These days the catch phrase on Wall Street is “The worst of the credit crisis is behind us”. It is being uttered by financial CEO’s, fund managers, economists, Hank Paulson, and the rest of the crew who brought us last year’s gem “The subprime crisis is contained”. It’s just like a bunch of horny teenagers in some cheesy 80’s horror - high-fiving each other after narrowly escaping some lunatic with a knife who just killed their friend. You know that its not over. You also know that they know it may not be over. But most importantly, you know once they start having sex with each other, they will be dead very soon.

While the orgy hasn’t started yet, there are signs that it may. Mergers are starting to pick up, financial companies are getting access to capital, and traders are beginning to bid up shares of financial companies immediately following ugly earnings reports. “The news is worst at the bottom” seems to be the siren song, but ask those teenagers mentioned above who thought their friend getting stabbed by a psychopath was some really crappy new. They’ll tell you that the worst news is sometimes never heard until its too late to hear it.

Anyways, I’m not interested in debating the issue that the worst is behind us, because I don’t even know what “worst” means as a noun and don’t know whether to agree or disagree for the most part. The worst losses? The worst year? The worst quarter? The worst bank implosion? The worst equity markets? The worst credit markets? The worst what? Obviously, I understand the message that they are try to send to investors, I also understand their motive for saying it. The intent of the message is to instill confidence. This is, for all intents and purposes, the same as the catchphrase that these same individuals started to spew at this time last year, “Subprime is contained”. This was also intended to instill confidence.

Instead I want to explore whether it is beneficial to even instill confidence in such a manner, and if so to whom?  The problem I have is that they tried to instill confidence by acting sure about a future unknown event in the market, which they had no idea about, and for a large part can not control.  Markets are not stupid.  They are conscious of their own unpredictability.  They know that if these people really were confident about the bank balance sheets, the concentration of risk, and the health of the financial system as a whole, they would put their ass on the line and say “Bring it on!” or “We are not worried that it will spread.  We are ready for it.”  Why wouldnt’ you say that, well if you’re a CEO or a Federal Chairman, you look much less foolish saying “I was wrong about something I shouldn’t have had any idea of in the first place”  than “I was unprepared for an event that I told you I could handle.  You hired me for this very purpose.” One instance the blame falls on “the random crazy wild credit mess” and in the other situation the blame falls squarely on the person in charge.

If you agree with my reasoning above, it indirectly implies that by saying “Subprime will be contained” and not “We are ready for subprime not to be contained” in order to instill confidence, these people were basically saying “We are fucked if subprime is not contained.”  What would you do if you were a market?   Well for starters, if I was an investor I would start to sell some assets I would think would get hit if it were not contained - shares of financial stocks, paper backed by Alt A loans, money funds that invest in ABCP, and all the other stuff that blew up.  I also would stop buying new issues of any CDO’s, CLO’s, leveraged loans, ABCP, and other things that have the effect of cutting off the credit spigot and make bank balance sheets swell.   If I was a homeowner in some of the better markets, I would see if I could put my house up for sale.  If I were an employer, I would let go a few people or stop hiring new people.  The list goes on.  In our complex economy filled with complex derivatives and too much debt, the anticipation of such an event would almost cause it to come true.  The sale of these assets would have been the first signs of it not being contained - whether there were fundamental reasons or not to sell them.  Saying it will be contained while it is still contained tells people nothing except that if an alternate future happens, then it will be bad.  Who wouldn’t reduce their risk exposure at such a time?  And who, after seeing asset values fall during this initial deleveraging, wouldn’t begin to think that maybe it isn’t contained and then act accordingly?  While it may have been inevitable either way, we will never know, saying that subprime is contained did much more to sway the market towards the tipping point, than it did in keeping it away from it.

Now we find ourselves with a similar new phrase, “The worst is behind us.”  These people have no idea whether or not this is true and it is absolutely arrogant to claim that you can compare something to something that hasn’t even happened yet.  If something is the worst it means that out of some set, it is the most bad.  That set is not yet complete.  How the fuck do you know and when did you get a crystal ball that can not only see the entire future but help you to make comparisons about it?  What is scarier is that now they are really thinking short term.  They are using the relative calm, leveraging it against the future, so that they can raise capital not for growth, but to remain an ongoing concern and people seem to be buying it.  The problem will come when either something happens that make people question whether the worst is over of not - either a new “shoe to drop” or just the persistence of this still ongoing turmoil, or even relative calm resulting in a new wave of selling for those who missed the first chance.

Once again, the most effective thing to say is, “We think the worst is over, but if it is, thanks to the Fed’s actions, we are ready to handle it.”  Saying the worst is over to instill confidence at a time when you are raising capital at enormous interest rates so that the worst does not indeed happen in the near future just bothers me on so many levels.  For the most part it irks me that in one respect they are confident that the worst is over but in another respect fearful of it.  It’s the equivalent of a junkie going to his parents to borrow money saying, “I’m going to be clean this time I just need this money for one more hit and then I’ll be clean.  I know it.”  What is more is that they are turning everyone else into enablers in some respect.  People want to believe it so bad that they are willing to accept something that they know is impossible to be sure of as gospel.  They do not want to see “the worst” and are willing to do whatever is in there power not to see it happen.  The following is some excerpts from an article on “enabling” in regards to alcoholism.

Many times when family and friends try to “help” alcoholics, they are actually making it easier for them to continue in the progression of the disease.

This baffling phenomenon is called enabling, which takes many forms, all of which have the same effect — allowing the alcoholic to avoid the consequences of his actions. This in turn allows the alcoholic to continue merrily along his (or her) drinking ways, secure in the knowledge that no matter how much he screws up, somebody will always be there to rescue him from his mistakes.

What is the difference between helping and enabling? There are many opinions and viewpoints on this, some of which can be found on the pages linked below, but here is a simple description:

Helping is doing something for someone that they are not capable of doing themselves. Enabling is doing for someone things that they could, and should be doing themselves.

Simply, enabling creates a atmosphere in which the alcoholic can comfortably continue his unacceptable behavior.

So how do you stop an enabler?  Whats the solution?

As long as the alcoholic has his enabling devices in place, it is easy for him to continue to deny he has a problem — since most of his problems are being “solved” by those around him. Only when he is forced to face the consequences of his own actions, will it finally begin to sink in how deep his problem has become.

Some of these choices are not easy for the friends and families of alcoholics. If the alcoholic drinks up the money that was supposed to pay the utility bill, he’s not the only one who will be living in a dark, cold, or sweltering house. The rest of the family will suffer right along with him.

That makes the only option for the family seem to be taking the money intended for groceries and paying the light bill instead, since nobody wants to be without utilities.

But that is not the only option. Taking the children to friends or relatives, or even a shelter, and letting the alcoholic come home alone to a dark house, is an option that protects the family and leaves the alcoholic face-to-face with his problem.

Those kinds of choices are difficult. They require “detachment with love.” But it is love. Unless the alcoholic is allowed to face the consequences of his own actions, he will never realize just how much his drinking has become a problem — to himself and those around him.

Are those who are saying “the worst is behind us” all creditholics, and are we just enablers if we believe them?

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