lavalyn

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.

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.

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.

Four Questions About How We Got Here

JasonC: on the global scale, does it really make a difference? Lehman going bankrupt and debtholders getting pennies... versus Barclays buying Lehman out, and Lehman shareholders taking the hit instead. Barclays buying the shreds of Lehman doesn't make the value of Lehman assets increase. Surprisingly enough, it *is* a zero-sum game, just a matter of who gets burned.

Given that the Bear Stearns, and then Fannie Mae/Freddie Mac bailouts created a reputation that the "Fed has your back," a collapse is definitely necessary. Systemwide, worldwide, maybe some sense can be put back into credit worthiness review, instead of letting the US Treasury subsidize every ailing company.

Four Questions About How We Got Here

There has to be a (fuzzy) line between maintaining stability in the marketplace and letting the market reward and punish its participants. Wall Street, what do you think of when you read those words? To me, they bring images of ruthless profit-hungry vultures that will punish any misstep of any company from the corporate ideal of the bottom line. Look at their analysts, moving markets with the magic words "Market Outperform," "Conviction Sell," "Overweight." Listen to the conference calls, hear them harp on next quarter's profits... lash out at any deviation from the mantra of profit profit profit.

The very meaning of the phrase Seeking Alpha is an underlying belief that superior research, superior reasoning, and superior decision making results in superior returns. The flip side of that is that inferior decision making results in inferior returns.

Lehman Brothers made inferior decisions, choosing first to hide their assets and refrain from deleveraging in April, then continuing to try to hide their assets in "Level 3" in July. They chose to redouble their bets when they had a good base of capital (share price) that they could have deleveraged with instead. They chose to ask too much of a price of the Korean Development Bank in June. And in doing so, they totally forgot that they were a bank, a wholesaler of financial risk. The role of a bank is to *manage financial risk*.

Equity holders deserve nary a penny for holding to the end like this. Debt holders deserve, as dictated by insolvency law, that they will get priority recovery on those debts. Why should they get more, at your and my expense?

What's Left to Spend in the 'Credibility Bank'?

Or you could say that this is just desserts for a nation that pays hundreds of millions to CEOs that run companies into the ground, millions to professional sports players... and somehow gets paid more for less production than people in China.

The "Chinese worker that make [an] average of $250 a month" produces the things Americans use. The question that it raises is normally phrased "why should the Chinese be paid so little?" when the real question is "Why should Americans be paid so much?"

Financials: Don't Believe the Rumors

You'd be right if you didn't account for these companies' incredible leverage. You're right, FNM and FRE assets are not worth zero... but their decline in recovery value exceeds their shareholder capital. It's mostly surmised that LEH is in the same boat, with Level 3 assets as they are and their off-balance sheet playing with R3 Capital.

Dealing with insolvent companies is a game that's risky to play, both when taking an equity position (it's technically worth zero) and as a client (what's the recovery rate going to be?).

Point of No Return or Perfect Buying Opportunity?

There's no such thing as excessive speculation. Or rather, where there's excessive speculation, there's a profit opportunity.

And no, oil going up like this did not cause the financials to implode. Overzealous and irresponsible lending by the banks did.

Point of No Return or Perfect Buying Opportunity?

I like these "non-answer" type articles. If anything, it's these sorts of articles that help astute investors find alpha. Specifically, I don't like being spoon-fed the analysis and conclusion.

Bespoke points out some anomaly in the market, to illuminate where to do some further due diligence. Sure beats the pumping of the usual suspects (ETFC, FSLR, etc.) by the usual fanboy/girl crowd.

Metrics, Mortgages and Analysts

jbmaria - I'd agree, but with less... vitriolic words.

Seriously, Cindy, you damage your credibility by lauding this one company, all the time, never faltering like this. I'm almost convinced you are a paid pumper.

Lehman Downgraded at Wachovia and Credit Suisse

Having seen how badly analyst recommendations go, I'd say they're just late to the party.

I mean, what was Merrill Lynch thinking when the *upgraded* LEH last Tuesday!? Anybody with real intent could have calculated the $3B loss from public information only... (25x leverage on total shareholder capital that increased 6B...)