C.M.O. 3.5.2009

Credit Market Overview
March 5, 2009

Do you remember those word problems in math class: A car is traveling west at 30 mph. Another car is traveling east at 20mph . . . etc. OK, so keep channeling your grade school math class and use the information below to answer the questions that follow.

If you agree to invest at least $10,638,297.87 you can:

a) Buy AAA bonds backed by loans from the sale of cars in the U.S. but not necessarily from an auto manufacturer headquartered in the U.S.A.

b) Achieve a yield to maturity of between 12%-16%.

c) Borrow up to 94 cents of every dollar you invest at Libor + 1.00% (~1.30% +1.00% = 2.30%) from a lender that can print money at will

d) Walk away from the non-recourse loan at anytime with no penalties

c) Pay your top executives as much as you/they please

Questions

1) Would you participate in this bond offering?

2) Do you think this bond offering will increase the number of cars sold in the U.S?

If you answered YES to question 1 than you could probably get a job at Blackstone, Fortress, Cerberus or Millennium as all four of these entities are looking seriously at the latest “fix” to come out of Washington to spur the economy back to it’s consuming ways. (An added benefit is that if you went to work at either of the first two names mentioned, given where the stocks of are trading, you wouldn’t have to worry about getting back dated options as the stocks are cheaper than most option premiums.)

Mr. Schwartzman, chairman of Blackstone Group LP, believes the plan will be successful in bringing investors back to the securitization markets saying: “You need a robust securitization market to reestablish a broad lending platform in the society.” (It is amazing to see how altruistic people become when they have their hand in Uncle Sam’s pocket.)

When asked about the new offering the President himself was quoted as saying: “This will help unlock our frozen credit market, which is absolutely essential for economic recovery.”

If you answered YES to question 2 I’m not saying you’re wrong but I would refer you to Mssrs. Gross and Attebury. “PIMCO Bill” is not so convinced of the programs resounding success. “It may be the same problem we have with the banks, you can bring the horse to water, but they may not drink.” Thomas Attebury, partner and PM with First Pacific Advisors, is “not a believer in this. There is a reason credit is contracting – because the economy is in recession and banks typically raise their lending standards to protect their precious capital.”

As with all things, time will tell. I do want to make one observation here. I find it interesting that Congress has gone out of its way to make a helluva lot of noise regarding the changes they want to make to reduce the attractiveness of choosing “Hedge Fund Manager” as a career goal. At the same time, however, they are going out of their way to design sweetheart deals like the one described above to fatten the purses of those managers and doing so with subsidies from the U.S. taxpayer.

Kind of like getting yelled at in the front yard where all the neighbors can see and then walking around to the kitchen window for your slice of fresh baked pie. After all, you have to protect those campaign contributions.

Enjoy the week.

Jim Delaney