Apr 25

The Restructuring Dance – How Long Will This Be Going On?

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Financial markets have continued to be buffeted by some bad news, which has mostly been ignored.  Meanwhile, key indicators like bond spreads and equity levels have recovered from, and in many cases improved beyond, where they were when Lehman Brothers was forced to bid adieu.

Thus, it seems like we may be entering the greed phase of the fear/greed cycle, but how far with this phase run? 

Maybe longer than you think, as long as the Restructuring Dance continues.

Let’s start with sovereign debt problems and one of the cradles of civilization, Greece. The problem of getting all of the largest economies in Europe (except Great Britain) to agree on a single currency and a single source of monetary policy, but leave fiscal policy to each member state has finally arrived….thanks to the Greatest Deleveraging followed by the Greatest Releveraging in the History of theWorld.
Greece is merely the first of several Euro-using states that will be facing the music of debts coming due. The salve of a European/IMF solution is only a temporary solution. And, despite assurances to the contrary by its Finance Minister, the only feasible way out the problem for Greece is debt restructuring.
With more sovereign credits in Europe ready to follow the Greek path, there are two unthinkable alternatives to restructuring:
Get the EU countries to agree to have a single ruling body for pan-European fiscal policy, or end the single currency experiment.
Oh, there is actually one more unthinkable, yet possible alternative: Let each troubled country go bankrupt and then restructure its debt. Sounds like restructuring on the front end would be much better.
Restructuring must also occur on Wall Street. 
Although Goldman Sachs is now in the SEC’s sights, do not think that the rest of the Street has clean hands. As noted in last week’s From the Northwest Quadrant, the issue here is one of imbedded conflicts which must be met with a strong dose of caveat emptor.
Irrespective of what is being jawed about in D.C., the Street must come to the realization that some kind of restructuring in the way business is done must occur. Whether this means the Volcker solution, the trading of all derivatives on an exchange, and/or something else is unknown. 
Expect sounds of restructuring to come from Wall Street once they realize the obvious this time: All of the protection money they want to throw at Congress won’t stop our commissioned salespeople in D.C. from being more concerned with getting re-elected (amidst a sea of anti-Wall Street angst) than getting cash payments.
Next up on the restructuring list are the rating agencies, lackies to the Street’s desires to churn out more complex and opaque securities. The conflicts imbedded in the rated paying the raters are obvious and ripe for Congressional bloviating.
Perhaps the rating agencies will also come forth with a restructuring proposal of their own; though, it will take more than bloviating for this to occur. Rating agencies are rather nebulous creatures for the average voter. Large banks have large buildings which make them much easier for the voter to despise.
 If you are trying to level the playing field, should you really be lowering the bar at the same time?  Yes, say the agencies, pointing to consistency across their global platform.  Proving that consistency may be the hobgoblin of rating agency minds.
Meanwhile, as the Administration attempts to push residential mortgage restructuring, lenders to large commercial real estate projects are forced to restructure else they recognize large unrealized losses – or so they think. Using the old good bank/bad bank approach and applying it to troubled commercial mortgages is one way to ‘solve’ the problem, while not solving the problem at all.
It certainly is starting to feel like we are entering the greed phase of the markets; and the creativity behind restructuring will undoubtedly allow it to roll along for some time. 
But, as during the subprime craze, we must ask, “How long will this be going on?”
Or, as the 70s rock group Ace once prophetically sang:
How long has this been goin’ on?Well, your friends with their fancy persuasions
Won’t admit that it’s part of a scheme,
But I can’t help but have my suspicions
‘Cause I ain’t quite as dumb as I seem.

And you said you were never intendin’
To break up our scene in this way,
But there ain’t any use in pretendin’,
It could happen to us any day.