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September 30, 2008

Price discovery and bad debt

A key holdup to getting past this crisis is the continuing unknown of the remaining value of mortgage-based securities. In Morgan's day, price discovery resulted when he went around the room seeking details of balance sheets. Today we need to achieve price discovery more actively, such as by holding auctions of the bad debt so that the market can find a new normal. Getting our arms around the scope of the bad debt would define the capital needs for banks, and there would be prices set that potential private-sector buyers of the debt could consider.

There have been few efforts to determine the true value of the mortgage-related securities. One was the 22 cents on the dollar that Merrill Lynch got in July by selling some $30 billion in supposed value of mortgage-backed derivatives for just under $7 billion. The average portfolio might be worth closer to 60 cents on the dollar, but whatever the level, once prices settle, financial recovery can begin.


L. GORDON CROVITZ, Calling J.P. Morgan -- He was more effective than Paulson and Bernanke combined.

September 29, 2008

Greenspan put, Euro Central Bank put

There was a lot of talk about a Greenspan put and whether Bernanke and the FOMC would continue it, or whether they were trying to take it away by holding firm on rates. Whatever the state of that "put" we know now that there is an ECB put for sure, given how quickly the ECB intervened to fend off what it perceived to be a problem. That the ECB flooded the market with liquidity is both interesting, and understandable, given that the ECB doesn't have Lender of Last Resort (LLR) powers.

What should have happened (and this is still a missing piece of information) under the current arrangements within the European system of central banks is that BNP, or any other bank experiencing a liquidity problem, should have had access to its respective central bank's Lombard facility. But the ECB stepped in ahead of the national central banks. The ECB does have the authority to provide liquidity, but doesn't have systemic risk responsibility, except for payments system stability. The event points out how important it is for the ECB to have its LLR powers clearly defined, and there is a need to ensure coordination across the two functions.

-- Robert Eisenbeis, via WSJ.

September 28, 2008

OCC's second Mortgage Metrics Report

The OCC's second Mortgage Metrics Report shows that not only are mortgage repayment plans and especially modifications increasing, they are increasing at a faster rate than new foreclosure starts. One metric in the report is the number of new loss mitigation actions as a percentage of all seriously delinquent loans.

OCC's second Mortgage Metrics Report

September 27, 2008

What we have here is a failure to resuscitate: Paul Newman at 83

Paul Newman Dies at 83. Noted screen actor and Datsun, Porsche driver.
Many great performances over four decades. We recommended "The Verdict" (1982).

September 18, 2008

Culture of credit

Overheard on the internet:

I remember working on an ad campaign for MCI-Sprint at my first agency job out of college. It targeted the poorer areas of Philly, Camden, Newark, etc. The point of the campaign was that you did not have to have good credit or have to go through a credit check in order to receive a phone. When it launched the second question the people were asked was "what credit card would you like to use"'. Not one person at corporate could figure out that people with poor credit generally don't have credit cards.

Posted at Brownstoner by: anon at May 30, 2007 12:06 PM

September 9, 2008

Josh Rosner, Graham Fisher: leverage amplifies losses

As Josh Rosner, an expert on mortgage securities at Graham Fisher in New York noted in a research piece last week, the leverage used to put such securities pools together can amplify losses. For example, a 4 percent loss in a mortgage-backed security held by collateralized debt obligations can turn into almost a 40 percent loss to the holder of the C.D.O. itself.

July 29, 2007
Fair Game
Summer School for Investors Is in Session

It's still summer but as the financial markets declared last week, back-to-school season for United States investors has arrived.

With the equity markets off sharply for the week and the credit markets seizing, investors are being forced to relearn some of the basics forgotten during the private-equity, easy-credit, corporate-buyout boom of recent years.

September 8, 2008

Option Volatility & Pricing: Advanced Trading Strategies and Techniques, Sheldon Natenberg

Option Volatility & Pricing: Advanced Trading Strategies and Techniques
, second edition (1994, Hardcover) by Sheldon Natenberg.

Natenberg not only takes great pains to explain the concept of volatility, in addition to other inputs into an option pricing model, but clearly shows that option pricing isn't the exact science many seem to believe, for the simple reason that we never know if our volatility estimate is correct.

September 6, 2008

Options as a Strategic Investment, Lawrence G. McMillan

Options as a Strategic Investment, 4th Edition (2001), by Lawrence G. McMillan .

Comprehensive and informative. Covers pretty much every conceivable option strategy in the context of both equity and futures options and imparts realistic expectations.

September 5, 2008

Motoring Friday: BMW X5, X6 vs Bill Howard and Dan Neil

The X5 has a feeling of sullen mass being bullied around by unsympathetic power and technology. Put another way: the X5 drives like a Formula 1 forklift. ... A tangled skein of electronics and digitally remastered suspension, brakes, engine controls, all required to negate the effects of more weight, requiring yet more weight (wheels and tires, brakes, engines, up and up and up) ? In this most elegant of vehicles, where's the elegance in that ?

Dan Neil and Bill Howard in 2008 August Roundel.

September 2, 2008

ETF Trends

etftrends is aimed at ETF consumers (written at an AOL-subscriber like level).

September 1, 2008

Shadow Stats: More on Government Economic Statistics

Shadow Government Statistics promises 'Analysis Behind and Beyond Government Economic Reporting': shadowstats.