the forest.

As I have said repeatedly, a CDS is nothing more than an insurance product written on an existing risk generally or most often expressed (the risk) as a bond, a loan or some form of documented liability of a borrower. Now once the original CDS is written the purchaser can market it for oodles of purposes but cut through all the nonsense and there is still the original writer of the risk; in our case AIG. Again, as I have said a half-dozen times, if all of a sudden there was a bid out there from the biggest pile of money in the world (the Fed) on the CDS-covered asset, the credit worthiness of the AIG structured finance unit is no longer an issue. There would still be hell to pay among secondary holders but hey, nothing that can't be settled among gentlemen. But that did't happen. Originally we all thought that it couldn't happen but The Suit has indicated that that portion of AIG's business was manageable. So, one might ask one's self, "Self, where was the problem?"

Before we start rearranging the entire regulatory landscape it seems to me that it might be a good idea to use AIG as a test case in an attempt to discover where it is that the problems truly lie. If we were to do this I have a suspicion that the trail might lead not to those areas already investigated in nauseating detail--with little to show for it I might add--but back to the undiscovered country such as the core businesses of AIG--the straight-up insurance business-- overseen one might point out not by the Federal reserve but by the Insurance Commissioner of the State of New York and the role played from the git-go in this mess by the State's AG, the odious Mr. Cuomo. Nothing may come of it but would we not have a fuller understanding of what really happened? Ponder this over the Turkey and football this weekend. Let us all give thanks for what we have and also for those brave souls it set forth 400 years ago and made all of this happen.

See you next week.