Born circa 1200 as Albert of Cologne, he was a Dominican friar and renowned German philosopher. Catholicism honored him with the rare title of Doctor of the Church, and a contemporary, Roger Bacon, so dubbed him Albertus Magnus due to his reputation as a scholar and scientist.
However, it was Saint Albert the Great's pursuit of the "philosopher’s stone," that mystical agent of alchemy that has the power to transmute common metals into gold, which has significance today.
I have spoken in this column before that it is the insidious nature of deflation to undermine all asset classes and erode the capital base of an economy. Bear Stearns was the first to reap the bitter harvest of poorly structured Value at Risk models, but the devaluation of the entire financial sector as a whole is the result of poorly managed, misunderstood and highly leveraged asset class. As we unwind this credit cycle, cash is king, and commercial and investment banks are scrambling for capital – capital that has not been forthcoming while writedowns continue into Q4.
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Saint Albert the Great wrote a treatise, the Theatrum Chemicum, which explored chemistry and alchemy together. An obscure reference to be sure, but Lone Star Funds’ John Grayken certainly found his "philosopher's stone": Overnight, he bought Merrill Lynch & Co’s trash and turned it into gold.
Wait, you say – there IS risk in that vast $6.7 billion basket of CDOs. Really? Grayken bought it for pennies on the dollar, and he did it with Merrill’s own money. And where is Merrill? Selling assets as fast as they can and paying Temask Holdings to buy their stock while diluting their shareholder value. The smart guys are always the ones buying when everyone else is selling.
Unlike the government-sponsored enterprise (GSE) bailout plan, there is no extra debt added here, no bonds to sell in a moribund market. Of course, there is some risk, but at 22 cents on the dollar, and with Merrill assuming all the CDO credit risk past the first $1.68 billion on a $6.7 billion deal, the odds of this being highly profitable for Lone Star are very good. I wonder how many Merrill Lynch shareholders wish they could transmute their Merrill shares into Lone Star investment units?
As for Saint Albert the Great, he’s probably smiling right now.
Bill Fox is EWI's Senior Bonds Analyst. He has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional bond traders.