October 09, 2008

Poll shows 60% of Americans are dummies

You know, this would have been helpful a week ago Monday when all you morons thought we weren't in any real trouble. And now that we've got things somewhat stabilized, you think the world is about to end.

Maybe, just maybe, it's because they're reading shit like this. My favorite part:

There is trouble here. In the absence of a functioning market, how can the bureaucrats at the Fed figure out the right prices/yields to charge? This is the same problem as valuing level 3 assets, but without a profit motive to aid in focusing the efforts of the businessman.


Point 1 - The Fed can rather easily determine the right prices by cashflow and performance analysis. That price then becomes the new mark to market (see Point 2). For example, if someone is trying to sell a CDO to the Treasury, with a face value of $1 bn, Treasury will do an analysis of the projected yield to maturity taking into the account the performance of the CDO. If 25% is not performing, then a baseline is $750 mn, less the already paid out portion. In general, you'd probably see a discount of 10-20% which would give a price of, say $600 mn. Granted, I'm not breaking out the math and some of these securities are a great deal more complex. However, that's essentially how this works.

Point 2 - The price the Fed pays for one security can be cross applied to a similar security (it only takes one trade to make a market price). Thus, the null valuation for level three assets goes away and suddenly bank balance sheets look a lot better.

Point 3 - The Fed and Treasury are likely to strip these pools apart and separate the good from the non-performing. The NP will then be sold off to loss mitigation folks. The rest of it will be insured and sold back into the market. Why will the market buy it?

Point 4 - The market will buy it because every minute someone sits in cash costs money. It's not just inflation, it's opportunity cost. How long can they afford to sit this out? A month. Maybe.

What's being missed is that this isn't 1929. Things move at speeds that would be unimaginable to the people of that era. The crash was long, drawn out and excruciating. This one has been short, deep and very painful. The recovery took a decade. Now, if it takes a year I'd be surprised.

Could things spin out of control? Sure. Get over it. Simply, it's like worrying about dying. Sooner or later, it'll happen. It's worthless worrying about it.

And quit watching Suze Orman.

(h/t to KT)

Posted by mcblogger at October 9, 2008 09:18 AM

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Your expertise is the market. For many other Americans, their expertise can be law, medicine, teaching, nursing, management, flipping burgers, etc.

They only see what they can get from the few news sources that they watch. Maybe they have soccer practice to take their kids to, or they have to cook dinner, or maybe they are trying to get laid. Reading Barron's is not part of their job or routine.

They rely on "experts" and trained professionals such as yourself, and others on Wall Street. But when something like this happens, while the experts and professionals were steering this ship, can you fault them for their lack of confidence?

After all, they trusted them. As you have pointed out, this is a confidence issue. And people don't have that confidence.

Posted by: YouKnowYouHeartDallas [TypeKey Profile Page] at October 9, 2008 10:59 AM

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