Market Monopoly

A bonus Friday afternoon guest post via Macro Man
— a portfolio manager at a London-based hedge fund, he trades global
currencies, equities, fixed income, and commodities. Over a long and
varied career, Macro Man has been an international economist, a
sell-side currency strategist, and a currency options market-maker.

His amusing Friday afternoon topic?  Market Monopoly!

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With the Olympics and the summer drawing to a close, it’s now time for market participants to get themselves back from the beach, turn off the TV, and focus on making money for the four-and-bit months that remain of 2008.  Yet the Olympic spirit lives on, and many of us would love to channel our inner Usain Bolt or Michael Phelps.

Indeed, over the course of his career Macro Man has met many market people who are just as competitive as Bolt, Phelps, or Tiger Woods, for that matter.   Sadly, while the mind is willing, the flesh is all too often weak (in this case, literally.)   How, then, can desk-driving market  people bring out the Olympian that lurks within us all and keep the competitive fires burning?

Macro Man has hit upon the answer: Monopoly.  The game requires no discernible athletic ability and is predicated upon acquiring assets as cheaply as possible, levering them up,  and separating other players from their cash.  It’s a skill set with which many (but by no means all) market punters are well-acquainted.   

Of course, in Monopoly, as in life, chance can play a significant role in determining winners and losers.   In real life, these slings and arrows of outrageous fortune can come from anywhere, but in Monopoly they derive from the dice and the Chance/Community Chest cards.   Come to think of it, it looks like the game of Market Monopoly has already started, because some of the cards have already been drawn.  Consider who’s already holding the following (vintage) Monopoly cards:

ADIA, CIC, and Temasek holdings.  These SWFs  already own very significant stakes in a number of banks in the US and Europe, in many cases via high-yielding preferred shares.  Though it may be a case of thrice bitten, four times shy, Macro Man can’t help but think that at the end of the dilutive capital-raising process, these guys will be the only ones left with enough equity to get paid any meaningful dividend income.

Counterparties of Merrill Lynch and Lehman Brothers in the structured credit space appear to have quite a few of these cards up their sleeve.

Holders of 2007 vintage AA-rated ABX.   Unfortunately, to collect the prize, they have to tender $100 of face.  (Since this vintage card was printed, prices have fallen further.  In the modern editions of Monopoly, second prize winners only get $10.)

John Thain.  Mr. Thain’s tenure at the helm of Merrill Lynch has been characterized by three things: large write-downs, a fire sale of assets to clean up the balance sheet, and Merrill itself providing the funding to the buyers in the aforementioned fire sale.  Alternatively, this card could represent Merrill’s settlement of its part of the auction rate securities fiasco.

Give this one to Macro Man, as he still can’t get rid of this %*&£ing cold.

Trustafarians.  With
the UK mortgage market imploding and the bid from City whiz kids a
thing of the past, trust fund babies represent the only remaining
source of demand for £2 million London properties, which are too
expensive for ordinary people and too small for any self-respecting
sheikh or kleptocrat.

Mrs. Watanabe.   Not
that long ago, flow in the Tokyo foreign exchange market was dominated
by Japanese life insurance companies, whose investment and hedging
patterns drove price action in the yen.  All available evidence
suggests that Mrs. Watanabe and other Japanese housewives have cashed in their insurance policies and used the proceeds to buy NZD/JPY on gaitame.com.

Actually,
this card appears to have been lost; it doesn’t look like anyone’s
getting paid off on real estate investments these days.

Warren Buffet.  The
Oracle of Omaha’s foray into Burlington Northern last year made
headlines, with some analysts wondering what Berkshire Hathaway could
see in the apparently unexciting railroad business.  So far this year,
the Dow Transport Index is up 9.1% despite the sluggish economy and the
credit crisis.  Warren’s already passed "Go" a few times on this one-
BNI’s up 24% y-t-d.

Freddie Mac shareholders
who started the year with $375 worth of stock and finally sold it at
yesterday’s close.  In a few months, Parker Brothers will re-issue this
card as   "Your Agency debt is bailed out.  Collect $100."

Hedge fund managers with kids in Manhattan and central London.  Credit
crisis?  Bear market?  Recession?  Tell that to the proprietors of
private schools, who inhabit The Land of Eternal Inflation.  The card,
of course, is a misprint; it should say "fees" instead of "tax", and
there seems to be a "k" missing….

Residents of New York state, who will no doubt be taxed to spruce up the public infrastructure before the state government flogs it off to the highest bidder.

The American taxpayer.  Unfortunately, after the forthcoming GSE bailout, there won’t be much money left over for the next stimulus package.

Investment bank employees,
many of whom get paid their annual bonuses around Christmas time.  This
year, most have little prospect of getting paid much more than $100 in
cash unless there really is a Santa Claus.

Anyone who turns state’s evidence in
the orgy of prosecution and litigation that is inevitable outcome of
the subprime crisis.  Predatory brokers?  Fraudulent borrowers?
Conflicted ratings agencies?  Corrupt mortgage lenders?  All are
angling for one of these cards.  Those who don’t manage to get one will
be left with the card below.

Too many to list.  Apparently,
Parker Brothers has enlisted the US mint to help expedite the printing
of these cards, which will be allocated to all of the aforementioned
crooks who don’t manage to snag a Get Out of Jail Free Card.  Readers
should feel welcome to supply their own nominees, or indeed suggestions
for who’s drawn some of the other Monopoly cards.