The Fine Line Between Investment Grade and Junk

I love a capella, and enjoy a good economic parody. So how could I not love the Richter Scales ode to the 2007 credit crunch, sub-prime implosion, and hedge fund blowups on Wall Street?

Lyrics are below:

There’s a fine, fine line
between investment grade and junk
There’s a fine, fine line
between liquidity and a crunch
And you never know ’til you settle up
if the credit is benign
There’s a fine, fine line
between a gain and a painful decline

There’s a fine, fine line
between the theories and the facts
And there’s a fine, fine line
between what’s solid and what cracks
And now my holdings badly misbehave
and my losses aren’t confined
‘Cause there’s a fine, fine line
between a gain and a painful decline

For years I piled on debt
and smiled as my profits soared
(I even bought a solid gold toilet, yeah)
Now I see that I can’t
be levered this much any more
(panicking, I’m panicking, I think I’ve soiled myself)
Bernanke, please save me,
cut rates, oh I implore…
(please, even 50 bps)

There’s a fine, fine line
between a bull and a bear
And there’s a fine, fine line
between delight and despair
I’m hoping I’ll avoid the pain to come
from trades yet to unwind
But there’s a fine, fine line
between a gain
and a crippling, crushing,
mortally wounding decline
(help me)

Mixed by Tat Tong

Inspired by Avenue Q

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What's been said:

Discussions found on the web:
  1. lux commented on Sep 13

    That’s right up there with the “I’ll be Watching You” Ben Bernanke video parody. Good stuff.

  2. corky meets mr clean, aka jeff macke commented on Sep 13

    Pimco Starts Distressed-Debt Fund

    ^i’m calling a top in the distressed debt market, it’s the next hedge fund category to blow up. whats even more scary and sad is that just 2 months ago Bill Gross was freaking out the coming apocalypse triggered by MBS & ABS bonds, but now he wants our money to buy this stuff? does he have alzheimers or take us for a bunch of suckers-

  3. David commented on Sep 13

    I like to see a Weird Al Yankovic music parody video about CNBC Kudlow & Cramer.
    How about Queen & David Bowie “Under Pressure” Music Video staring Uncle Ben.

    ps, I don’t trust my AAA Bond anymore.

    “Let every eye negotiate for itself and trust no agent.” William Shakespeare.

  4. David commented on Sep 13

    Berry watch a YouTube – Queen and David Bowie – Under Pressure
    Video clip, “Under Pressure” – and think about today’s talking points memo.
    While Wall Street and CBNC are smugly today claiming a new containment of the subprime problem, EU officials are acting according to the opposite conclusion.

  5. SPECTRE of Deflation commented on Sep 14

    Barry, looking at this article, the fine line isn’t that fine. This article zeros in on Level 3, but Level 2 is where I see huge problems. Level 2 is mark to Goldilocks, and Level 3 is mark to nothing because it’s a frigging guess. This should end well. NOT!

    Marking Down Wall Street
    September 14, 2007

    For the past three tumultuous months, investors have found it difficult, and sometimes impossible, to price many exotic financial instruments hard-hit by subprime turmoil.

    Now, with some of Wall Street’s biggest names — Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Bear Stearns Cos. — set to begin reporting results for this period next week, investors will be paying particular attention to the impact this has had on the brokers’ balance sheets.

    As they pore over the books, investors are likely to home in on data that have only recently begun appearing in the firms’ financial statements. Under a new accounting rule, firms are distinguishing between financial assets that have real market prices versus those based on models and those that are little more than management guesses.

    The upshot: Given current market stresses, bigger portions of the firms’ securities holdings might fall into the category of management guesses, and relying on these estimates might not help restore investor confidence.

    The uncertainty surrounding assets based on estimates, given current market conditions, could affect investors’ view of firms’ book values. That could call into question bullish arguments that the firms are undervalued at current, historically low price-to-book-value multiples.

    In addition, if investors grow concerned about the true value of some of the assets on the firms’ balance sheets, this could make them anxious about the amount of borrowed funds that the firms employ. Any change in sentiment on that score could force the firms to grow more conservative, leading to lower earnings.

    The firms began breaking down their financial assets into these “levels” at the start of their current fiscal year, which began in December, when they early adopted a new accounting standard related to fair, or market, value measurement. All U.S. companies will have to begin using it for financial years starting after Nov. 15.

    During the first two fiscal quarters, investors didn’t pay that much attention to this new data, which break financial assets down into three valuation categories. Now, with pricing — or marking — a big concern on Wall Street, skittish investors are expected to pore over the information.

    The biggest area of concern will be the category for asset values based on estimates, or Level 3. These assets made up about 10% or less of overall financial assets at Goldman, Morgan, Lehman and Bear at the end of their fiscal second quarters. Including Merrill Lynch & Co., which doesn’t report results until next month, the firms designated $331 billion as Level 3 assets, or about 6% of total assets.

    Of the nearly $270 billion in financial assets on Lehman’s balance sheet at the end of the fiscal second quarter, for example, about $22 billion, or 8%, fell into what is called Level 3. The firm said in its financial filings that values in this category “reflect management’s best estimate of what market participants would use in pricing the asset.” At Bear, about $18 billion of the firm’s $220 billion in financial assets fall into this category.

    At both firms, the bulk of their financial assets — $152 billion for Lehman and $163 billion for Bear fell into the mark-to-model category, or Level 2. Assets in Level 1 trade in active markets with readily available prices.

    Among issues that will now concern investors: How much in unrecognized gains and losses is being generated by Level 3 assets. Too large an amount of profit from these assets could call into question the quality of a firm’s earnings.


  6. Fred commented on Jan 29

    Great article. Really enjoyed the video too.

  7. Fred commented on Feb 19

    Great video.

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