Waiter, There's a Fly in Our Banks

Posted: Oct 12, 2011 12:01 AM

A great cook will always say soup is only as good as the stock that’s used to make it. 

It’s a simple concept. 

If high-quality stock is utilized, there is increased potential for great tasting soup.  Unfortunately, the “powers that be” continue to ignore this basic cooking principle and then wonder why their final product becomes a disaster that is rendered almost unpalatable. 

Take, for instance, the sub-prime mortgage debacle. 

The gurus of financial engineering seemed to think if toxic mortgages were combined into one bundle (the pot), and then divided into separate tranches (bowls), the end result would be tranche #1 of better quality than tranche #2, and so on. 

Dispensing the right amount of payoffs (seasoning), the various ratings agencies (S&P and Moody’s) bestowed varying designations, preferably AAA, in order to confirm the differences. 

However, regardless of the various ratings, the basic mortgage (the soup), though in separate tranches, came from the same pot, and all from lousy stock.  All it did was attract flies.  

Very revolting. 

Currently, we are led to believe the European Financial Stability Facility (EFSF) will be the savior for the European Union. 

From Slovakia (the poorest and maybe weakest), to Germany (the most wealthy and possibly the strongest), all are blended together, creating a very questionable bailout fund. 

The EFSF is designed to provide a backstop for the banks of Europe by purchasing government bonds. 

Much as our TARP was designed for last ditch efforts, so is the EFSF. 

However, unlike the U.S. which only has one sovereign government, the EFSF must contend with 17 eurozone members. 

In addition to requiring unanimous consent, they must all have the financial wherewithal in order to participate. 

If the stock of this soup is carefully examined, there is only one ingredient that’s worthwhile, and that’s Germany.  Soon, though, even they might be in question. 

So, the chief cooks of Europe can strategize and pontificate, but at the end of the day the soup is only as good as the stock. 

Regrettably, the other 17 ingredients that make up this stock are woefully lacking. 

When it’s ready to be served, will anyone order it? 

Soup du jour it may be.

It seems the only thing on the menu.