More "rogue" employees from Moody's.

Moody's Says Some Employees Breached Code of Conduct (Update7) - Bloomberg.com

The chutzpah displayed is staggering...

I'll be one to admit I have a short on AMZN and boy if I could "mark it" to wherever I wanted to I'd be pigs in shit.

Ciao
MS

What is real concerning the US Financial system now? A Dow constantly
being manipulated upward, CPI reports
that are a fraud, the total amount of
dollars floating around, etc. Those who
are in power want you to believe. Makes
you glad to pay taxes, doesn't it?!

Wow, what a load of bullshiat article.

First off, the article states that FAS 157 went into effect on Nov 15, 2007, "about the time Citigroup.. shocked inestors by wrtiing down $5.9b and Merrill.... was forced to write down $8.4b." But FAS 157 was in effect for fiscal years beginning after Nov 15, 2007... i.e. FAS 157 didn't affect financials until 1q '08 reporting (filed April 15, 08 or May 15, 08 depending on the entity's fiscal year). Nice research, Sorkin!

Also, to show exactly how true Tanta's closing remark is at least in relation to Schwarzman, in their early version of the S-1 (IPO filing document) filed last spring, Blackstone early adopted FAS 159 (another fair value standard that allows companies to fair value any financial asset or liability it chooses that is not already carried at fair value under other accounting standards).

In early adopting FAS 159 in its preliminary versions of its S-1, Blackstone chose to 'fair value' its anticipated carried interest in the PE funds it manages, in effect putting up the present value of future earnings on its balance sheet. This would have had the effect of increasing assets and equity by billions of dollars!

In the end, Blackstone was shouted down by potential investors who realized how ridiculous this was and they decided against adopting FAS 159 for carried interest. But the fact that they considered putting up such a bogus asset on the balance sheet under an optional fair value standard shows how opportunistic Schwarzman is and how his tune on fair value accounting changes depending on the direction of markets

He could have said "I'm a bubble surfer, just like everybody else on wall street for the past 21 years."

Or, " what's PE without fantasy and suckers."

Off with their heads.

So what's their beef? Just calculate the NPV of projected cashflow at current interest rates and you have your valuation INDEPENDENT of a tradeable market.

But the NPV of the discounted future cashflows SHOULD provide them a 'floor' to mark against should the 'market' not cooperate. Yes/no.

Actually, no. They would like to mark the assets to the NPV of discounted anticipated future cash flows, however FAS 157 says you must refect market sentiment in your mark.

So, I expect discounted cash flows on my security (purchased at par of 100) to be 90, due to modest credit deterioration. But similar assets are trading at 70. FAS 157 says you need to look at market prices of identical or similar assets to value your own portfolio.

The reason FAS 157 is so controversial is that very little trading is going on because market risk aversion is so high right now. So you have few data points to look at and the pricing that is out there reflects a very wide bid/ask spread. So I think my asset is worth 80, but dealers and counterparties are only offering 20. I'd like to value it at 80 on my BS but FAS 157 says I need to look at prices in the market.

One good point in the article is correct is the comment "And if they are so mispriced, why isn't some vulture investor buying up the CDOs en masse?" You'd think that if the difference between market prices and actual underlying economics was so wide, smart investors would come in and narrow that gap buy buying assets. They're not, to any great degree, however, and as time goes on one has to wonder whether the 'economic reality' is closer to 20 than to 80.

DCF or NPV is an overly simplistic method of valuing a financial asset. Useful as a rough rule of thumb, but doesn't take in to account some uncertainty. Just deciding what discount rate to use is an exercise in educated guesswork.

Lack of enough trading to see pricing is a sign that lots of folks figure they have no idea what this stuff is really worth.

PIMCOs Bill Gross, a Republicanletter to President Barack Obama - "You have inherited a mess"

"You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans. He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love. Over eight years, he failed to put forth a coherent energy policy. He needlessly invaded Iraq and lowered worldwide esteem for this nation as a symbol of freedom and benevolence."

OT: Lawyer-accountant golf joke...

4 guys playing together as a best ball team...2 lawyers and 2 accountants...the accountants come up with the score and the lawyers will defend it...

it was funnier when I heard it

Gross is a pimp....how about his PR yesterday that read:

"Obama to Produce first $1 trillion deficit, Gross says"

Straight off the B'Berg wires

Seems to be backing off that today....

Ciao
MS

Blackstone's IPO was just a huge off load (and load is being kind) of liability. The Chinese (uh oh there's and ethnic group) bought into it with money from the "people's fund"..(or some crap like that)...again using OPM. That was over $3b....wonder how those phone calls are going.....

And people wonder why the world is not rushing to bail out these clowns who happen to be "experts"....expertly lining there own pockets.

Ciao
MS

Why would anyone expect this clown Schwarzman to say anything that wasn't completely ridiculous and self-serving? All you have to know about him is that he spent years touting the "enormous benefits" of private equity and how the public markets were terribly inefficient... Then he took his company public so he could cash out. He also spent $3 million on his birthday party. If my one-year old ever finds out, she'll be pissed that we only coughed up about $50 for hers...

"... why aren't vulchers moving in ..."

One problem is that these "securities" may be unsecured with collateral. Some court cases have shown that the shoddy packaging leaves ownership of the underlying assets in doubt.

Seems no one wants to be the hero to step up right now.

The problem is that none of these losses are realized. The downturn has yet to move beyond subprime. When a company has to raise actual cash to cover unrealized losses, it probably does not make too much sense.

In Vino Veritas,

In any case, The Law of One Price is a Myth. True arbitrage opportunities should always disappear quickly... in theory. But as Homer Simpson reminds us, Communism works...in theory.

In point of fact, if actual markets operated with such efficiency, Warren Buffett and a whole lot of guys who arb convertibles on Wall Street would not exist.

RE: bombing range subdivision

Perhaps this will be the final revelation that puts Lennar into bankruptcy. This is simply inexcusable. Seems like an ideal class action lawsuit.

ECB Is Martian, Fed Venusian, Says Deutsche Bank: Chart of Day

ECB Is Martian, Fed Venusian, Says Deutsche Bank: Chart of Day - Bloomberg.com

Unity. It means to each his own.

That doesn't make any sense at all. FAS 157 only clarified the rules in booking assets. If a firm is conservative enough in the way they approach in booking their financial assets, there should be no issue with the accounting rule. The only issue left is in following proper due-diligence and risk management guidelines.

I, too, call BS on Mr. Schwartzman, but there is an underlying problem with mark-to-market. Obviously price discovery depends on liquidity. If there is no liquidity, there is no price. Having no price is not (although close) the same as having a price of $0.00. But that is what the accounting is really asking you to do. In good times, with lots of liquidity, mark to market is easy. The market sets the price. In bad times (or REALLY bad times in this case) there is no market, and no one sets the price. So the answer is...make one up? That doesn't seem right. Value it at zero? That doesn't seem right either, because as trashy as these assets are, they're not COMPLETELY worthless. That's really the undelying issue I think.

ford june sales - DOWN 28%
SUV sales - DOWN 54%

holy holy.

(ford shares now cheaper than a gallon of gas in california)

Having no price is not (although close) the same as having a price of $0.00.

What nonsense. Everything has a price. Just put it on ebay and check what one would buy it for. That is the price.

Sue,

The thinly-traded aspect definitely reduces the value.

I really think that valuing houses is the best comparison. We know that houses in CA (and CDOs backed by mortgages secured by those houses) are worth less than they were last summer. However, deciding how much less is not easy. Mark-to-market in its current form says that you mark to the latest sale (for the CDOs); that overestimates losses, just as pricing only to the last sale when it was a foreclosure sale overestimates the fall in house prices.

Note that foreclosures, and firesales, happen all the time in both markets; if the market is functioning normally, it's easy to figure out the non-firesale value, but right now it is not.

1269: going short some more as several more 5 month index lows are breaking.

But what if no one bid? Then what is the price?

If you offer $0.00 or more and nobody bid then the price is negative - you have to pay to get someone to take it away. Try advertising your trash for instance.

All of the gains from beginning of the month 401K/IRA contributions erased...

Sue,

A classic car isn't a bad analogy. The main reason I think of houses is that most of these instruments are in some way tied to house prices. (I've explained this to non-geeks before,and houses is the example I usually use, so I used it again.)

The theory behind mark to market was valid - it was to prevent abuses - failing to account for - to disclose - impaired asset values ... a response to Enron etc

The problem is it assumes a functioning rational market - one where assets were priced on their real values - based on thing like their cash flows etc ... and that is not what is happening today

Fully performing, non-impaired assets - assets that are performing exactly as expected and planned when purchased - are being forced to be written down - often to zero value or even less - but in most cases to pennies on the dollar

If you bought 100 mortgages of $10,000 each, and those mortgages paid 12% interest - you would have $1,000,000 total portfolio value with $120,000 annual interest income - $10,000 a month income ....

you expected with this return, this interest rate, an assumed 5% default rate - that over the life of the loans in the portfolio that 5 of these loans would default - that you would receive 95% of the projected total income - or $9,500 a month ...

you also assumed that with those 5% of the loans that default, you would get the property back and sell them - and would lose say 30% - 5 loans at $10,000 = $50,000 less 30% = $35,000 recvd on sale - a $15,000 loss

So today - your portfolio has a foreclosure rate of 2%, and there is no indication it will increase substantially beyond that - your borrowers are paying their loans and there is no indication or expectation that will change ... you are getting $9,800 a month, actually more than the $9,500 projected

You are happy with your investment - since you bought these loans to keep for 30 years - for their cash flow - and they are doing better even than you anticipated ....

Sounds pretty good right?

Nope - under mark to market to have to write down the value on your books to current market value anytime there is an appreciable change ... so you would think an investment would be valued based on its cash flow right? Nope again - under mark to market the value is what you could get if you had to sell today - even if you have no interest in selling ....

And the only current "sales" are from folks who - despite their portfolios being like yours - performing as expected - had to write them down, which triggered their lenders to require more capital - forcing them to sell quickly to raise cash - fire sales ...

You have to write your fully performing assets down to the current fire sale values (since they are the only current comparable sales) - and guess what, when you do that YOUR lender - who lent you the money to buy these assets - will demand of you that you deposit cash with them to make up the marked down difference in value

Even though the assets are performing better than anticipated when you bought them - and when the lender lent on them - you have to pay in cash to make up the difference

And if you can't come up with the 30% or 50% or 80% difference?

Say good bye to your asset ... despite that the loans in your portfolio are performing exactly as you expected - better even - if you cannot make up this entirely "paper" loss with real money you lose everything

And then a vulture - most likely from CHina, Dubai etc -buys these loans from the lender - paying 30 cents on the dollar - for a portfolio of loans performing exactly as originally agreed .....

Nope - no problem there ... entirely fair ... NOT

This is the best example of how messed up we are right now - and why I think there is a certain sector of the financial industry who are purposely inflating the alleged severity of the problems - we will see the largest transfer of wealth - and for pennies on the dollar - of fully performing, non-distressed, non-impaired assets we have ever seen - with a large percent going to offshore owners in the process ....

One simple action would eliminate a very large part of the problems in the financial markets - and that is to modify mark to market to say as long as the underlying assets are performing as originally expected/agreed that they do not have to be marketed to market ... this only makes sense - if the asset is performing as expected - if you are getting what you planned when you bought it - it is in no way impaired and should not be forced to be written down...

This simple change would almost immediately address the biggest issues in the markets - the biggest impact being to eliminate the death spiral of capital calls against impaired, devalued assets and the forced liquidations that result

Some say that mark to market was fine when things were going up - that the investors liked it as it let them increase value of their assets - and so they shouldn't complain now ... but this fails to acknowledge that when market was increasing there were legitimate market rate non-distressed sales to establish value ... today there is not

That said - I believe there is some limited validity to this claim ... IF a company used mark to market to increase the value of the asset on their books above what it was when they acquired the asset, then they should be required to write down to the original asset value when acquired - and if they had borrowed addtl money on the assets based on the increased book value that a capital call for that amount would be justified and fair ....

They should NOT however, provided the asset is performing as expected and planned when acquired, be required to write down below the value when acquired ... the value at acquisition was based on expected cash flows and as long as those are as expected the value is not impaired and a write down is not warranted ...

These unrealistic forced mark to market write downs that are almost completely unrelated to the underlaying collateral quality forces most of these funds to be subject to capital calls from the lenders that lent the money so they could buy these loans

If they are forced to write down to lets say 30% (and there are many mark to markets writing down more than 100% of the value) of the original market value that means they have to come up with 70% of the original market value and pay that to the lenders

In order to raise this money they either have to fire sale many of the assets themselves or they raise capital by selling part of the company

The vast majority of that money is coming from off shore sources, China, Dubai etc - but regardless of the source of these funds the existing shareholder value is greatly diminished - diluted

You are correct that eventually when the market gets more back to normal that these assets will have to see write ups - which will become large profits - but these profits will largely go to the new money

Existing shareholders shoulder 100% of the write downs ... but only get a portion of the write ups

Last - the VALUE of these loans is not the "market" resale value of the loans - it is the payment/cash flow - and as long as the cash flow is continuing as projected the asset value is not impaired

It is little different than if these were portfolio's of apartments instead of portfolios of loans

No one would think it wrong or unusual for an investor to buy a bunch of apartments and leverage 80% or higher - to put up 10% to 20% of their own money and finance the rest

Which is pretty much how these loan pools work - and investor or fund puts up 10% or more in cash and borrows so they can buy more "apartments" - or in this case loans

Each "apartment" generates monthly cash flow just as each loan does - each scenario depends on cash flow to pay debt payments

So in reality the leverage which seemed so excessive really isn't that different than buying apartments

The "value" of an apartment building is directly related to the cash flow it generates from rent - just as a portfolio of loans value is also related to the cash flow - the payments on the loans

Last - buyers bidding 10% or 20% ARE finding a very FEW sellers - sellers desperate to raise any cash at almost any cost ... and therein is the massive problem and disconnect

The current ruless REQUIRES that these panic firesale values be used to mark non-distressed assets to market

Which then triggers the death spiral ... once the loans are written down to these extremly low and non-representative values it allows the lenders to these investors to make big cash calls

Which forces these investors - whose portfolios are peforming and are NOT ever likely to experience large default rates (or default rates signoificantly higher than are priced into the protfolio) - to now have to try and sell under distressed conditions - performing loans in their portfolio's

And when they sell the loans its generally the goood stuff - as thaty is whet they can get most for - which takes the cash flow away and makes the remaining portfilio comprised of a higher percent of lower quality loans - with higher likelihood of default

And along the way we transfer a large share of the value to outside parties

Its exactly the deal with Bear Stearns - one day they are worth $50 or more a share - the next day they are force "sold" by Fed to JPMorgan for $2 a share ... and a few weeks later ol JP announces the acquisition will add billions in value to the company, which cause their stock to increase a bunch

The Bear Stearns shareholders took in shorts - the JPM ones benefitted almost immediately - a huge transfer of asset value and wealth