Reflection: On Gambling: On Rolling out the Call: On Rolling Out the "Con"; On Delusion

Today we have news that year on year, foreclosures have increased 65% in April 2008. Secretary Paulson says we have turned the corner. Federal Reserve Chairman Ben Bernanke says we need to do more to confront the impact of foreclosures. I will leave it to the reader to deduce which has the clearer sense of reality.



I have been reading the book "Blood Sport", the story of President Bill Clinton during the Whitewater years---it is in audio form also. The banking crisis of those days----and I remember them well as a homeowner with interest rates over 10%, and banks failing, and even some in the conservative states of Minnesota and Wisconsin. The total losses picked up by the FDIC was 50 BILLION. Today-----the crisis of mortgage foreclosures is at 500 BILLION and headed to a TRILLION according to some estimates. The major technique of most humans faced with these numbers is DENIAL. Especially during political season. We need some bold ideas for action and not just delay-----but DELAY is the strategy locally, nationally, and whether it will work is questionable----and the stakes are huge. Here is the analysis.



If you click on the post there is my classic post on the "Theory of Double Down"----in gambling, in stock investing-----as I recount, I have been debating this theory with my brother for the past 50 years since we were playing competitve MONOPOLY in the garage.



As a young stockbroker I remember vividly staring at investor accounts the days after the stock market Crash of 1986 where they were fully margined. The issue was right on the table for those who did have margin calls----should the investor meet the margin call with additional capital or should the position be closed out? The answer depends on what one thinks will happen in the future---the past charts are not relevant.

In the options business this dilemma is called "Rolling out the Call"----an investor with a losing position in an expiration ---say peanut butter chunky September 25 Calls, and suddenly the value of chunky falls to 10---there is the impuse to sell the call, take the tax loss, and buy the March 2009 Call, or would the March 2010 call be better. That way---when the market for chunky peanut butter comes roaring back.......WHEW....all will be well. (Chunky calls are fictional for example purposes only.)

On a local basis, if there is a very soft real estate market, with new home sales near zero, the rolling out the call could consist of ADDING lots to create a "Mix" or "Menu" of homes available for purchasers to choose from. Behind the rhetoric of this theory is the practical idea of bankers to hedge their bets by adding and in fact creating a monopoly of homes available in the new market---capturing this market for the next 20-30 years. Rolling out the call to 2030. This is a game for only the strongest players. The rest have to fold.

In the national scene---the infusion of capital from the Federal Reserve and the changes to the Fannie Mae and Freddie Mac to add capacity have allowed banks to get cash for poor quality collateral, and avoid disaster temporarily.....

This all reminds me of a young wife who is unhappy with her marriage, and in her despair decides to have children in the hopes that this will solve her unhappiness. The essential relationship is the key.......and it is the key in the financial sector as well. Unless the essentials are faced, the prospects are not bright.

Who is the best candidate for America? Is it Hillary who spent lots of time on the Whitewater accounting and the problems of Madison Guarantee Savings, or McCain who had his own involvement with problem banks. Yes. I can see it now. President Hillary visiting with the financial gurus in the White House, while, Bill, maybe in the Blue Room, wanting to be supportive, meeting with ...well....who knows....maybe Jennifer Flowers would stop by the White House just for old times sake.

That's how I see it.