Monthly Archives: May 2008

Leveraged Cubed

This is just plain shady if true: leveraged, leveraged buyouts?

From the sounds of this article Guy Hands Rejects Bank LBO Debt Offers, Sees Subprime Parallels it seems that banks are participating in a ridiculously sketchy-sounding practice: they appear to be bridging sales of bridge-loans that they can no longer sell to the same private equity firms to whom the loans were originally pledged.

In effect, they are loaning money to the same firms to whom the original loans were made.

This is analogous to a 2nd Mortgage Holder on a home loaning a home buyer money to buy the mortgage on their own house.

It is unclear from the article if the bridge^2 are coming from CLO's but if so, this is really 3 layers of leverage to consumate these transactions.

I am hoping the author either misunderstands or is mistaken about the financing for these deals, but given the last year's events, it is probably accurate. Especially when considering that all involved get paid fees based on a percentage of the total $ value of these transactions, there are issues beyond issues all wrapped up in a shady looking box here.

Signs of the Apocalypse

I am willing to bet that there is a group of radicals huddled up in a cave somewhere with half-eaten cans of beans muttering to one another “see…we were right!”.

According to them, the horrible earthquake in China today, the tragic storm in Burma, and the financial calamities on Wall Street are all part of the same massive scheme…

And they are right! Only the scheme is wrong.

One of the things I noticed today as news of the horrors surrounding the earthquake in China started hitting my Twitter-stream a few minutes after it happened is that it is pretty amazing how fast news travels nowadays. It is only recently with services like Twitter and blogging before it that we have started to utilize this sweet tool called the Internet to its fullest potential.

So, I think the crazy dudes watching the TV screen are witnessing something revolutionary, just they are like those in Plato’s cave watching shadows. You and I, reading these words together on these devices and sharing them with “strangers” half-way around the World – we are outside in the light making that revolution the great thing it is.

Now we need to figure out how to use it to help our friends in China, Burma and elsewhere. Then maybe we can even convince those dudes to get out of the cave.

Mark To…Nothing

I guess another way to stop the bleeding is just to stop valuing assets.

Merrill Says Level 3 Assets Jump 70% in First Quarter

Merrill Lynch & Co. said so-called Level 3 assets climbed 70 percent in the first quarter, as the largest U.S. brokerage reclassified commercial mortgages and other assets as hard to value.

Merrill’s Level 3 assets, the firm’s most difficult to value, rose to $82.4 billion as of March 28 from $48.6 billion at the end of December, according to a regulatory filing today. The New York-based company’s ratio of Level 3 to total assets rose to 8 percent from 5 percent.

As the article goes on to discuss, these so-called “level 3″ assets have continued to spike across the street, including at places like GS, which is well known for having very large private equity interests – a major component of its’ level 3 exposure.

One should note that among the $82.4 billion at MER includes a 20% stake in Bloomberg – in other words it is not all toxic hard-to-hold paper.

Though enough of it probably is that I keep holding SKF as an insurance policy as there are surely some shoes plummeting from far above just waiting for an unsuspecting chart-following optimist.

But nevertheless I am keeping the positive hat on another day.

May Rain

One might wonder how a rainy May afternoon in the midst of finals produces optimism, but somehow this afternoon, as I trudged through an overly-gloomy Cambridge afternoon, I felt another twinge of optimism start to bite.

It was surely not hindered when I turned down to my “device” a few moments later to see yet another optimistic headline from our good friend Mr. Buffett (Buffett Says Credit Crisis Ebbs for Wall Street Firms). However the causation was from another source, with this being yet another example of easy mistakes when like outcomes correlate in expected ways.

Instead, the source of this optimism arose from a somewhat unusual source; in the midst of a recent revisit to the existentialist angst of my undergraduate years over the last few weeks, I realized that one of the implications of the imperfect system of our financial markets is that one can err both on the downside and the upside. The same inability to predict the markets that caused quantitative hedge funds driven by the minds of brilliant PHD’s to crack creates the possibility for better than expected outcomes if we all band together in optimism.

Whether characterized in terms like: consumer confidence, irrational exuberance, or more simple ones like enjoying the weather; people’s perception of world events have very real impacts on how those events materialize in the world. One can see this in concrete terms in the area of quantum mechanics where our observations of subatomic particles literally impacts where they appear in the world. So if we can impact particles, why can’t we make waves in the financial markets?

I would argue that we can, and we will. Whether through the herds that almost submerged Lehman after Bear broke or the dot-com mania of people’s first introduction to the Internet, we have clearly observed that crowds move markets – both on the upside and the downside.

So although we will surely see way too many people lose their homes over the next year, and unfortunately we will also see friends and neighbors lose their jobs. Maybe we can reach out a helping hand to brush off our collective dirty knees…and get back to making this country the great place that it is. Because you never know, it might be sunny tomorrow, or it may rain.