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In Defense of CNBC (Sort Of)

The one beautiful nuanced meta-message of the Stewart interview with Cramer was that he essentially demonstrated to CNBC (and other news outlets) how to conduct an interview. (That piece was shear brilliance.) CNBC and most news outlets suffer from the Stockholm Syndrome -- falling in love with their captors. CNBC (which was first FNN which is where Kiernen and others came from) started as a small financial news network which needed advertising dollars from the very sources they interviewed. Trashing them probably would not have been a very propitious decision. Sadly, it seems, however, that CNBC has never been able to shake those roots.

CNBC is not much different than analysts who get on earnings calls and lob softballs at the CEOs to knock out of the park.

Somewhere along our history the 4th estate has become an extension of those holding the power. Unfortunately, our system of democracy and capitalism requires an agressive 4th estate.

The U.S. Financial Accounting Standards Board ((FASB)) will discuss mark-to-market guidelines at a board meeting Monday. The FASB says it will focus on "additional application guidance that would clarify how mark to market is used in illiquid markets." Earlier today, FASB chairman Robert Herz told a House subcommittee that new rules could be implemented within three weeks.

This issue cannot be simplified into a zero-sum solution as so many seem inclined to do.

While it's true that mark to market accounting accelerates (perhaps prematurely) asset writedowns which immediately impacts company balance sheets, it's also true that mark to market accounting prevents overinflating balance sheet assets which could lead to gross misallocations of capital to companies whose asset values will never recover. Even worse, companies with overvalued poorly performing assets will likely induce managers to take bigger near term risks with fresh capital to improve the balance sheet problems hidden from shareholders in company financial statements not using mark to market accounting.

The answer has to be somewhere in between or, more desireably, both. Companies should have to provide balance sheet pictures with mark to market and historical value or some measure of expected present value.

This transparency would permit investors to evaluate or challenge the CFO's assumptions and make an informed investment decision.

The U.S. Financial Accounting Standards Board ((FASB)) will discuss mark-to-market guidelines at a board meeting Monday. The FASB says it will focus on "additional application guidance that would clarify how mark to market is used in illiquid markets." Earlier today, FASB chairman Robert Herz told a House subcommittee that new rules could be implemented within three weeks.

Wall Street Wizard, we are in 100% agreement on transparency. But we're not aligned on solvency. In your view, mark to market is correct and if you're insolvent under mark to market, you're insolvent. While I agree with your conclusion, I'm willing to relax market to market rules for solvency tests but believe that both mark to market and mark to model (or whatever PV measurement we're all in agreement to use) must be presented. Throwing companies into chapter 11 is never good for the economy and in my experience chapter 11 is an industry event, not a single company event (as it was initially conceived). Whenever one company goes into chapter 11, others in the industry always follow -- e.g., telecom & airlines. So I think part of my perspective is viewed through the chapter 11 lens. (Wiping out shareholders and substantially reducing creditor's claims wipes out massive amounts of value and puts competitors who acted prudently at extreme disadvantage vis a vis chapter 11 entity.)

In my view, not disclosing both values is dangerous because investors will not know how to rationally value assets.

The U.S. Financial Accounting Standards Board ((FASB)) will discuss mark-to-market guidelines at a board meeting Monday. The FASB says it will focus on "additional application guidance that would clarify how mark to market is used in illiquid markets." Earlier today, FASB chairman Robert Herz told a House subcommittee that new rules could be implemented within three weeks.

Wall Street Wizard, Ok, I partly see the error of my ways but not entirely :-) For accounting (solvency) purposes one model or another has to be chosen. I'm ok with the less conservative model here as it will keep more companies solvent.

But I don't think it's unreasonable to require a view on the financial statements of both. By requiring companies to provide both Mark to Market and either Mark to Model or some other PV calculation, you're giving investors the opportunity to manage risk tolerance. Some conservative investors may choose to invest in companies where the Mark to Market and Mark to Model value variances (MMMMVV) are quite low. Others may see greater risk and opportunity in the companies with higher variances. Unquestionably, the risk adjusted present values of high and low MMMMVVs should not be the same. Investors should be able to make an informed decision as to whether or not they want to invest in high or low MMMMVV companies.

I believe my solution provides that.

Bernie Madoff's deputy Frank DiPascali, who spent 33 years as Madoff's investment adviser, pleads guilty to 10 charges including conspiracy, securities fraud, money laundering and perjury.

Bring on the rest:

Jodi Crupi
Walter Noel
Robert Jaffe
Peter Madoff
Andres Piedrahita
Jeffrey Tucker
Ezra Merkin
Jeffrey Picower
Shana Madoff
Ruth Madoff
Mark Madoff
Andrew Madoff

While it won't bring back investor's money, justice will be served. Although each of those above have repeatedly professed their "shock" and innocence to any who have asked, they are certainly feeling the walls closing in on them.

The beautiful thing about con artists is that they will sell their soul for a buck. Sit back and watch the implosion: It's going to be a fun ride.

What About Madoff's Accomplices?

I find it impossible to believe the sons were/are as ignorant as they (and bernie) would like us to believe. The sons ran the brokerage/trading arm of the business which was for years one of the largest. Bernie's alleged strategy was Split Strike Conversion which required ongoing purchase and sale of equities and stock options, both of which could have been executed through Madoff Securities.

While the sons don't appear to be rocket scientists, I'm incredulous that never pressed their father about running trades through the firm, queried who the trades were run through, etc.

On Rescuing Homeowners Undergoing Foreclosure

Smartypants, i like your subtle reference to Ayn Rand's Atlas Shrugged.

Unfortunately, don't agree, and the data doesn't support, that people spend based on their current level of income, but rather spend based on their life cycle wealth. For example, a young lawyer might spend above his means b/c he believes that within 7-9 yrs he's going to make partner and make a lot of money in the future. Similarly, an investor may look at the value of his/her stock portfolio and say i'm going to buy that new BMW. When the value declines or employment prospects change for the worse, spending slows (and so does the economy).

Read, among his other works, Modigliani's 1985 nobel prize speech

Life Cycle, Individual Thrift and the Wealth of Nations

nobelprize.org/nobel_p...

Bottom line is people do spend based on their life cycle wealth and that includes the perceived value of all their assets which for most Americans includes their home.

When home values decline, people cut back on spending. While I don't disagree that income levels must catch up with home values, the health of our economy depends, to a great extent, on consumer spending. When people stop spending, companies cut back on capital projects, jobs are lost, and the economy slows.

I don't see how that's a good thing.

The SFRET plan gives individuals a chance to keep their homes without filing for bankruptcy. BUT it also holds them accountable to repay the government for the handout they're inevitably being given. Property values will definitely go up (to the pre-bubble levels) in the short or intermediate term, but they should level off and move up a little. In the long run (call it 10-15 years), property values will increase. In the interim, GDP can remain strong.

Moral Hazard: The Real Culprit of the Financial Crisis

When economists, financial analysts and social scientists examine financial bubbles they look primarily at the agents’ incentives. Whether we’re talking about individual investors or institutions we’re always told to follow the money. Generally, we see empirical and anecdotal evidence in the bubble formation period of both groups making abnormally high risk-adjusted returns. (One may even argue that at this early stage there really is not a bubble because no bubble has even been created yet. It’s just investors making abnormally high risk-adjusted returns.) The post hoc analysis, however, never looks at the institutions who sat on the periphery and recognized three fundamental realities: (1) not participating may permit other institutions to continually make these high rates of returns; (2) these other institutions may take their profits and diversify in businesses like theirs; or (3) profits pouring into the coffers of our competitors may make us irrelevant.


So the periphery sitters have two choices, let the players build and grow their business (and make a lot of money) or get in the game (and take some of that business). It’s in the latter decision where the bubble gets created, logic is abandoned and a period unwarranted capital allocation proceeds. The periphery sitter doesn’t care if their involvement will create the bubble or if it will create a bubble, exacerbate a burgeoning bubble or if, in the long run, it will ultimately lead to capital destruction. No, the periphery sitter only looks at its own survival and concludes if I don’t get in the game, new wealth may get concentrated in the hands of players that may seek to diversify their lucre into my business.


It is precisely when the periphery sitters enter the game when the bubble potential is heightened and most vulnerable. (The size of the bubble will be a function of the added production capacity the periphery sitters add to the market when they join.) Few industries can, effectively, double or triple their capacity and get the same returns as the players were getting when the capacity was much smaller; yet that is exactly what we see in each bubble. (Because Wall Street has virtually unlimited access to capital, it’s easy to see how their movement from periphery sitter to primary player can dramatically change the capacity for any industry they decide to throw capital at. The 2000 telecom bubble had the same problem. Tons and tons of new capacity were brought on line by Wall Street’s unchecked easy money policies towards telecom carriers that lacked the requisite demand to absorb the new capacity.)


So why does Wall Street, in the most hackneyed of clichés, throw good money after bad? Is it because they don’t understand the risks? Is it because they don’t understand the industries they’re investing in?


It seems unlikely that Wall Street doesn’t understand the businesses they invest in. After all, they hire the best and brightest from inside the industries they look to invest in supported by the best financial minds their money can buy.


The problem is more fundamental than that. It’s fear, jealousy and the expectation that when reality catches up to fantasy, everyone will fail. Blame will be evenly distributed among all players. Depending on the size of the bubble some companies will fail and in the case of the most recent bubble, even some Wall Street firms will fail. But in the end, since everyone is to blame, no one is to blame.


The aftermath is ugly, but the gun is already reloading for the next bubble.