1-2 Knockout

Two Words: FIX IT

1-2 — Tue, 18 Nov 2008 11:26:21 -0500

Does it depress anyone else that congress stole their script for today's hearing from SNL?

(2:20/4:19 mark)

GM Goes All-in (With 2-7 Off-Suit in the Hole)

Anal_yst — Sun, 16 Nov 2008 23:14:52 -0500

Propaganda film from GM, full website here. Honestly, we couldn't make this shit up.

I think my favorite part is the "Facts & Myths" section, home to gems such as:

Wait, wait wait a second: If GM filed for bankruptcy that'd be bad for stockholders? AND employees? HOGWASH! I shan't believe it!

Presented without further comment, enjoy this lovely bullshittastic video courtesy of the General

HT to Paul Kedrosky via twitter

Targeted Advertising Fail

Anal_yst — Sat, 15 Nov 2008 21:29:13 -0500

As I've been saying since soon after the days of Mary Meekers "groundbreaking" Internet Report , I've been skeptical of the metrics and methodologies used to value Internet companies.

This is (a prime example) why.

Pat on the back to Linkshare. Value-add indeed!

(ht to a friendly anon user)

The Shark, it Has Been Jumped (Middle East Edition)

Anal_yst — Thu, 13 Nov 2008 21:11:35 -0500

For those of you who ain't down with the hot beats all the kids are listenin' to these days, lemme learn ya'll somethin.

I give you Busta Rhymes' new track, "Arab Money". Abridged lyrics:

[Chorus: Ron Browz]
Shalai Lai Lai Halilili Hai Lo!
Hi Li Ba Lai Hey Hi Li Bai Lo!
We gettin' Arab money!
We gettin' Arab money!
Ha La Shiki Hai Lili Ba La!
Milli Ai Lai Shi Lili Ba La!
We gettin' Arab money!
We gettin' Arab money!

[Verse 1: Busta Rhymes]
Now, there ain't no way that you could kill the beast dead
I got Middle East women and Middle East bread
I got oil well money in the desert playing golf
Dolce shorts, dashiki with a Louie Scarf
Chest cold, diamonds make a nigga wanna cough
In Dubai, 20 million on the villa loft
And then I step up in the club and then these other niggas mad as shit
The way I make the people wanna sing the hook in Arabic!

[Chorus]

Seven star hotels, Maybach, movie sick
Big bitches, knock-kneed camel-toed groupie shit
Women walk around while security on camelback
Club on fire now, niggas don't know how to act
Sittin' in casinos while I'm gamblin' with Arafat
Money long, watch me purchase pieces of the Almanac
Y'all already know, I got the streets buzzin'
While I make you bow down and make Salaat like a Muslim

[Chorus]

See, now I take trips to Baghdad dummy
While I use stacked chips and count Arab money now
I don't need to get fresh, about to grow a beard duke
So much cake even the money look weird too
Domestic bread, and I'm broad, I'm tryna eat right
Prince Alwali, Bin Talal, Al Saul
They respect the value of my worth in Maui, Malaysia
Iran and Iraq, Saudi Arabia!

When American rappers start tying you into their songs, its probably a good sign that shit is about to (slash already has) hit the fan.

Guess throwing all your money into ridiculous development projects like islands in the shape of palm trees and a map of the World, and the tallest building on the Planet wasn't the best idea (duh).

Make of This What You Will...

Anal_yst — Sun, 02 Nov 2008 15:20:17 -0500

What Do You Value?

Anal_yst — Mon, 20 Oct 2008 16:04:18 -0400

The "American Dream" upon which Obama routinely waxes-bullshit (McCain is just bad on this front, in fairness) is not - contrary to what he and many of his supporters think - that everyone has the god-given right to be financially well-off.

Before the Obama freaks inevitably jump down my throat, let me state this as clearly as possible.

Warning:

This is a non-partisan post. I do not support Obama or McCain. Let me repeat: I am completely Party and Candidate-neutral in this election. This is an examination of concepts central to this election, and the philosophies behind them. This post is not intended to be, and in no-way represents an endorsement or criticism of any Candidate beyond the issues discussed. In the next few weeks, we'll likely be posting new material lambasting both McCain and Obama, so please don't be so quick to judge.

Now that we've gotten that out of the way (although I expect the attempt will inevitably be in vain), the WSJ describes the differences between Obama and McCain's "value-based" tax plan:

Sen. Obama replied that it's a matter of values. His plan values work, not just wealth, he said. And after largely dodging Joe the Plumber, Sen. Obama referred to him on Saturday as one of the working people who would receive a tax cut under his plan.

"It's time to give a tax cut to the teachers and janitors who work in our schools; to the cops and firefighters who keep us safe; to the waitress working double shifts, the nurses in the ER," he said. "And yes, the plumbers, fighting for the American dream."

I want to focus on one clause in that statement for a moment, "His plan values work, not just wealth." Let that sink in for a second. Obama tacitly acknowledges that work is valuable. However, based off the subsequent paragraph, above, he fails to make the connection that not all work has the same value, which in capitalistic society is commonly measured by the price paid for that work. (ed: A deeper discussion of the price paid for work being an accurate measure of the value society attributes said work is beyond the scope of this discussion, for another time though for sure, 1-2 care to give it a shot?) My job, for example, is not nearly as valuable or more accurately, not priced as highly as that of a surgeon, an all-star trader, a talented architect, etc, all of whom likely make several times what I do (just take my word for it).

When you break it down, the value of any work, like the value of most things, is a function of supply and demand, itself naturally influenced by several other factors (education/skill/experience required, barriers to entry, perceived value to the employer, risk factors, etc). There are lots of people who want to, and are qualified to be a waiter/waitress relative to the demand for such work. There are far fewer individuals who want to, and are qualified to be a surgeon, relative to the demand for that type of work. This is why the waitress does not make as much money as the surgeon.

One does not need an advanced degree to understand this very simple concept. However, Obama blatantly acknowledges that his system simply "values work," completely subverting the "market-based" valuation of said work. Generally speaking, the "market-based" system rewards increased education, experience, and knowledge. It encourages people to not only work hard, but to work smart. Similarly, it encourages ambition and dedication, generally providing greater (financial) rewards the higher up on the career path one climbs. It is worth mentioning though, and is often ignored in political discussions, that with increased income, more often than not comes increased stress, hours, and responsibility. For some people, sometimes, in some situations, the trade-off makes sense, for others, it doesn't. Essentially, we must acknowledge the fact that making money, at whatever cost, is NOT everyone's goal. This is an important distinction which is notably absent from virtually any rhetoric I've heard from either candidate, and most clearly ignored in Mr. Obama's redistributionist policies.

While we absolutely agree that people have other many other motivations for choosing a particular form of work, it absolutely cannot be denied that money is a significant factor, sometimes the primary one. Any non-deluded person in Law, Finance, Medicine, Politics or a almost any other field will tell you that if it weren't for the money (or the future expectation thereof), they likely wouldn't be doing what they're doing (or working up to where they are).

Just because you live in America does not mean that you are entitled to owning a house, a car or an iPod. You are not guaranteed to be able to take a vacation to Disneyland, to be able to pay for the "best" private schools and Universities or anything that is not explicitly guaranteed in the Constitution, among various other documents of course. (For what its worth, I'd like to see both reform and improvement in healthcare and education, both of which are, and should be guaranteed, but that's a conversation for another time, lest you think I'm some right-wing elitist jackass, which I"m not, but I digress...)

Newt Gingrich probably put it best:

"The Declaration of Independence says we are endowed by our Creator with certain inalienable rights, among with are life, liberty, and the pursuit of happiness. Notice, unlike the welfare state it doesn't guarantee happiness, it doesn't offer happiness stamps, it doesn't suggest the government should pay therapy for those who have not yet found happiness."

Everyone in this country, whether they realize it or not, has the opportunity to be well-off, financially or otherwise. Do some people have upbringings which afford them advantages not given others? Absolutely. Is it likely far more difficult for the average kid from the ghetto or born into a rough familial situation to attain such success? Surely. Addressing this issue though is, again, an important conversation for another time.

Sometimes life just plain ol' isn't fair though. Everyone has to deal with this unavoidable fact at one point or another, to varying degrees and under varying circumstances. These are the things that we cannot control, coming down with a rare genetic cancer, for example.

The important fact that we must remember though, a fact that is painfully absent in the minds of so many Americans, is that there are many things we CAN control.

The kid born to the impoverished, out of work laborer parents isn't relegated to the same destiny. He or she can, through a combination of working harder and smarter, become almost anything he or she wants to be. Not everyone has the natural talent (etc) to do certain things, like play in the NBA or perform at the Metropolitan Opera, but remember, we're talking about things we can control. This is economic and social mobility.

This, my friends, is the American Dream.

Despite the nonsense populist pandering of various Politicians (Mr. Obama is a worse offender than Mr. McCain on this front), we must remember that the majority of us largely have the power to control our own destinies in this respect. This requires us to abandon the denial and sense of entitlement Politicians like Obama reinforce with their rhetoric and policies.

This requires us to remember that our decisions and our actions have consequences for which we must accept responsibility.

When it comes down to it, ceteris paribus and broadly generalizing, we all chose our careers, which for most of us, means we chose our incomes. The waitress who likely never went to college and makes $30,000/year made a series of choices to get there , just like the Wall Street analyst who makes $300,000 likely worked his ass off to get into a good college and top Business School did.

Are there exceptions? Of course! But remember, we're talking about things over which we have control Lets imagine that maybe our waitress got pregnant and needed a flexible job to feed her starving baby, but remember, you don't get pregnant by accident (barring rape, of course). In this example, a bad decision - perhaps it was getting drunk and not using a condom during intercourse, lets say - is still a decision; it was not outside our lovely waitress' control. Good for the waitress that she is accepting the consequence of her actions - getting a job to support her baby - and not lining up for a suckle at the government teet for a handout because of her own poor decisions.

Unfortunately, Mr. Obama would take money (via tax hikes) from people who made decisions which resulted in their financial well-being and redistribute it to those whose decisions resulted in a lower level of financial success. This reeks of socialism, and I challenge anyone to explain how it isn't with a clear, level-headed response.

Those with even a fleeting familiarity with political philosophy must invariably be likewise familiar with the work of Locke and Rousseau, and the ideas of Property and the Social Contract. (I'm skeptical whether either Presidential Candidate fits into this category, but I digress...) I think you'd be hard pressed to find any reasonably sane person who doesn't believe that we should be concerned with the greater good, for example, to make sure that we try to take care of those who cannot care for themselves.

What Obama does not seem to want to acknowledge (with his redistributionist policies) though is that the social contract is not asymmetrical. That is, in agreeing to be bound by it (and to benefit from it), each person tacitly agrees to adhere to it.

Thus, it is not the obligation of those who adhere to the Contract- those who played the game and achieved financial "success" (arbitrarily defined by Obama at $200 or $250k/year) because of it - to be forced to subsidize the lives of those who haven't.

I am not so naive to presume though - as some critics of these policies have argued - that increasing taxes on the rich will cause a massive shift in high-paying jobs offshore, a trend which will trickle-down and result in further job erosion across the board. Will it happen? Perhaps some, but in Obama's defense (see, I really meant non-partisan!), most certainly not to the vast degree which many of his critics claim.

Much to our severe disappointment, both Obama and McCain have consistently demonstrated that their understanding of basic economics (to say nothing of their lack of knowledge of any other related subjects) rivals that of a 5th grader. Maybe.

Naturally you have to discount any political rhetoric leading into an election by somewhere around 50% (+/-), all the more when such rhetoric relates to such broad, sweeping changes like those advocated by Obama. McCain isn't much, if any better here, but realistically I don't expect that if elected, he would be anything close to the "Maverick" he would have us believe he is. Any changes he actually delivered on are likely to be more incremental and far less distuptive than the ones proposed by his opponent. We are not saying that fact leads us to think McCain would necessarily make the better President than Obama; there are many areas in which we need to see significant and sweeping change. However, it is worth nothing that - especially given our current economic predicament - implementing such massive and far-reaching policies like the ones Obama has presented might not be the best idea.

Despite discounting his populist rhetoric, given the Democratic Congres (and other factors), I fear that if elected, Obama just might actually deliver on his redistributionist promises, and it scares the living crap out of me for the reasons I've discussed above.

The U.S. Government is a large, complicated beast, one that Obama wants to make even moreso on both fronts. This is very seldom the best way to go about fixing anything, especially Government, especially in a massive economic downturn (recession, whatever). The "system" is not necessarily broken as Obama would have you believe. Quite the contrary. It was broken, and now we need to rebuild it (better...faster...stronger...wah wah wah wah wah).

Mr. Obama's vision of the American Dream, and the ass-kissing rhetoric with which he presents it are very similar, almost a carbon copy of the political mentality that had no small part in our current economic woes. While it may not be politically convenient, now, more than ever, we need to take this opportunity to remind the Public that we aren't entitled to the things to which we have grown accustomed. It might not be what we want to hear, but it is an unassailable truth which we need to accept sooner, rather than later, lest we learn our lesson the hard(er) way at some point down the road.

Unfortunately, Mr. Obama seems intent on doing the opposite, of fueling the entitlement mentality that has lead us to years worth of negative savings rates, of record debt at virtually ever level, and fueled the mortgage and real estate boom/bust from which we're trying to recover. He can point to greed on Wall Street as the cause of all our problems, but the reality of the situation is that greed on Main Street was just as much to blame.

Rewarding, nay, encouraging such behavior - regardless of what Street it takes place on - is no way to fix anything.

Quote of the Day

Anal_yst — Mon, 20 Oct 2008 01:44:22 -0400

Not trying to copy LoSC, but this quote - in an entirely unsuspected place - sums up what I've been trying to explain to several friends and colleagues who have yet to grasp the severity of our current economic woes. From the NYT Digital Domain Section:

If the recession is severe, “eventually, everybody gets slaughtered at some point."
--Tavis McCourt, Analyst, Morgan Keegan

There will be firms that may benefit from the carnage over the long-term (Best Buy's inevitable dominance once Circuit City bites the bullet, hedge funds that successfully profited from the insane vol we've been seeing, etc). However, a rising tide lifts all ships, and vice versa. Watch out for beta, kids.

Lies, Damn Lies, and The New York Times

Anal_yst — Wed, 15 Oct 2008 00:29:02 -0400

We generally try to maintain a reasonable level of tact and respect for fellow writers here, but sometimes we come across something so disappointing that the gloves simply must come off. With that disclaimer in mind, I can't help but ask:

Floyd Norris, are you freaking kidding me? As if the quality of financial journalism (especially over the past year or so) wasn't already a virtual oxymoron, we have to deal with "the chief financial correspondent of The New York Times and The International Herald Tribune" writing crap like this?

The CFA Institute, the organization of certified financial analysts, distributed a questionnaire to its members on Thursday, and so far has received more than 5,000 responses from people whose job it is to review financial statements and make investment recommendations.

A College newspaper could do better, jeeze! Seriously, the 1st line man?!?! CFA = Chartered Financial Analyst, this isn't rocket science buddy. Lets not even talk about how you can write about a survey without providing a single, solitary link or other reference to prove that it actually, ya know, exists. After reading your post, for all anyone knows you might as well have made the whole thing up (and kind of did anyway, ironically enough). Are you seriously that much of an interweb n00b? Hell, any armchair blogger worth their weight in ratings reports could do better, from their Blackberry none-the-less.

For the record, the CFA Institute actually did publish the details of its survey (learn to use the Google Machine, son), and there are some salient details Mr. Norris failed to point out, like, oh, it was actually a "global member poll on governments’ attempts to stabilize the markets and liquidity," a fact Mr. Norris conveniently omits, among several others...

Anyway, just as all Nazis were German, but not all German's were Nazis, not all CFA Charter Holders fit into the group of "people whose job it is to review financial statements and make investment recommendations." As a matter of fact, I'd say just back of the envelope, of that population of people for whom that is their job, CFA members probably comprise maybe 50%, absolute tops, maybe 1/2 that, if not less? Its not (despite the CFAI's best intentions/attempts) the de facto global standard by which everyone in Finance is held or judged, my friend.

Not to discredit those who have attained it of course, but passing the 3 levels of the CFA exam, while not easy by any stretch of the imagination, isn't really the same as a PhD (Masters, or even some MBA's) in Finance or Economics, but that's not even the point (and certainly not one worth arguing about here, so spare us, please).

It should come as no surprise that they are more concerned about banks overvaluing assets than about the possibility that mark-to-market accounting is causing assets to be valued at unreasonably low levels.

Dare you consider why this might (seem to) be the case? Of course not, but I'll get to that later. The bigger problem is that this conclusion is a complete an utter non-sequitur Check the CFA link above, nowhere in the survey were participants asked which direction they thought values were skewed towards relative to "current market value". NO.WHERE. Is this guy pathological or is he just another thread in a long string of ignorant journalist searching for a sensational story where one does not exist?

They were asked for opinions on the importance of several possible causes of market volatility, on a scale of 1 for no importance to 5 for major importance. They could rate as many of them as very important as they wished.

Here are the percentages who rated each factor as 4 or 5, meaning they thought it played a significant role.

Unwillingness of commercial banks to lend to one another: 88%

Concern about likelihood of global recession: 78%

Concern that financial institutions continue to hold assets at values that do not accurately reflect current market value: 75%

Lack of coordinated action by regulators across regions: 40%

Mark-to-market accounting: 36%

Slow pace of implementation of U.S. bailout plan: 31%

End of ban on short-selling: 20%

Someone must not have done very well in Statistics class...

Here are the original question and distributions from the CFA website:

Now, someone who has paid attention in Stats class can look at the above table and be wholeheartedly unsurprised with the results. I'm pretty sure no one with even 1/2 of a functioning brain (eliminating politicians, among others) has claimed that Mark-to-Market accounting or the short ban were the major drivers of the shitstorm we've been dealing with. Naturally they didn't help matters, and weren't/aren't (at least in their current form) very well conceived or executed, but they didn't start the fire. (run with the Billy Joel lyrics, you know you want to).

A statistically correct conclusion from this data would be something along the lines of saying that (using standard descriptors for each # choice 1-5) 75% of respondents agree or strongly agree that concern over banks holding assets at values which don't accurately reflect current market value has contributed to continued volatility. (See what I did there? That's the difference between data interpretation and plain-old making shit up, Norris.) Of course, even this statement in-and-of-itself assumes respondents somehow (their CFA ninja finance skillz?) have a better idea of "market value" than other market participants do, which is itself silly, at best, since the "market" for these "assets" well, frankly doesn't exist.

Now that the banks can be recapitalized by the government, they should be eager to get the bad news behind them by marking toxic assets at toxic levels.

How do you propose they do that, sir?

Have you ever tried modeling the cash flows, default rates, collateral, recovery rates, etc, for a portfolio of mortgages, themselves structured into even more complex securities the likes of which actually may require rocket science to comprehend? Hell, have you ever done even the most basic DCF? Do you have any idea what the hell you're talking about?

Didn't think so.

You would think that, having been proven to be so wrong about these assets — that is how they got into this mess — the banks would be a little humble about insisting that their valuations now should be relied upon even if no one is willing to pay the prices they calculate.

The banks were working within the framework allowed by law, regulation, and market oversight. Just because the SEC, FASB, Ratings Agencies, Auditors, Accountants, and Investors (to say nothing of the internal risk groups) dropped the ball isn't the banks' fault. Sure, they were given enough rope with which to hang themselves, lo and behold they did, HUGE surprise that is, right? (In fairness, and putting sarcasm aside just for one, very brief second, the banks did screw up, badly, but this short, curt, unsurprisingly NYT-esque jab does nothing but further the populist anti-Wall Street vendetta sweeping the Country and the World.)

Norris gets close to saying something useful or coherent towards the end, though:

If the banks believe that the market price is a fire-sale price, they can use some of the government cash to buy the assets cheap, and profit if they turn out to be right. Those purchases could also drive up the market price.

If not, why should anyone believe their protestation that the problem is the accounting, rather than the assets themselves?

Who claimed (and was remotely serious) that the accounting was the main fault besides the Bank CEO under fire from a panel of clinically retarded Legislators on Capitol HIll? You mean to tell me people try to dodge blame? HOGWASH! Seriously, the accounting is DEFINITELY a part of the problem, not the biggest, but it is most certainly not helping matters any. (ed: Suggested reading: FAS 157, FAS 133, FAS 140, any accounting or finance book, etc). We are by no means defendants of the Banks here at 1-2 Knockout, hardly, but your whole post reeks of the typical leftist, anti-capitalism rhetoric for which the Times is infamous.

In conclusion, I'm appalled with Norris' post for a variety of reasons, perhaps most of all because with his stature, with his distribution, he had the opportunity (and still does, hint hint, wink wink) to do so much more than to propagate his perverted survey results into this anti-Wall Street, populist rubbish. The worst part is that here or there, throughout, he almost gets close to making a good point, but then just as quickly as it emerged on the horizon, its right back to the dull grey skies of piss-poor financial journalism, sigh...

ht to Dealbreaker for bringing this to our attention

(Disclosure: Anal_yst is not affiliated with any political party, and actually reads the NYT on occassion without blasting its writers.)

The End is Nigh': Estrogen Edition

1-2 — Mon, 13 Oct 2008 21:55:05 -0400

Tyler Durden: We're a generation of men raised by women. I'm wondering if another woman is really the answer we need.

or

And so I went in secret off to Delphi.
Apollo sent me back without an answer,
so I didn't learn what I had come to find.
But when he spoke he uttered monstrous things, strange terrors and horrific miseries—
it was my fate to defile my mother's bed,
to bring forth to men a human family that people could not bear to look upon,
to murder the father who engendered me.

In case no one noticed, the end may be near. Number six on my checklist (below Republicans Lose South and above Krugman Wins Nobel) is "Major Financial Publication Run by Women".

Difficult as it is to admit, the domination of venerable Financial Tabloid, Dealbreaker.com (is that an oxymoron?) by estrogen in the forms of Bess Levin, Equity Private, and Muffie Benson-Perella has forced me to concede that the end may in fact be near.

For years the Wall St. archetype has been that of a chauvinistic, sex-driven, middle-age male making up for his lack of high school social rank (ARS we're looking at you). He held numerous secret affairs, with helpless women, whose only shot was to sleep their way to the top. Women were ghosts on Wall St. Afterthoughts.

Not any longer. Now, just as mother used to with Cinnamon Toast Crunch on Saturdays they spoon feed us our news, gossip, and channel our intellectual curiosities where they see fit.

Once upon a time one could rebel against the Oedipisian complexes festering in the male Wall Streeter's heart, for once we left our nests we were free to be men--at least until some slog convinced us we needed their protection yet again.

Now there is no respite, no escape, no "happy little cave" for us to hide in.

We, fellow Wall St. males are now a thing of the past, obsolete, and merely an appendage of the female new world order.

The end is near friends, the end is near.

PS - You ladies can bathe me in your liquidity any time.

The Great Obama!

Anal_yst — Sun, 12 Oct 2008 16:39:32 -0400

Looks like ol' Rupe (Murdoch) isn't sitting idly as we head towards election day. Reprinted in full from the WSJ, in all of its sarcastic, bullshit-calling glory:

And now, America, we introduce the Great Obama! The world's most gifted political magician! A thing of wonder. A thing of awe. Just watch him defy politics, economics, even gravity! (And hold your applause until the end, please.)

To kick off our show tonight, Mr. Obama will give 95% of American working families a tax cut, even though 40% of Americans today don't pay income taxes! How can our star enact such mathemagic? How can he "cut" zero? Abracadabra! It's called a "refundable tax credit." It involves the federal government taking money from those who do pay taxes, and writing checks to those who don't. Yes, yes, in the real world this is known as "welfare," but please try not to ruin the show.

For his next trick, the Great Obama will jumpstart the economy, and he'll do it by raising taxes on the very businesses that are today adrift in a financial tsunami! That will include all those among the top 1% of taxpayers who are in fact small-business owners, and the nation's biggest employers who currently pay some of the highest corporate tax rates in the developed world. Mr. Obama will, with a flick of his fingers, show them how to create more jobs with less money. It's simple, really. He has a wand.

Next up, Mr. Obama will re-regulate the economy, with no ill effects whatsoever! You may have heard that for the past 40 years most politicians believed deregulation was good for the U.S. economy. You might have even heard that much of today's financial mess tracks to loose money policy, or Fannie and Freddie excesses. Our magician will show the fault was instead with our failure to clamp down on innovation and risk-taking, and will fix this with new, all-encompassing rules. Presto!

Did someone in the audience just shout "Sarbanes Oxley?" Usher, can you remove that man? Thank you. Mr. Obama will now demonstrate how he gives Americans the "choice" of a "voluntary" government health plan, designed in such a way as to crowd out the private market and eliminate all other choice! Don't worry people: You won't have to join, until you do. Mr. Obama will follow this with a demonstration of how his plan will differ from our failing Medicare program. Oops, sorry, folks. The Great Obama just reminded me it is time for an intermission. Maybe we'll get to that marvel later.

We're back now. And just watch the Great Obama perform a feat never yet managed in all history. He will create that enormous new government health program, spend billions to transform our energy economy, provide financial assistance to former Soviet satellites, invest in infrastructure, increase education spending, provide job training assistance, and give 95% of Americans a tax (ahem) cut -- all without raising the deficit a single penny! And he'll do it in the middle of a financial crisis. And with falling tax revenues! Voila!

Moving along to a little ventriloquism. Study his mouth carefully, folks: It looks like he's saying "I'll stop the special interests," when in fact the words coming out are "Welcome to Washington, friends!" Wind and solar companies, ethanol makers, tort lawyers, unions, community organizers -- all are welcome to feed at the public trough and to request special favors. From now on "special interests" will only refer to universally despised, if utterly crucial, economic players. Say, oil companies. Hocus Pocus!

And for tonight's finale, the Great Obama will uphold America's "moral" obligation to "stop genocide" by abandoning Iraq! While teleported to the region, he will simultaneously convince Iranian leaders to peacefully abandon their nuclear pursuits (even as he does not sit down with them), fix Afghanistan with a strategy that does not resemble the Iraqi surge, and (drumroll!) pull Osama bin Laden out of his hat!

Tada!

You can clap now. (Applause. Cheers.) We'd like to thank a few people in the audience. Namely, Republican presidential nominee John McCain, who has so admirably restrained himself from running up on stage to debunk any of these illusions and spoil everyone's fun.

We know he's in a bit of a box, having initially blamed today's financial crisis on corporate "greed," and thus made it that much harder to call for a corporate tax cut, or warn against excessive regulation. Still, there were some pretty big openings up here this evening, and he let them alone! We'd also like to thank Mr. McCain for keeping all the focus on himself these past weeks. It has helped the Great Obama to just get on with the show.

As for that show, we'd love to invite you all back for next week's performance, when the Great Obama will thrill with new, amazing exploits. He will respect your Second Amendment rights even as he regulates firearms! He will renegotiate Nafta, even as he supports free trade! He will . . .

Now, if only I could convince my liberal schmuck friends to read this we'd be in business, sigh...

Guest Post: The Year 2058

1-2 — Wed, 08 Oct 2008 15:18:24 -0400

From The Man Upstairs:

This morning, as I watched banks around the world cut interest rates and market participants recognize the move as if it were a handjob proffered at the prom (in the immortal words of Turtle, "Who the f*** wants a handjob?"), it struck me that even if the global economy isn't f'd, a lot of people think that it is. But like I've said previously, the world's been a pretty stuck-up place over the last decade; maybe a good f'ing is exactly what it needs (I would like to see the Journal describe the global correction as such).

Anyway, despite considering myself an optimist, it's pretty hard not to let this sort of thing bring you down when all you do is read about it, talk about it, and literally watch it happen all day, five days a week. So this morning I did what any good analyst does when he's faced with a set of facts that he doesn't enjoy - I buckled down, and let my mind steadily wander away from reality. At one point, I had the thought, If the me of 50 years from now could say something to me today, what would he say?

Dear Kenneth,

First of all, I want you to know a few things. McCain did die shortly after 2008, so you made the right move. Also, I still haven't seen a major sports championship in Philly, so don't get your hopes up. Lastly, the third installment of Nolan's Batman was good but it was no Dark Knight. That said, the remake of the remake of the remake of The Longest Yard just won Best Picture.

I'm writing you this letter because I know the country is going through a tough spot right now. Despite Douglas Adams' advice, everyone has panicked. But, don't sweat it - things in 2058 are pretty sweet. (Yes, you still say "sweet" fifty years in the future). I mean, we're starting to have an ozone layer again, which is nice; I forgot how cute polar bears are. Hunter Manning just threw 72 TDs last year. Chris Rock Jr.'s delivery actually gave someone an aneurysm at his show last week. But I digress.

Listen, slick - the economy is going to be fine. Despite the unconscionably irrational fear in the markets, the U.S. of 2008 is still home to the best economy on the planet. Was then, is now, too; GE actually bought two countries in Africa last quarter, people and everything. And you know how you think it's ironic that credit spreads have blown out to historically high levels just as the largest retiree population the U.S. has ever seen is coming to prominence, sending the long-term, underlying demand for fixed income products through the roof? And you know how you think that over time, this demand shift will probably make fixed income a good bet as an asset class? Totally happened. By the way, MGM Studios? Still hasn't sold its library or re-financed its debt, but the loans feel pretty covered at current levels.

Oh, and you do eventually write something worth reading - but I'm not telling you when.

Even our hindsight needs glasses,

Kenneth

Chairman & CEO, KND, Inc.

p.s. Our bar in New Zealand is killing it.

Securities & Exchange Commission: Dropping the Ball Since '04

Anal_yst — Sun, 05 Oct 2008 14:40:50 -0400

Great piece in the NY Times about the 2004 SEC ruling which allowed the Investment Banks to substantially increase their debt load. (HT Francine @ re:the auditors). I strongly suggest you read the entire article to get the full story, which is essentially one of complete and utter regulatory ineptitude. For those of you with some time to kill this week, you might even want to check out the complete 55-minute audio clip of the actual meeting from the Times as well. (Ed: if anyone actually gets through it let me know )

This is one of my favorite (among many) choice bits from the article:

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”

Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.

Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.

Uh, so the most prescient thing to come out of that meeting, Mr. Goldschmid's quote above, was received with "nervous laughter"? Seriously? And their brilliant idea to "hire the best minds"? Really? How the hell did the SEC expect to hire the brightest minds when the very banks they're supposed to be watching over pay 10+ times more?

Maybe step 1 should have been to take a good look in the mirror:

“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”

Best minds and those with strong quantitative skills indeed!

I don't doubt Campos' intellectual capacity, but having a former prosecutor/small business owner decide on complex financial regulations is akin to an Investment banker trying to diagnose cancer. Sure, both may have the raw mental capacity and some tools with which to partially understand whats going on, but that hardly makes either an expert on the subject. This of course is to say nothing of the fact that several people at this infamously historic meeting seemed to be acutely aware that they were tempting fate.

A regulatory philosophy based on a hope and a prayer (or crossed fingers) does not a good strategy make (duh?).

Its almost cliche at this point, but what this comes down to is just another classic case of regulatory hubris, of no one stepping up to question what would happen if, or when their best laid plans (inevitably) went awry. I hate pointing fingers, and its something we consciously try to avoid here, but there appears to be indisputable evidence that the SEC had its head shoved firmly up its ass on this one.

Too bad "main street" will never understand. Call me a cynic (true), but inevitably most of the MSM will continue to focus on the "Wall Street Bailout" angle, not that I expect the layman to particularly understand or care about how badly the SEC let them down.

Golf Clap to Stephen Labaton and the Times on this one.

Presented Without Comment...

Anal_yst — Sat, 04 Oct 2008 09:56:17 -0400

SEC, FASB, FAIL

Anal_yst — Wed, 01 Oct 2008 20:54:35 -0400

Earlier today, the SEC and FASB issued a press release meant to address concerns about the effects of mark-to-market accounting, specifically FAS 157, as they relate to the current financial "crisis". I’ve been working on this in much greater detail for the past week or two (check out the re:the auditors for some interesting perspectives until I get around to finishing, eventually) but below I’ve presented an easily-understandable translation of the SEC’s responses to their own FAQ’s:

Q: Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

A: Yes, no, maybe, sometimes. It depends. Really, we're just clarifying the already vague language of FAS 157 (etc) with even more vague, open-ended language. Thats just how we roll (, dawg).

Q: How should the use of "market" quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?

A: Yes, but only if it represents an actual transaction price and/or a binding offer. Unfortunately, since auditors and internal valuation groups have been using pricing services as the de facto source for the past few years as if it was level I-type information (when in fact the price may come from the service’s models or other data), this doesn’t much help now. Add to the fact that per Deloitte's own survey on Fair Value Pricing (2008),

"Over 46 percent of survey participants stated they have at least two full time resources focused on fair valuation as compared to 29 percent last year."

Uh, so 54% use 2 (or fewer) sources? How encouraging...

Q: Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

A: Last line of their explanation pretty much sums it up:

“Determining whether a particular transaction is forced or disorderly requires judgment.”

Oh, thanks for clarifying. Read the press release (or the original FAS 157 guidelines), FAsb's means of defining terms here is a serious clusterf*ck of the most circuitously ambiguous kind. Worse than interest expense (#ERROR) in a merger model, I shit you not.

Q: Can transactions in an inactive market affect fair value measurements?

A: Again, last line sums it up:

” The determination of whether a market is active or not requires judgment.”

No shit, sherlock.

Q: What factors should be considered in determining whether an investment is other-than-temporarily impaired?

A: Uh, I’ll take D – all of the above?; Again, lots of ambiguity and words in “” marks like “Rules of thumb” and “reasonable judgement”.

Summary: More ambiguous bullsh*t from some of the same schmucks whose bright idea(s) played no small part in getting us into this mess in the first place. Who knows, they’ve got a “meeting” coming up shortly, maybe (hopefully) they’re just saving the big reveal (step 1: remove head from ass…) for Friday?

Marc Ecko: Gentleman & Patriot

Anal_yst — Tue, 30 Sep 2008 16:56:47 -0400

While I work on some serious posts about the wonders of mark-to-market accounting and other fun stuff, I figured on this Rosh Hashana, a few of you could probably use a little pick-me-up.

Its good to know that while the financial sector is on the verge of epic fail, our own apparel industry is picking up the slack. We support globalization, clearly, but in trying times like these we need American entrepreneurs and business owners like Marc Ecko. Just-in-time inventory management is old news. Bikini-clad line workers? That's what we call innovation.

Respect, Mr. Ecko, respect.