Richard Bove of Punk Ziegel authored a report stating that today's mortgage / financial debacle is just as overblown as it was in 1990. The problem is that his data is incorrect.
First, he says that the banks have plenty of capital. Challenge! Not when they are borrowing money at egregious rates.
Secondly, he states that 30-year mortgage rates are around 4.88%. Challenge! rates are in the mid 6.00% area.
Thirdly, he says that there is no liquidity crisis as evidenced by three-month LIBOR at 3.00% (actually lower). Challenge! LIBOR is in the 2,90% area because the Fed has pumped massive amounts of liquidity via lower discount and Fed Fund rates and Term Auction Facilities (which the Fed just increased to $50 billion). Think three-month LIBOR would be below 3,00% if the Fed was not pumping this much liquidity into the system? I don't think so. If the Fed would tighten today, three-month LIBOR would probably be 5.00% - 6.00%.
Mr. Bove's poor assessment of the current situation is bad enough, but I am informed that the head of major brokerage house has given this piece to branch managers and has told them to distribute it to brokers.
When I confronted brokers as to why she would do this, I was told that they were told that clients need to be told something positive. This is classic sales B.S. Tell retail investors something comforting even if it is false so they don't move their assets. What great disservice to clients.
How about tell clients the truth. Tell them that the situation is bad, but not hopeless. Tell them that opportunities exist in municipal bonds, agency bonds and bank, high-quality MBS, foreign bonds and bank and finance bonds and preferreds, if one is willing to ride out continued volatility.
Failure to tell the truth is what caused much of the subprime and ARS pain among investors. In the coming weeks, those who are blowing sunshine up the asses of investors will look stupid and those victimized investors will be very angry and will in fact leave.
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