Juggling Dynamite

 Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds. See Banks Sell Toxic Waste:

 “Worldwide sales of CDOs — which are packages of securities backed by bonds, mortgages and other loans — have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches. They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.”

“It's grossly inappropriate to take this level of risk. Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig. . . . Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses.”

And all at a time when some 82% of public pension funds are already sporting staggering funding deficits due to the losses they sustained reaching for risk returns in the last stock bubble.  All at a time, when individuals are living longer, and saving less and desperately in need of some guaranteed retirement income.

When our fiduciaries are swindled, the whole system breaks down.  Pension trustees must be held accountable.  They have a legal and moral duty to act as shark repellent protecting the capital in their care.  They must counsel corporations and governments that the key to sustainable pension funds is through increased contributions not increased risk.

Excellent commentary on the significance of the Chineese market comes courtesy of the Prudent Bear and Rob Peebles:  This won't hurt a bit.

While many commentators today acknowledge that we have a gloabl economy with a remarkable correlation in the performance of global equity markets to date, when it comes to the looming dangers of a Chinese stock market crash, some compartmentalize thinking and say that a crash there would be a non-event for the rest of us.  CNBC hosts and guests were postulating this “we're all safe over here” theory again recently.

In case anyone has missed it, here are some recent stats on the Chineese market:

-Almost as many brokerage accounts were opened in April (4.5 million) as in the entire first quarter.

-60-70% of Chinese investors are retail individuals rather than professional managers

-many employers there allow workers that have a trading account, a one hour break each day so that they have time to buy and sell some stocks.

A fair comment yesterday on The Motley Fool criticizing reports from the National Association of Realtors which have been hopelessly optimistic over the past many months as to the depth and duration of the ongoing housing market decline:

“It comes down to this: The NAR's prospective on housing is irrevocably skewed because its very existence depends on the fiction that housing is a good “investment.” All evidence points to the contrary.  A home is a great place to live, but not when it leaves you poor.”

In the interests of honest commentary, one must also acknowledge that reports from sell side securties firms suffer from the very same skew.  Securities dealers exist to sell people investments, especially equity investments where margins are highest.  They must say that equity products are always a good investment, otherwise their business model predicated on perpetual growth and smooth earnings falls completely apart.

Buyer beware:  no one on Wall Street or Bay Street has any earthly reason to ever suggest that the stock or bond markets may be over-valued.  The truth does eventually seep out however, it just takes time and some premptive discipline on the part of investors who must always guard their kitty from the culture of buy, smile and wave.