lavalyn

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  • Nixing 'Mark to Market' Won't Solve the Problem
    Look back six months ago to see what happens when firms don't mark to market (correctly). Einhorn made his now prophetic position that Lehman Brothers didn't mark to market correctly in Q1 2008. The mad rush down for them wasn't mark to market based, it was distrust of the balance sheet that got the vultures circling overhead.

    When you have the public distrusting the balance sheet, no amount of mark to model numbers will help you. See also: Enron.
    Oct 01 18:29 pm |Rating: 0 0 |Link to Comment |View article
  • Next Victim, Please!
    No, it's all the short sellers' fault! Wait...
    Sep 26 11:57 am |Rating: 0 0 |Link to Comment |View article
  • Another Day Without Precedent
    Fed rates mean nothing. What does matter are LIBOR-OIS spreads (unsecured lending versus effectively pure interest rate risk consideration) and TED spread (Treasury versus real lending rates).

    You could have 0% Fed rate and still have frozen credit if nobody in the banking system trusts anybody else.
    Sep 25 23:52 pm |Rating: 0 0 |Link to Comment |View article
  • Bernanke Gives Up on Reverse Auction Idea
    143167: unfortunately, that will take more time to fix. As you can probably tell, the US can't just inflate itself back into having real world value. Which cuts into a bigger problem, that the US has lost its ability to "produce stuff" to the likes of China and India, and is now desperately trying to cling to whatever "wealth" it can via technological measures like DRM and legislative measures like copyright/patent law extensions.

    The major consumer manufacturing that's done in the US is now itself on the verge of collapse, as Americans are finally moving towards higher fuel efficiency vehicles over ridiculous and unnecessarily gas-guzzling behemoths.
    Sep 23 21:02 pm |Rating: 0 0 |Link to Comment |View article
  • Bernanke Gives Up on Reverse Auction Idea
    I don't understand why the focus is on the banks, when you can resolve the banks' issues by flooring the underlying mortgage payments.

    For those here that say there are no "concrete" alternatives, I would say "analyze this:"

    Using Case-Schiller data, we can see how much a home is worth in various locales... we can use that calculate how much a 30-year mortgage costs per month for a conforming loan on an average home in that locale. Proposal: the government guarantees mortgage payments for mortgages issued from (reasonable periods, Q2 2005 to Q2 2007?) equal to 80% of that payment size for prime mortgages, 45% for subprime. The resulting setting of a floor price for the mortgage paper immediately sets a bottom value for the papers in question.

    This is very expensive, to be sure, but so is the $700 billion being used to currently bail out only the banks with no help to Main Street. Lower income homes are less likely to be foreclosed, keeping the average Joe in their homes, as the return on foreclosure (with certainty in payments from the government versus the uncertainty of home prices today) is lower. Prime mortgages are also less likely to foreclose for the same reason.

    It's a truly Keynesian school of thinking, but I'd rather help both Main Street and Wall Street than just the fat bankers.
    Sep 23 19:21 pm |Rating: 0 0 |Link to Comment |View article
  • Short Selling: Myths and Facts
    glassbox: institutional investors allow the borrowing of shares because it generates additional revenue. "Yes, you may use these shares in this pension trust to be lent for short selling, in exchange for a fixed fee per month." The brokerages make money on the lend too, of course. There's apparently some interesting tax ramifications as well, as dividends paid by shorts are not treated the same as dividends received... I am unfortunately not a tax expert.
    Sep 22 11:36 am |Rating: 0 0 |Link to Comment |View article
  • Short Selling: Myths and Facts
    American: yes, that is correct. Ideally, the locate should also be a lock, so that other people can't use those shares as well for the short. In practice, because the successful locate for shorting generates revenue for the lender, that doesn't happen. I wouldn't blame the resulting increase in float on the borrower (short) side, but on the lender side... oh, who's on the lending side? The prime brokerages, like Morgan Stanley et al.
    Sep 22 11:33 am |Rating: 0 0 |Link to Comment |View article
  • We've Crossed the Line from Capitalism to Socialism
    RWilliams: think about this for a moment. While I think it's obvious that the financial system is in crisis, it's much less certain what the best solution is. Or even if the current proposal is going to fix or alleviate the *symptoms* of the problem.

    The underlying conditions must all be resolved before you can really see improvement again:
    1. Housing prices need to stabilize - and that's a function of the average Joe, not the bankers on the Street holding those subprime mortgage papers.
    2. Banks need to deleverage - this new bill does that.
    3. People have to regain their confidence in the economy - that will take a great deal of time.

    It would also be nice if:
    4. Irresponsible behaviour is punished. Fundamental to our capitalist free market philosophy is that the market will mete out its rewards and punishments by the worthiness of your own actions.
    5. Those that need the bailout get it. Why can't you or I get bailed out on our debts (credit cards, mortgages, HELOCs) when we make stupid decisions, and yet the rich bankers on the Street with their 6 and 7 digit bonuses get to gorge from the taxpayer trough?

    I'm unconvinced that this bailout is going to do more than the inevitable... from my perspective, the inevitable is a high inflation level (to wipe bad debts away) and a dramatic decrease in US consumption.
    Sep 21 22:12 pm |Rating: 0 0 |Link to Comment |View article
  • Hank Paulson, Buy-Sider
    Schweizer: thank you for pointing out the obvious, but most often forgotten. People are still stuck with mortgages they can't afford, people are still stuck with homes in negative equity. This bailout of Wall Street does nothing to help those: it doesn't boost the cash flow of subprime lenders to pay their bills, it doesn't magically raise home prices, it doesn't take a bunch of homes off the market.
    Sep 20 20:11 pm |Rating: 0 0 |Link to Comment |View article
  • Should the SEC Force Hedge Funds to Disclose Short Positions?
    glassbox: I don't blame people for wanting to hide short positions. Look at the response David Einhorn got when he announced he had an active short position against Lehman Brothers. Absolutely vilified. We may call diehard bulls "deluded" but there's no equivalent to "selling America short" for longs.
    Sep 19 22:26 pm |Rating: 0 0 |Link to Comment |View article
  • The Real Reason Behind the Global Financial Crisis
    I like the idea of a well-regulated trading market for CDSes, much in the same way we have well-regulated trading markets for futures and options. But requiring an insurable interest to obtain CDSes seems like a trivial hurdle to bypass. Loopholes galore. We'd just call them something different, like, oh... "financial catastrophe bond" or something.

    I fundamentally can see some merit in the "an insured bond has the same risk-adjusted weight as an uninsured bond." No doubt there will be howls of agony from the worldwide banking sector. But it would really open up and expose how much counterparty risk is really being taken. Or rather, making insurance counterparty risk irrelevant to capitalization. Doesn't stop any bank from insuring anyway, but makes it not be perversely profitable to insure.
    Sep 19 22:15 pm |Rating: 0 0 |Link to Comment |View article
  • The Real Reason Behind the Global Financial Crisis
    JasonC: perhaps it's time you learned about Basel II. Sure, it's true, that CDSes are zero-sum. If CDSes all went poof, what happens? Nothing directly. But because of the international banking agreement called Basel II, banks that could count an "insured" bond as an asset can no longer call that bond insured, and therefore does not count its full value in its (risk-adjusted) capital.

    Banks have to carry a minimum reserve amount of capital to weather losses. CDSes let banks make more loans with the same amount of capital. Make those CDSes disappear, and suddenly all those banks are legally under-capitalized... and they have to sell assets, or raise more capital elsewhere.

    So no, making CDSes all disappear has some VERY significant ramifications.
    Sep 19 20:25 pm |Rating: 0 0 |Link to Comment |View article
  • Idiotic Idea of the Day, SEC Edition
    Why single out the short sellers? We should have all the hedge funds produce their long position disclosures daily as well!

    Seriously speaking, all the negative force focused at the short sellers is just smokescreen. Investors of the fundamentals should be *delighted* that the short sellers are willing to give them good deals on good stocks. Oh wait, they weren't actually good fundamentals? That's not the short sellers' problem.

    The inability to short sell even with locate is going to make the options markets interesting, to be sure. When the market-makers can't hedge, the market-makers will have to take market risk, and that will only cause rising premiums for that risk... and also a more unstable (and downward moving) asset market as investors become unable to hedge their risks and demand higher return for their capital.

    This decoupling of the options and the spot market will cause a rout much reminiscent of 1987.
    Sep 18 11:34 am |Rating: 0 0 |Link to Comment |View article
  • AIG: America's Insurance Giant
    I'd go one further and say that financial guarantees are actually not all that hard to enforce. In probably one of the most free markets out there, the Futures markets have one of the most stringent protections against default risk out there: daily mark to market, automatic closeout of positions, a clearinghouse that backs all transactions, in a tightly regulated market.

    A testament to how we can actually become more free by adding regulation.
    Sep 17 09:54 am |Rating: 0 0 |Link to Comment |View article
  • AIG: America's Insurance Giant
    "Never finance illiquid assets with liquid liabilities."

    I'm sorry, but this blanket statement will be the one that will topple the entire banking system. The entire point of banks is to borrow short term and lend long term. What are bank deposits if not demand liabilities? What are mortgages if not long term and illiquid debt? And more to the point, how in the world did the banking industry exist before the wave of securitization, when you couldn't even repackage mortgages to, say, Fannie Mae?
    Sep 17 09:28 am |Rating: 0 0 |Link to Comment |View article

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