Monday, September 15, 2008

Subprime Confusion

I think that until one gets a full disclosure as to what kind of assets were on Lehman's books, it is too early to say anything really smart about the Lehman meltdown. Hopefully, they will have something like UBS's report to shareholders, that went over very precisely what went wrong. That is, what kinds of Asset Backed Securities, or credit default swaps, were on their books? One needs to know not just the 30,000 feet level, but the actual type, their subordination. I haven't seen any of that. I suspect they had assets that, marked to comparable securities, made them insolvent. But back in 1980, most of the financial system was insolvent, but back then very little of their balance sheet was marked to market, so they lived through the high interest rates. I imagine back in 1970, it was similar, but with the 'banking book' not being marked to market, only insiders from back then know.

It's an interesting issue, because as we see with closed end funds, the market value can diverge from net asset value. I'm not clear that this Lehman bankruptcy was necessary or appropriate, but I don't have much information. I'm doing some bottom up work on mortgages now, and can tell you that figuring out their valuation is very difficult.

But I do love Paul Krugman, who confidently asserts that the answer is more regulation, without any evidence that more regulation would have mitigated this. The government, and the regulators, were behind this 'ownership society' push. I think its implausible to think that more resources would have changed that focus. They might have made it worse.

8 comments:

Anonymous said...

i think they gonna let aig fall based on the liquidity added overnight by everyone. look out below

Anonymous said...

Sounds like you advocating that some other way, besides the market, is used to value securities in a bank's portfolio. What are the options?
Value at cost would obscure bad management decisions, and give an incentive to let these things go unaddressed.

Anonymous said...

what a disgrace greensberg's interview on cnbc....entertaining at the same time to see them hat in hand

Anonymous said...

they ain't gonna let AIG fall, they're going to buy it. They being us, sorta of but not exactly.

Anonymous said...

I forsee a game theory paper about, if your company is going to fail, what order in the begging-from-govt. queue you shoot for to maximize the probability of a bailout. Like, if Lehman had beat Bear to the punch the situation might be reversed...

J said...

I have no reliable information, but my impression is that mortgages are being paid and more than the regular amount of credit is available. What is happening is a regular run on the banks. This is the mythical time when blood is running on Wall str. Now is the time to buy on credit.

Camabron said...
This comment has been removed by the author.
Anonymous said...

At heart this entire crisis is due to a lack of oversight from the SEC which under the oligarchic system present in the US, has been in bed with the federal government and allowed the wall street firms to run loose. In fact the whole problem with the economic system in the US is that corporations are the ones really running the federal government, ie big business in bed with big government. It's easier to bribe one big entity than 50 different ones at the state level.