What 'Wipe Out the Stockholders' Really Means

The most overused catchphrase of this cataclysmic recession is “let’s just wipe out the bank stockholders and get on with it.” The rhetoric has become a part of the folklore of the market crash. But TV pundits and politicians haven’t dealt with the true meaning of the words. They need to understand who the bank stockholders are: innocent bystanders at an accident caused by drunken investment drivers.

Over the decades--as legislation and regulation have allowed bank holding companies to grow into ever-larger conglomerates—bank shares have become treasured investments for the biggest pension and retirement funds, mutual funds, college and hospital endowment funds.

You won’t find the names of many of these funds in the published lists of banks’ largest investors, because they’re hidden behind the names of the money management firms they retain to make the actual investment and trading decisions. If nationalization destroys the common stock (and possibly preferred shares) of banks, the money managers may feel the pain, but their public service clients will be the ones wiped out. At year-end 2008, according to Bloomberg, the 100 largest of each of the top 10 banks’ institutional owners, held an average 60% of each bank’s common shares.

Take the case of the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF). It manages some $800 billion for over 3.5 million members from more than 15,000 academic and medical institutions. At 12/31/08, TIAA-CREF owned 179 million shares of the Big 10 banks.

On average, TIAA-CREF is the 19^th largest holder of each of the Big 10 banks. At year-end, these shares were worth a total of $3.7 billion (plus $436 mil. worth of Goldman Sachs (GS) and Morgan Stanley (MS), which I did not include in the Top 10). TIAA-CREF may have lightened the load this year, but, encouraged by Washington’s largesse and lower bank stock prices, it may also have substantially increased several positions, putting it more firmly in the crosshairs of the Beltway’s bank bazooka.

Faculty and doctors, whose retirement funds might be seriously impaired by a “wipeout” of bank shareholders, are hardly alone in this crisis. The Vanguard Group, Capital Research, Wellington Management, T. Rowe Price and countless other caretakers of the public’s wealth have also loaded their portfolios with shares of the caretakers of the public’s savings and checking accounts. While the stockholders of broken companies are traditionally made to pay for the mistakes of their managements, a “mistake” of this scale calls for innovative planning. It makes no sense to sacrifice the nest-eggs of ordinary—and some extraordinary—citizens in the name of arbitrary accounting rules. Which brings us to the rest of the story...

Bank franchises, however diluted geographically through acquisitions, still retain the value of their local and regional franchises. Most of their business is relatively unaffected by the foolish games they played in their trading and investment departments. But the entire franchise is now being held hostage by its most contaminated assets, those which cannot be adequately valued because the market in which they trade has virtually come to a halt. I suggest the government direct its efforts to first establishing a viable market for this toxic bathwater, before throwing the babies out with it.

Put most simply, because banks ran amok in an unregulated market, tripping over their ill-conceived business models, the government should defend, not attack, their innocent shareholders. It should suspend mark-to-market accounting pending the creation of one or more trading markets that can determine fair market value.

The trouble with mark-to-market is that it’s never done to the upside. Public companies traditionally sit on undervalued assets whose true worth comes to light only when the parent company sells out or merges. It’s why we so often see rich premiums offered in public company buyouts. In the last year there have been at least three unsolicited tenders for public companies at more than 60% over the public trading price—Yahoo (YHOO), Dow Jones and Take Two Interactive (TTWO). I don’t recall anyone writing up their assets to better reflect their value to the public. Only Dow Jones shareholders were lucky enough to grab the brass ring when it was offered.

Yes, suspension of mark-to-market is a capital offense in the accounting world. But when the technique is used only in selected situations—to make valuation estimates based on a moment in time and in the absence of competitive bidding, only when value has been impaired and never when value has been improved—it calls for a more thoughtful perception of justice. Washington: Are you listening?

Disclosure: Author owns Yahoo shares; owns no bank stocks.

Comments

[COB:]

I rarely blog or respond online but this post is at the core of what is wrong with the approach to our economic issues. TIAA CREF and other pension funds are not innocent or unsophisticated bystanders that the rest of us should bail out. sorry, but pension holders will have to feel some serious pain on par with the bondholders, current employees and others....while the shareholders get wiped out. We have reached the point where 80% of the population is being directly or indirectly bailed out from bad investments propagated by the "others". The "others" always trace to a convenient list of institutions "too big to fail" so government interference is pretended to be the only option. What is wrong with the time tested bankruptcy process in which pension holders are first in line for benefits during the reorganization or liquidation? Instead, the author is proposing to artificially prop up the value of the equity by constantly injecting cash into the enterprise....or allowing false accounting to avoid covenant defaults.... in the hope that some day the future discounted free cashflows will justify the value on the books.

Illiquid assets that have sufferred wtih mark to market accounting are not necessarily mispriced as the author implies. If they were, the huge disproportionate war chest of private equity capital would be actively engaged in creative buyouts. This is not happening. We as a nation legitimately need to deleverage and falling asset values are the consequence. Delaying the fall with changes in accounting rules or government preferred equity stakes will not change this in the long run. The assets are permanently impaired.

The idea that mark to market accounting rules are not fair because they do not capture hidden value is ridiculous. The example of pre merger enterprise value increases relates to value synergies that obviously do not reside within the enterprise alone, so why should the assets be valued higher as a standalone enterprise. I also dont think we need to respond much to the idea that the "local franchise value" of the banks is so being hidden by the bad assets. The sophisticated investors who are tearing apart the balance sheets to find value see this effect but it obviously pales in comparison to the toxic assets under evaluation. With online banking and low barriers to entry in regional banking, is the mark to market accounting the only factor keeping asset and equity values depressed?

The massive government bailout, spread the pain approach feels good right now, but we will all pay the price down the road. Does anyone realize how massive the change to our fundamental system of value creation this is? As a small business owner who has invested $1.8MM over the last 2 years into my businesses, I now find myself buying municipal bonds, gold, oil/gas stocks, TIPS Treasuries, ETFs that short the Treasuries and several other shorts on individual stocks. There is not much new tax revenue or job creation from this. Staring at increased inflation, income taxes, payroll taxes, healthcare costs....like millions of other business owners, the equation has shifted away from starting or expanding businesses in favor of other investments. Eventually, the range of options will include mutual fund investments in fairer, more business friendly countries or simply retiring earlier.

Mar 01 10:49 AM

[ain't no fo...:]

Hmm... lets see what this investing thingie in stocks is all about.

So, you mean I can buy shares in a company any time I want, as long as I've got the money?

And I can sell shares in a company anytime I want, and my broker or money manager will (hopefully) give me my money back?

So, then if I bought C at 50 or BAC at 48 eighteen months ago, and then my investment starts to fall, and the news is all bad and getting worse, no one's holding a gun to my head forcing me to hold it forever? I can actually sell it if I choose to?

WOW, what a novel concept!!!! I can sell my investment if its falling out of bed. Gee willickers, I'd have to be a real moron not to sell it if its getting its arse handed to it... I mean, pain is optional right?

Seems like a smart INVESTOR would just have to get HUMBLE, accept the fact that he/she made a teenie little mistake, and sell and wait for sunnier days.

All it would take would be the two dirtiest words in the average stock "investor's" dictionary:

DISCIPLINE to stick to their loss prevention/risk management principles (if they bothered to have such silly rules in the first place)

HUMILITY to admit they are human and made a mistake.

Man, that damn humility thingie will get you every time.

Mar 01 10:58 AM

[DiracMan:]

COB,

Very thoughtful post. Please break your silence more often! From a micro level what you say is prudent and quite accurate. But I believe the crisis is systemic and is on a macro level the world has never seen before. This is because of the Credit Default Swaps potential fissionable chain reaction multiplier on any default event that would normally be contained by being limited to the counterparties that hold the debt.

It is like the movie "Speed" that if the stop the bus it explodes. The Federal Reserve and the Treasury cannot let any of the zombie banks fail because it will be Systemic Financial Armageddon.

What do you think of this article?

www.villagevoice.com/2...

Is it hokum from your viewpoint? After five months of careful research I say this analysis is the truth of the situation.

It appears to me we are in a very real version of "FINANCIAL SAW XIV: THE MOVIE". Damed if you do. Damed if you don't. All roads lead to annihilation no matter what choice is made.

I would be interested to hear your viewpoint.

Thank you for your post today!
On Mar 01 10:49 AM COB wrote:

> I rarely blog or respond online but this post is at the core of what
> is wrong with the approach to our economic issues. TIAA CREF and
> other pension funds are not innocent or unsophisticated bystanders
> that the rest of us should bail out. sorry, but pension holders
> will have to feel some serious pain on par with the bondholders,
> current employees and others....while the shareholders get wiped
> out. We have reached the point where 80% of the population is being
> directly or indirectly bailed out from bad investments propagated
> by the "others". The "others" always trace to a convenient list
> of institutions "too big to fail" so government interference is pretended
> to be the only option. What is wrong with the time tested bankruptcy
> process in which pension holders are first in line for benefits during
> the reorganization or liquidation? Instead, the author is proposing
> to artificially prop up the value of the equity by constantly injecting
> cash into the enterprise....or allowing false accounting to avoid
> covenant defaults.... in the hope that some day the future discounted
> free cashflows will justify the value on the books.

Mar 01 11:17 AM

[logicalthought:]

Several of you posters (most recently, "wpdragon") aren't addressing the issue of the non-self-directed pension funds, whereby the teachers, etc. who were invested in them had no choice in choosing thier investments, and no opportunity to not participate in the plans. I'm not claiming to know what the answer here is (although I think that my earlier post on this pages raises some appropriate questions that might lead to that answer), but let's at least frame the issue fairly. It's too bad that there isn't politically tenable way to wipe out the investors who had some choice in where their money was invested while protecting those who didn't.

Maybe Roylat's comment (above) is the most relevant, in that he points out that the remaining possible losses in the equity value of these banks is so minor that it isn't worth upending whatever's left of the free market in order to protect that (relatively insignificant) amount of money.

Mar 01 11:21 AM

[formerhawk:]

You are right. The price of real property continues to drop. Ever heard of a spiral in economics? Mark to market continues the spiral because the sale price of the asset is shown as now and not at the anticipated or actual sell point. Too bad lots of the damage is already done. Thanks Phil, glad you're back in Texas.

Mar 01 12:03 PM

[Roylat:]

Well said. I agree with your criticism of the author's "analysis." I'm hopeful, though, that out of this crisis will emerge a renewal of the fundamentals that lead to economic strength and social fairness.


On Mar 01 10:49 AM COB wrote:

> I rarely blog or respond online but this post is at the core of what
> is wrong with the approach to our economic issues. TIAA CREF and
> other pension funds are not innocent or unsophisticated bystanders
> that the rest of us should bail out. sorry, but pension holders
> will have to feel some serious pain on par with the bondholders,
> current employees and others....while the shareholders get wiped
> out. We have reached the point where 80% of the population is being
> directly or indirectly bailed out from bad investments propagated
> by the "others". The "others" always trace to a convenient list
> of institutions "too big to fail" so government interference is pretended
> to be the only option. What is wrong with the time tested bankruptcy
> process in which pension holders are first in line for benefits during
> the reorganization or liquidation? Instead, the author is proposing
> to artificially prop up the value of the equity by constantly injecting
> cash into the enterprise....or allowing false accounting to avoid
> covenant defaults.... in the hope that some day the future discounted
> free cashflows will justify the value on the books.
>
> Illiquid assets that have sufferred wtih mark to market accounting
> are not necessarily mispriced as the author implies. If they were,
> the huge disproportionate war chest of private equity capital would
> be actively engaged in creative buyouts. This is not happening.
> We as a nation legitimately need to deleverage and falling asset
> values are the consequence. Delaying the fall with changes in accounting
> rules or government preferred equity stakes will not change this
> in the long run. The assets are permanently impaired.
>
> The idea that mark to market accounting rules are not fair because
> they do not capture hidden value is ridiculous. The example of pre
> merger enterprise value increases relates to value synergies that
> obviously do not reside within the enterprise alone, so why should
> the assets be valued higher as a standalone enterprise. I also dont
> think we need to respond much to the idea that the "local franchise
> value" of the banks is so being hidden by the bad assets. The sophisticated
> investors who are tearing apart the balance sheets to find value
> see this effect but it obviously pales in comparison to the toxic
> assets under evaluation. With online banking and low barriers to
> entry in regional banking, is the mark to market accounting the only
> factor keeping asset and equity values depressed?
>
> The massive government bailout, spread the pain approach feels good
> right now, but we will all pay the price down the road. Does anyone
> realize how massive the change to our fundamental system of value
> creation this is? As a small business owner who has invested $1.8MM
> over the last 2 years into my businesses, I now find myself buying
> municipal bonds, gold, oil/gas stocks, TIPS Treasuries, ETFs that
> short the Treasuries and several other shorts on individual stocks.
> There is not much new tax revenue or job creation from this. Staring
> at increased inflation, income taxes, payroll taxes, healthcare costs....like
> millions of other business owners, the equation has shifted away
> from starting or expanding businesses in favor of other investments.
> Eventually, the range of options will include mutual fund investments
> in fairer, more business friendly countries or simply retiring earlier.

Mar 01 12:31 PM

[viewfromnyc:]

There are no innocents. What has been exposed as the high tide of the S&P 500 recedes, is a multitude of inept money managers. As the weighting of financials in the S&P 500 increased , all the closet indexers (that is a eupehmism for Beta as masquerading as alpha) had to increase the weights in their investment portfolios. There is absolutely no excuse for the poor investment decisions of many pension fund and mutual fund managers. Not only should the investment managers be fired by their pension clients and the capital allocated to skilled managers but the inept capital allocators at the pension funds should be fired too. Bull markets breed complacency. There are plenty of investment managers who foresaw this crisis, they either underweighted financials, underweighted stocks or went short. Anyone who directly or indirectly provided capital to banks is complicit in the failure. The risk of any investment in a limited liability structure such as a corporation is a complete loss of the capital invested no matter where in the capital structure that investment is made. Shareholders shouldn't be surprised that they lost a significant percentage of their investment in banks (they should have been cognizant of the risks the banks were taking). There is really no compelling argument to socialize investment losses (socializing catstrophic losses from unforeseen of infrequently occuring natural disasters is another matter). I don't think I find anyone on this site who'd by for socializing gains.

Mar 01 02:40 PM

[henarl:]

Most of the people in the public sector whose retirement funds are somewhat jeopardized by the bank nationalizations are those same "middle class" folks that the government is harping on helping. Actually tho, the bank stocks in these funds and trusts have already lost about 90% of their value so there is really very little left to lose.
As to mark to market, I agree with the auther's viewpoint. Suppose you had a rental property that you paid $200,000 for but, because of the housing collapse, you could only currently sell for $100,000, or perhaps not even that because buyers thought it would go lower yet. Let's say the "market" that it would be marked to then would be $100,000. Now lets say that it is leased for a net income of $12,000 per year or 6% of your original cost and the tenents are current with their rent payments. Since you agreed to lease based 6% income when you entered the transaction, and since the value of an income producing asset is based on it's income, why would you think that your property is now only worth $100,000? Why is this different than a $200,000 6% mortgage that is current? It's an income producing asset that should be valued on the income it produces. The gamble of default on the mortgage is a similar risk to the gamble that your tenant will break the lease and you will not be able to re-lease, but until one of these negative outcomes actually occurs, the income is still there and so is the value. The mark to market rules do not differentiate between mortgages that are in default and those that are not and that is just wrong.

Mar 01 03:03 PM

[john1940:]

The solution to much of this is more responsible action by all the parties in the chain of these investments. The banks that initiated all these bad loans should be shut down and assets sold to firms that can control their risk better. Don't keep the same companies alive if they can't fix their problems. Shareholders should demand better performance and this is where the SEC has failed since it made it nearly impossible for shareholders to change management via proxy battles. Institutional managers have to be carefully watched and fired regularly to insure the best interests of their clients are maintained and fees justified. The author's attitude about the poor clients is understandable but pushes toward a solution that holds the advisory managements blameless. Fire all of them. And the clients eat the losses. No one said there isn't risk in stock investments. I'm eating all of mine and blaming me.

Mar 01 03:07 PM

[ain't no fo...:]

logicalthought, I concur heartily with "ViewfromNYC"'s comments - many pension and mutual fund managers exercised no more market discipline or humility as so-called "professional" money managers than did inexperienced and naive small "investors". The point of my original comments was simply that ALL investors, including the pension fund guys, need those two basic attributes to survive in ANY market environment - Discipline to stick to their pre-established risk management rules, and Humility (and courage) to admit they are wrong and to hit the bricks when they admit it .

I've got friends who are retired teachers.. their unions have established arrangements with pension fund managers but the individuals still have a lot of leeway in what TYPE of funds they get invested in based on their risk tolerance and knowledge.

I'd venture to guess that there are a few unemployed Wall Street lawyers today who could make a good living on behalf of the pensioners by suing the heck out of the incompetent fund managers who rode those financials into the gutter.

Mar 01 03:26 PM

[DuffBeer:]

Like it are not it is about confidence and that is non existing. Maybe they let the wrong bank fall (Lehman) because it has been hell ever since that move.
As for Bank of America did CountryWide and Merrill Lynch owe BAC so much money that this was the only way to get some back?

There are many bright commenters here with alot of interesting facts and thoughts as to what to do or what not to do but from a guy who can count how many bottles are in a six pack---- Nothing seems to be working.
This did not happen over night and it will not be fixed over night .
Could it have been the banks have been broke for a long long long time but with the help of a pencil , white out and that new math I never learned --- we did not see red we saw green.
I just hope that the brew masters never use the banks math for measuring the hops !!!!
Cheers, DuffBeer

Mar 01 03:38 PM

[john1940:]

I ignored another important point. In the future banks need to be highly regulated but not nationalized unless temporarily to bail one out. US banks have not handled risk competently and have had enough chances. Every 5-10 years the banks barf up another financial crisis -- South American debt, Russian bonds, S&L crisis, Long Term Capital Management, Sub Prime loans. I've probably forgotten some. Banks just can't manage risk adequately to make loans and at the same time adequately protect depositors. They've had enough chances and employees were highly compensated to perform better.

Mar 01 03:50 PM

[logicalthought:]

wpdragon:

Perhaps I'm misunderstanding how some of these pension plans work. At my most recent firm, I had a 401K in which I was able to choose from an array of different investment vehicles. (Approximately 18 months ago I chose "cash", haven't changed it since.) However, I was under the impression that there are lots of folks who have no choice in how their pension funds are allocated. If that's wrong, then I agree with you.

Mar 01 05:43 PM

[monday1929:]

The MARKET is the alter at which Banks worshipped and justified their cut-throat ways. The MARKET was "always right" until the MARKET recognized the Crimes of the Bankers, Brokers, and Raters.
Now, the MARKET is a strange mystical beast????


On Mar 01 06:26 AM andruomail wrote:

> Shouldn't be impossible to come up with a better alternative than
> mark-to-market. Unless the assets are so hard to understand that
> we have to let the market determine the price like some kind of oracle...

Mar 01 09:01 PM

[monday1929:]

Anyone who thinks the solution to the banks problems is eliminating mart-to-market is deluding themselves. This strategy worked when the bubble could be re-inflated and the bankrupt banks (and that is what they were and are) could recover given time and hidden bailouts (like the "Mexican" bailout in early '80's which sent US taxpayer money directly to citibank to save them from their bad risk management.
This DEFLATIONARY episode will last too long to get away with this, at least not without the American people seeing just how rotten the players are.


On Mar 01 02:40 PM ViewfromNYC wrote:

> There are no innocents. What has been exposed as the high tide of
> the S&P 500 recedes, is a multitude of inept money managers.
> As the weighting of financials in the S&P 500 increased , all
> the closet indexers (that is a eupehmism for Beta as masquerading
> as alpha) had to increase the weights in their investment portfolios.
> There is absolutely no excuse for the poor investment decisions of
> many pension fund and mutual fund managers. Not only should the investment
> managers be fired by their pension clients and the capital allocated
> to skilled managers but the inept capital allocators at the pension
> funds should be fired too. Bull markets breed complacency. There
> are plenty of investment managers who foresaw this crisis, they either
> underweighted financials, underweighted stocks or went short. Anyone
> who directly or indirectly provided capital to banks is complicit
> in the failure. The risk of any investment in a limited liability
> structure such as a corporation is a complete loss of the capital
> invested no matter where in the capital structure that investment
> is made. Shareholders shouldn't be surprised that they lost a significant
> percentage of their investment in banks (they should have been cognizant
> of the risks the banks were taking). There is really no compelling
> argument to socialize investment losses (socializing catstrophic
> losses from unforeseen of infrequently occuring natural disasters
> is another matter). I don't think I find anyone on this site who'd
> by for socializing gains.

Mar 01 09:08 PM

[monday1929:]

"spirals", or crashes are what occur after manias- EVERY time. And this was the biggest mania EVER. The spiral will not be stopped by a "rule change". But I hope they do lift MTM, the ensuing rally will be a great shorting opportunity. You who fed the bubble are to blame for the crash.


On Mar 01 12:03 PM formerhawk wrote:

> You are right. The price of real property continues to drop. Ever
> heard of a spiral in economics? Mark to market continues the spiral
> because the sale price of the asset is shown as now and not at the
> anticipated or actual sell point. Too bad lots of the damage is already
> done. Thanks Phil, glad you're back in Texas.

Mar 01 09:21 PM

[monday1929:]

Good points, well made. BEWARE- there will be MASSIVE municipal defaults, and soon. Many "conservative" investors will lose their nest-eggs this way. And the advisors will of course say, "no one could have predicted this". See what happened in the 1930's- many defaults. And this will be worse than the 1930's.


On Mar 01 10:49 AM COB wrote:

> I rarely blog or respond online but this post is at the core of what
> is wrong with the approach to our economic issues. TIAA CREF and
> other pension funds are not innocent or unsophisticated bystanders
> that the rest of us should bail out. sorry, but pension holders will
> have to feel some serious pain on par with the bondholders, current
> employees and others....while the shareholders get wiped out. We
> have reached the point where 80% of the population is being directly
> or indirectly bailed out from bad investments propagated by the "others".
> The "others" always trace to a convenient list of institutions "too
> big to fail" so government interference is pretended to be the only
> option. What is wrong with the time tested bankruptcy process in
> which pension holders are first in line for benefits during the reorganization
> or liquidation? Instead, the author is proposing to artificially
> prop up the value of the equity by constantly injecting cash into
> the enterprise....or allowing false accounting to avoid covenant
> defaults.... in the hope that some day the future discounted free
> cashflows will justify the value on the books.
>
> Illiquid assets that have sufferred wtih mark to market accounting
> are not necessarily mispriced as the author implies. If they were,
> the huge disproportionate war chest of private equity capital would
> be actively engaged in creative buyouts. This is not happening. We
> as a nation legitimately need to deleverage and falling asset values
> are the consequence. Delaying the fall with changes in accounting
> rules or government preferred equity stakes will not change this
> in the long run. The assets are permanently impaired.
>
> The idea that mark to market accounting rules are not fair because
> they do not capture hidden value is ridiculous. The example of pre
> merger enterprise value increases relates to value synergies that
> obviously do not reside within the enterprise alone, so why should
> the assets be valued higher as a standalone enterprise. I also dont
> think we need to respond much to the idea that the "local franchise
> value" of the banks is so being hidden by the bad assets. The sophisticated
> investors who are tearing apart the balance sheets to find value
> see this effect but it obviously pales in comparison to the toxic
> assets under evaluation. With online banking and low barriers to
> entry in regional banking, is the mark to market accounting the only
> factor keeping asset and equity values depressed?
>
> The massive government bailout, spread the pain approach feels good
> right now, but we will all pay the price down the road. Does anyone
> realize how massive the change to our fundamental system of value
> creation this is? As a small business owner who has invested $1.8MM
> over the last 2 years into my businesses, I now find myself buying
> municipal bonds, gold, oil/gas stocks, TIPS Treasuries, ETFs that
> short the Treasuries and several other shorts on individual stocks.
> There is not much new tax revenue or job creation from this. Staring
> at increased inflation, income taxes, payroll taxes, healthcare costs....like
> millions of other business owners, the equation has shifted away
> from starting or expanding businesses in favor of other investments.
> Eventually, the range of options will include mutual fund investments
> in fairer, more business friendly countries or simply retiring earlier.

Mar 01 09:32 PM

[ain't no fo...:]

logicalthought:

Congrats on the great timing... you'll have some real firepower when the markets turn. I went mostly to cash in the summer of 07 but left enough in the account to trade smaller sizes and VERY short timeframe - basically became a defacto daytrader because I didn't like holding overnight. I actually make my living trading/investing, so no way around dipping my toes in, but I managed to pay all my bills last year with no drawdown, I'm grateful to say.

But I also don't know whether some plans force you into an investment (I know in some places the choice is very limited, but you can at least pick between major asset classes).

My buddy the retired teacher asked me for advice last year and I got him out of a lot of his equity exposure (except then the administrator talked him back into a little "juice" - emerging markets (can't say I didn't warn him) and got him in shorter duration on his treasuries and corporates... his union has a plan administrator out of KS I think (he's in MA) - he has many options including PIMCO, several fund families, money markets etc.

Best of fortune to you as we maneuver thru this nightmare. The AIG news is not going to sit well probably, and Asia is down hard (most large markets down 3+%).

Be well,
Dragon

Mar 01 10:53 PM

[sr9web:]

Mark to market must mean just that, but when there's no market, market to zero isn't the answer either. Buying is done in analog bunches, not a binary smooth line - this must be taken into account.


On Mar 01 05:24 AM Dave Wrixon wrote:

> Look if you don't have Mark to Market, you have Fantasy Land accounting
> which is largely where these problems started in the first place.
> If you wish to see a restoration of confidence in the financial system
> that will restore fortunes across the board, the future investors
> must have the necessary transparency. If that means that those that
> have lost their money need to be confronted with that painful fact
> then so be it. As for losses then be prepared for much more of the
> same.

Mar 02 01:37 AM

[Jim Hawthorne:]

Excellent commentary! Thanks!


On Mar 01 10:49 AM COB wrote:

> I rarely blog or respond online but this post is at the core of what
> is wrong with the approach to our economic issues. TIAA CREF and
> other pension funds are not innocent or unsophisticated bystanders
> that the rest of us should bail out. sorry, but pension holders
> will have to feel some serious pain on par with the bondholders,
> current employees and others....while the shareholders get wiped
> out. We have reached the point where 80% of the population is being
> directly or indirectly bailed out from bad investments propagated
> by the "others". The "others" always trace to a convenient list
> of institutions "too big to fail" so government interference is pretended
> to be the only option. What is wrong with the time tested bankruptcy
> process in which pension holders are first in line for benefits during
> the reorganization or liquidation? Instead, the author is proposing
> to artificially prop up the value of the equity by constantly injecting
> cash into the enterprise....or allowing false accounting to avoid
> covenant defaults.... in the hope that some day the future discounted
> free cashflows will justify the value on the books.
>
> Illiquid assets that have sufferred wtih mark to market accounting
> are not necessarily mispriced as the author implies. If they were,
> the huge disproportionate war chest of private equity capital would
> be actively engaged in creative buyouts. This is not happening.
> We as a nation legitimately need to deleverage and falling asset
> values are the consequence. Delaying the fall with changes in accounting
> rules or government preferred equity stakes will not change this
> in the long run. The assets are permanently impaired.
>
> The idea that mark to market accounting rules are not fair because
> they do not capture hidden value is ridiculous. The example of pre
> merger enterprise value increases relates to value synergies that
> obviously do not reside within the enterprise alone, so why should
> the assets be valued higher as a standalone enterprise. I also dont
> think we need to respond much to the idea that the "local franchise
> value" of the banks is so being hidden by the bad assets. The sophisticated
> investors who are tearing apart the balance sheets to find value
> see this effect but it obviously pales in comparison to the toxic
> assets under evaluation. With online banking and low barriers to
> entry in regional banking, is the mark to market accounting the only
> factor keeping asset and equity values depressed?
>
> The massive government bailout, spread the pain approach feels good
> right now, but we will all pay the price down the road. Does anyone
> realize how massive the change to our fundamental system of value
> creation this is? As a small business owner who has invested $1.8MM
> over the last 2 years into my businesses, I now find myself buying
> municipal bonds, gold, oil/gas stocks, TIPS Treasuries, ETFs that
> short the Treasuries and several other shorts on individual stocks.
> There is not much new tax revenue or job creation from this. Staring
> at increased inflation, income taxes, payroll taxes, healthcare costs....like
> millions of other business owners, the equation has shifted away
> from starting or expanding businesses in favor of other investments.
> Eventually, the range of options will include mutual fund investments
> in fairer, more business friendly countries or simply retiring earlier.

Mar 02 07:28 AM