Comments on: Witnessing History http://alephblog.com/2008/09/16/witnessing-history/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 18:05:33 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Jeffhttp://alephblog.com/2008/09/16/witnessing-history/comment-page-1/#comment-18815 Jeff Wed, 17 Sep 2008 16:26:56 +0000 http://alephblog.com/?p=918#comment-18815 I pulled a few of these together last night for RealMoney. My idea was to explain why the rule was important -- in part because it raises a barrier to private solutions. Even potential buyers with strong balance sheets may balk at the capital requirements. If you get a "good deal" on a buy, it costs more on your other marks and everyone else's. So when they all follow your liquidity precept, there is little alternative but government action. I think you know that I do not mean to "lay the blame" on FAS 157 alone. I do think that the accountants do not have sufficiently broad perspective to set our national policy. I pulled a few of these together last night for RealMoney. My idea was to explain why the rule was important — in part because it raises a barrier to private solutions. Even potential buyers with strong balance sheets may balk at the capital requirements. If you get a “good deal” on a buy, it costs more on your other marks and everyone else’s.

So when they all follow your liquidity precept, there is little alternative but government action.

I think you know that I do not mean to “lay the blame” on FAS 157 alone. I do think that the accountants do not have sufficiently broad perspective to set our national policy.

]]> By: David Merkelhttp://alephblog.com/2008/09/16/witnessing-history/comment-page-1/#comment-18808 David Merkel Wed, 17 Sep 2008 03:56:58 +0000 http://alephblog.com/?p=918#comment-18808 Jeff, I agree, but I go back to my main discipline when I was an insurance risk manager -- liquidity analysis. Never finance illiquid assets with liquid liabilities. Almost all financial failures can be boiled down to that, though one has to broaden the paradigm for ratings triggers and other contingent demands for liquidity. Illiquid assets, if financed with equity or non-putable debt, won't kill any company. That doesn't mean the strategy will succeed, but it does mean they won't face a "gun to the head" scenario. I saw three or four articles yesterday that laid the blame at the feet of FAS 157. It's hooey, but none of them stood out enough to make me link to them. I just saw a trend -- the only other one is blaming short-sellers -- the last resort of those scoundrels who bought companies with bad balance sheets. Jeff, I agree, but I go back to my main discipline when I was an insurance risk manager — liquidity analysis. Never finance illiquid assets with liquid liabilities. Almost all financial failures can be boiled down to that, though one has to broaden the paradigm for ratings triggers and other contingent demands for liquidity.

Illiquid assets, if financed with equity or non-putable debt, won’t kill any company. That doesn’t mean the strategy will succeed, but it does mean they won’t face a “gun to the head” scenario.

I saw three or four articles yesterday that laid the blame at the feet of FAS 157. It’s hooey, but none of them stood out enough to make me link to them. I just saw a trend — the only other one is blaming short-sellers — the last resort of those scoundrels who bought companies with bad balance sheets.

]]> By: Jeffhttp://alephblog.com/2008/09/16/witnessing-history/comment-page-1/#comment-18807 Jeff Wed, 17 Sep 2008 03:36:12 +0000 http://alephblog.com/?p=918#comment-18807 Who thinks that FAS 157 "caused" this problem? Not I. Meanwhile, it does not work well for illiquid holdings. Examples abound. Most corporate bonds do not trade that much. Plenty of CDO's trade only at fire sale prices. AIG had business lines that cannot have no direct comparison. Many portfolios contain holdings that have little trading. Your choices (and mine) can be readily marked to market, but the world is more complex. There is a real issue here -- how to value illiquid holdings. Sometimes a well-constructed model is better than a trade..... Who thinks that FAS 157 “caused” this problem? Not I.

Meanwhile, it does not work well for illiquid holdings. Examples abound. Most corporate bonds do not trade that much. Plenty of CDO’s trade only at fire sale prices.

AIG had business lines that cannot have no direct comparison. Many portfolios contain holdings that have little trading.

Your choices (and mine) can be readily marked to market, but the world is more complex.

There is a real issue here — how to value illiquid holdings. Sometimes a well-constructed model is better than a trade…..

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