Same As It Ever Was
Welcome to the second half of 2008.
We begin the second half pretty much the same way we finished the first half: Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.
One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.
Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm's one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.
You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.
No, it was the accountants' faults.
You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.
Therein lies the foible of Schwartzman's Folly, for if you own marketable securities for which there is no market, then by definition, these are not really marketable securities.
How then to price all of this paper on the books? Why, just rely on the people who bought them in the first place! Never mind that they don't understand what they own, they failed to do their due diligence before buying this garbage in the first place. Do not acknowledge these folks have an enormous personal incentives NOT to mark this junk down.
You can trust them! They're good people.
Perhaps this helps to explain why Blackstone Group's stock is off nearly 50% since the IPO: The foolish shareholders of BX have been making the mistake of marking the stocks-to-market. My suggestion: Forget that they are a private equity firm, and consider instead your own approximate fair value interpretation of what the company is worth!
Attention fund managers: Here is my new Stephan Schwarzman inspired idea. Y'all should be buying Blackstone in the open market today at $18, and at the four o'clock close, be marking it at $36. That will be not only be your fair value interpretation of what it's worth, but it reflects a 100% gain instantly.
And, that's before the $.30 dividend.
Indeed, for those investors struggling with the current selloff, I suggest you forgo mark-to-market accounting at present, and instead start implementing mark-to-subjective-self-interested valuations. Your portfolio returns, and you're outside investors, will thank you for the immense improvements in your performance.
Musical reference and soundtrack via the Talking Heads
FASB 157 -- Delayed, or Not? (November 15, 2007)
SFAS 157: Market Prices Too Low? Just Ignore Them! (March 31, 2008)
Are Bean Counters to Blame?
ANDREW ROSS SORKIN
NYT, July 1, 2008
Summary of Statement No. 157
Fair Value Measurements
Mohamed El-Erian Argues for Propping Up Asset Prices
Naked Capitalism, MARCH 18, 2008
DISCLOSURE: Listening to self-interested CEOs is not suitable for all investors and involves risk of loss. Although the information contained herein has been obtained from sources believed to be sentient, its reliability, accuracy and completeness cannot be guaranteed. This report has not been reviewed by legal or accounting counsel or Harvey Pitt or anyone of even a modest degree of competency. Followers of this advice may either make a lot of money or go to jail or both. This report is for informational purposes only and under no circumstances is it to be construed as an offer to rub, lick, massage, or touch you there or here or especially here in an inappropriate manner. At various times, we may mock various transactions in the securities referred to herein. Any recommendation contained in this report may be considered sarcasm, but if you failed to recognize that you deserve to lose money.
Your mileage may vary.
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Great idea-er. I'm also going to slap back those Case-Shiller down ticks to my humble abode prior to the meeting with the refi people at Countrywide... er... a... Bank of America... er... a... the soon-to-be Federally-owned Bank America.
Now, let's see... about my Escalade...
Posted by: VennData | Jul 1, 2008 8:01:04 AM
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