Andrew E Butter

The Stress Test Cliff Notes

The credit crunch ended the day that PIMCO said that they "might" pay 80 cents on a dollar for toxic assets currently priced 30 cents "mark-to-market-that-d...

That second all the banks in America magically became solvent, and they strictly conformed to Basel II requirements for capital adequacy...that wasn't hard was it?

Well Phew...I'm glad it's all over!!

Could Distressed Real Estate Expose Cracks in the EU Model?

1: No discussion of Basel II that I noticed, basically it was vultures hovering around debating when to swoop.

2: Basel II is homogeneous except that it allows valuations to be done per national standards - whatever they are; nd if you want to change them, that's OK too. That's the barn door you can drive a combine harvester through.


On Apr 16 12:56 AM THofler wrote:

> Very fascinating. Isn't financial regulation largely homogeneous
> under Basel II at this point? Was there any discussion of Basel
> II?

The Dow's Weight in Gold

I like the colors, but you don't explain what the relationship is between Gold and the Dow , or why there should be one?

How about putting in variables to explain the effect of of the Gold Standard, Bretton Woods and the policy of the US Government to manipulate Gold prices over the past 10 years you might get a different answer?

Schrodinger's Mark-to-Market Law of Dead Cats

I agree with you - someone designed a bridge that fell down, it is a disgrace.

We disagree about where the original mistake was, and how to fix it.

The original mistake was valuing houses in a market that was obviously in disequilibrium using market-to-market to decide a prudent Loan to Value. The system that allowed that was ultimately at fault, bankers, accountants, regulators, does it matter?

The mistake was pretending the market was not in disequilibrium.

Now the market is in disequilibrium, on the other size. All I'm saying is quit pretending, and use IVS which was explicitly designed to handle this situation.

By the way I am an engineer - Cambridge University Class of 75, designed hundreds of pipelines and pump-stations; never had a complaint yet.


On Apr 03 10:38 AM SW Richmond wrote:

> Mr Butter,
>
> I will engage your attempt at misdirecting my criticism in this manner:
>
>
> If you were an engineer you would know that the engineers would not
> have used two values, they would have used a worst case value and
> designed the system to withstand that, something the bankers obviously
> did not do. And while they would certainly have used a range of
> operating values for sizing the pump, the piping would have been
> rated for worst case. Period.
>
> Bankers, on the other hand, want to change the rules to suit them
> as the case might warrant. Each time I drive over a bridge my engineering
> background makes me exceedingly glad that bridges are not designed
> by bankers. The banking system designed by bankers and run by bankers
> has directed traffic straight into the chasm precisely because their
> bridge failed. Now that the bridge has failed the stress test they
> want to change the design requirements for the bridge. This is not
> a rigorous approach to anything, let alone engineering. It is obfuscation,
> something that would land an engineer in jail and earn him the contempt
> of his peers, as in the case of the recent famous bridge collapse,
> the response to which included a search for the guilty. Bankers,
> on the other hand, seem to praise each other for constantly indulging
> in obfuscation, and believe they are due bonuses for getting away
> with it. Nor has there been any such search for the guilty, since
> everyone knows that bankers are not guilty of anything even though
> they have destroyed millions of lives.
>
> Of course, I am well aware that Shroedinger was a scientist and not
> an engineer.

Schrodinger's Mark-to-Market Law of Dead Cats

Sorry to misuse Schrodinger’s name but I thought he was a Physicist, if I’d known he was an engineer I would have been more careful.

Let me explain my point in engineering terms.

Say you are designing a pipeline, you work out the maximum flow and you size the pipe and the pump by optimization. So in your calculation sheet you have one “value” for pressure, the purpose of that value is to decide the head of the pump.

Then you work out the surge pressure that might occur either in a normal course of events (opening and closing valves too fast, electrical failure on the pump - etc), or because once in a blue moon someone might do something stupid (that's called Murphy's law (I hope you don't have any special affection to people called "Murphy", if you do I apologize but I'm afraid that is a well known engineering expression).

Anyway then you get another "value" for pressure, and you decide do you put in surge protection devices, relief valves etc to prevent column separation, or do you just specify a pipe of a higher pressure rating and up-size your thrust blocks? Either way you have two values for pressure, depending on the purpose of your "valuation".

In this analogy in 2003/4/5/6 the "engineers" decided not to work out the "surge pressure". Someone did something stupid, the pipe burst causing a huge amount of damage.

Questions:

(1):Who's fault was that?

(2): Is it smart the next time you design a pipeline to deny that you need to work out TWO pressures, or is it reckless?



On Apr 03 08:33 AM SW Richmond wrote:

> One of the reasons that we are where we are today is that everyone
> likes "mark to market" when the market is up and it makes them feel
> wealthy.
>
> "So a prudent "Mortgage Value" (an EU concept) or "Other-than-Market-Value
> (International Valuation Standards), would have been the correct
> value to use. In 2006 that might have been 40% lower than mark-to-market
> if properly assessed. And there was no reason why that value should
> not have been reported - just no one asked the question."
>
> By suggesting we might have used 'correct' values for houses in 2006
> the author suggests that we might have broadly recognized we were
> in a bubble. Well, some of us did, but the high 'mark to market'
> valuations kept the game going and there was absolutely no interest
> in marking MBS securities to anything but inflated market values
> based on the inflated values of the homes contained therein. Now
> that the bubble has burst and the securities are beginning to fail
> to perform AND the underlying assets (homes) are losing their market
> value, we are to correct our earlier error and mark those securities
> to values which are still based on the inflated home values? This
> is mark-to-fantasy, defeats transparency and is exactly the wrong
> approach.
>
> Are the auditors who are to buy into this idea not supposed to take
> into account future outlook for these securities? Have we forgotten
> about the now-famous Credit Suisse mortgage reset chart? Are we
> ignoring the unemployment numbers?
>
> Hmmmmm, tell me again why this makes sense? And finally, as an engineer
> I object to your ridiculous misuse of Shroedinger's good name. MBS
> do not exist in some quantum state, as much as banks would like them
> to. There is nothing scientific about any need to imagine that an
> MBS is more valuable than it really is. It is quackery. I'm afraid
> your article merely exhorts everyone to get on board with this latest
> fantasy.

Schrodinger's Mark-to-Market Law of Dead Cats

You are right, I liked the idea of the dead cat in a box which is alive and dead at the same time

Yeah..I suppose you are right the title IS pretentious if you didn't read the joke on the last one.

Thanks for the comment

The Big Banking Emperors' New Clothes

The tragedy is that changing M2M is the right thing to do.

Just instead of adopting International Valuation Standards for valuing those assets they went with the Emperor

AIG: Before Credit Default Swaps, There Was Reinsurance

A very comprehensive analysis.

Interesting that Lloyds of London, the traditional place for re-insurance, has no exposure to this debacle.

Basically AIG found it cheaper not to (properly) re-insure the policies they wrote. Like you say, they had no intention of paying up in the event there was a claim.

I bet they didn't even bother to get quotes from Lloyds. That might be an angle for anyone investigating criminal negligence?

The Physics of the Dead Cat Bounce

Sure - you go into a casino with a stake and tell yourself it's just fun, you are careful, you invest -play the reds and the blacks

Then you start to trade

Then you gamble

Then you borrow to gamble

Then you steal to pay your debts


On Mar 31 01:14 PM carey_jim wrote:

> Long term investing happens when people take a long time outs from
> the market to spend their money.
>
> However, it doesn't take born traders long to discover that making
> money is more fun than spending it and so they start trading again.
>
>

The Physics of the Dead Cat Bounce

I agree completely


On Mar 31 09:35 AM socrateazz wrote:

> Most short term market moves are based on belief. The shorter the
> term the more belief influences a move. Most long term moves are
> based on reality. The longer the time period, the more reality influences
> values. Beliefs can be reality. Is the belief the economy will
> improve more real than the belief the economy is being destroyed
> by bias idiots? The market will eventually show the way! My belief:
> You can not fix a car by indescimanantly buying inappropriate parts
> and gluing them in place without reasoning out how they will actually
> work. That is what I see happening right now. Some things might
> work. But will many of them? Any that do not work is a waste of
> money and resources!

The Physics of the Dead Cat Bounce

Yeah so many variables, you have to consider the fleas also


On Mar 31 09:19 AM pockyclips 2020 wrote:

> A dead cat bounces only if freshly killed. This cat's been bloated
> for
> at least 18 months!

The Physics of the Dead Cat Bounce

Unfortunately the editor took out the double strike-through of "and the General Theory of relativity ..I Fink", (I suspect he didn't see the joke).

I remember Schrodinger....he had a cat and it might have been dead and it might have been alive - bit like this problem, but he found out which by looking in the box, not by throwing it off a building and seeing how high it bounced.

This I think is Newton fair & square, nothing to do with quantum mechanics. Very much the type of experiments that 12 year old's would do which is why it's called a "Class Project".

Anyway, semantics aside, time will soon tell if this cat was alive or dead, and Relativity will have nothing to do with that.


On Mar 31 06:50 AM User 386086 wrote:

> remember Schrodinger was against quantum reality. As was Einstein
> and Dirac. Your calculations are reminiscent of renormalization a
> procedure Dirac did not favor. You may well be brilliant but I'm
> still going with Dirac. No offense.

International Valuation Standards: The Only Viable Alternative to Mark-to-Market

I agree, in these fast-moving times, tedious is well - tedious.

So pay too much if you like, that's always an option.

That's what happened, people who found it too tedious to do proper valuations paid too much.

Now they are broke.

What's really tedious is they are asking other people to bail them out.


On Mar 24 09:45 AM Roland Cycan wrote:

> Goldman Sachs, AIG, Blackrock, and other big financial institutions
> have thousands, or tens of thousands, of outstanding financial assets
> that are not easily valued.
>
> They simply cannot have a process that is expensive, tedious, and
> time consuming each quarter end. I disagree with you when you
> say that the expense, tediousness, (and time consumption?) involved
> is not a reason for not doing the valuation properly (properly meaning
> by IVS standards). I say that it is a reason, and a good one.<br/>
>

Geithner's Real Stress Tests

Sure that's my point, but it's not diplomatic to call it a scam or a con - the politically correct word is " forebearance".

It worked in 1938, after the South American Blow out, after the S&L and after the Asian Crisis.


On Mar 26 10:03 AM dcb wrote:

> Considering that bernake and Geitner have said they won't let any
> big institutions fail my own personal view s the stress test are
> a con game. If done properly we won't see the results, or the criteria
> will be such that all the big banks will pass. it's a big shell game.

Market Long Waves: Why Bernanke and Geithner Are Flying the Plane into the Ground

Th plan I have recommended consistently since July 2008 is to mandate that valuations of assets used to assess capital adequacy are done using the only valuation standard approved by every valuation institute of consequence in the world (IVS) instead of the ambiguous and often comically inaccurate standards that caused the mess and are exacerbating it.

Once you really know what things are worth, then you can make a plan. Until then you are just stumbling in the dark, my plan, turn the lights on.



On Mar 28 07:09 PM User 374476 wrote:

> Thank you for the difficult position of pointing out what you percieve
> as wrong. The easy position would be to lay out a better plan.
> Glad you didn't do that. Too many are already taking the easy way
> out. Reducing the rate to zero in 2007 isn't a solution, more like,
> monday morning quarterback...who knows if it would've worked?