Posted on 09/15/2008 8:08:51 AM PDT by TigerLikesRooster
Yep, say what you will about Buffet, but when Warren Buffet talks, I listen.
The problem is, for every 1 five star chef out there that can amaze us with the skill at knifework, there are 3 people that prove a knife is a potentially dangerous instrument. Those 3 people will run the gamut from the kid cutting his finger with his first pocketknife, through the delinquent slashing tires, and up to the rare (but headline making) nutcase stabbing people, until the nutcase is put down.
At some point, our masters will draw the conclusion that knives are dangerous and regulate them. And then people will figure out how to get around the rgulations.
The big questions arising from the multiple beserk knife rampages that so many of the financial firms have engaged in is:
Is anyone going to be able move any paper at all for the next _____ months/years? (and if not) We will have an economy to speak of after the next _______ months/years because of it?
“I feel like I’m in a playpen.”
I have come to the somewhat comforting conclusion that most news, and specifically financial news, should be completely ignored in the year prior to electing a new President.
Reality just seems to go on vacation during this period and sensationalism is the order of the day.
they all shrugged off counterparty risk.
The sheer arrogance is amazing - party like it’s 1929 !!!!!
What needs to happen, if these types of contracts have any value going forward, is there to be a transparent market such that they all get marked to market every night.
First Rule Of Trading: Never trade any instrument that you can’t understand, monitor, and control your risk.
I certainly agree. Derivative contracts are a very useful and very powerful tool.
My comment was on the difference in value and in pricing of these contracts, not on the idea of allowing financial contracts between willing parties.
It does seem to me that every five years or so that we see another "only once in 500 years" conflagration.
Clearly, since so many willing parties are now losing on these contracts that were generally designed as hedges and not as speculation, many parties are clearly mispricing these instruments.
You've got one right here, watching the sh*t unfold.
The ones who are even aware of it are thinking it’s a one-time event that has nothing to do with their own brilliant and prosperous futures.
Human stupidity is never a one-time event, and neither are greed, fear, and arrogance.
I've looking everywhere for an understandable explanation of this problem. But everywhere, it's Obama this, McCain that, Palin this, Biden - well no one talking about thim. :)
Thanks for the straight, politics-free post.
“What needs to happen, if these types of contracts have any value going forward, is there to be a transparent market such that they all get marked to market every night.”
Please read Buffet’s comments if you haven’t already done so.
What he points out is that for these mostly illiquid contracts there is no market to mark to, so instead the contracts are marked to a price determined by a model.
The pricing model is selected by the owner of the derivative contract, probably mindful of what is the most optimistic valuation that will get past the independent auditor. The crazy part, as Buffet points out, is that under this regime it is possible for both ends of the trade to book a profit in what is essentially a zero sum event.
Can moral hazard get any worse than this?
bookmark for later read
I understand what level 3 “assets” are - if they can’t be marked to market, the must be subject to a clearinghouse-type arrangement. Then you’d not see the banks hide their nonperformers in level 3 every quarter. Notice how the level 3 assets keep going up ? It’s because they don’t WANT to mark them to market.
Let me give an example. If you have a mortgage asset and it’s been nonperforming for 90 days, under NOD and about to get a foreclosure notice, we know that most foreclosure recoveries in the last month or two have been 40% on that asset. So, mark it to 40% ad move on. Simple, really, altho I realize that’s a very oversimplified example.
Look at Lehman - none of their assets even got a bid. Gee, ya think their assets are worth much ? They had a mark to market event - the market said “no mas”.
Here’s something I found on Nuclear Phynance that might be worth a chuckle if you haven’t seen it yet.
Breaking News: Lehman To Be Acquired by Tooth Fairy
The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being ransported back to that magical place where Lehman still sells for over $70 per share.
In related news, Lehman has agreed to sell all of its level III capital, including CDOs, ABSs, pet rocks, baseball cards, slightly used condoms, and credit default swaps written by MBIA and Ambac. Lehman’s level III capital will be acquired for 150% of its face value by Tinkerbell, who will carry it off to Neverland to be fed to a crocodile. Lehman is financing 90% of the acquisition at an interest rate that has not been announced; Tinkerbell’s up-front payment consists of a handful of pixie dust, three crickets, and a bullfrog. Analyst Dick Bove estimates that the bullfrog could eventually be transformed into three princes and a pumpkin coach. The deal gives Lehman no recourse to any of Tinkerbell’s assets other than the Level III capital. If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.
Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”
Meanwhile, the SEC has announced an investigation of mean, evil, bad short-seller David Einhorn. While out for a beer with a friend, Einhorn reportedly suggested that the Tooth Fairy does not exist and that wishing upon a star is not a wholly reliable price discovery mechanism. Christopher Cox, chairman of the SEC, said, “Vicious rumors attacking the Tooth Fairy will not be tolerated. Our entire financial system and indeed the American way of life depend on the Tooth Fairy and wishing upon a star. How else could one value level III capital appropriately?” The SEC is reportedly planning to set up re-education camps for short-sellers.
Yeah I’ve seen that. Love it !
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