1-2 Knockout

What Do You Value?

The "American Dream" upon which Obama routinely waxes-bullshit (McCain is just bad on this front, in fairness) is not - contrary to what he and many of his supporters think - that everyone has the god-given right to be financially well-off.

Before the Obama freaks inevitably jump down my throat, let me state this as clearly as possible.  

Warning:

This is a non-partisan post.  I do not support Obama or McCain.  Let me repeat:  I am completely Party and Candidate-neutral in this election.   This is an examination of concepts central to this election, and the philosophies behind them.  This post is not intended to be, and in no-way represents an endorsement or criticism of any Candidate beyond the issues discussed.  In the next few weeks, we'll likely be posting new material lambasting both McCain and Obama, so please don't be so quick to judge.   

Now that we've gotten that out of the way (although I expect the attempt will inevitably be in vain), the WSJ describes the differences between Obama and McCain's "value-based" tax plan:

Sen. Obama replied that it's a matter of values. His plan values work, not just wealth, he said. And after largely dodging Joe the Plumber, Sen. Obama referred to him on Saturday as one of the working people who would receive a tax cut under his plan.

"It's time to give a tax cut to the teachers and janitors who work in our schools; to the cops and firefighters who keep us safe; to the waitress working double shifts, the nurses in the ER," he said. "And yes, the plumbers, fighting for the American dream."

I want to focus on one clause in that statement for a moment, "His plan values work, not just wealth." Let that sink in for a second.  Obama tacitly acknowledges that work is valuable.  However, based off the subsequent paragraph, above, he fails to make the connection that not all work has the same value, which in capitalistic society is commonly measured by the price paid for that work.  (ed: A deeper discussion of the price paid for work being an accurate measure of the value society attributes said work is beyond the scope of this discussion, for another time though for sure, 1-2 care to give it a shot?) My job, for example, is not nearly as valuable or more accurately, not priced as highly as that of a surgeon, an all-star trader, a talented architect, etc, all of whom likely make several times what I do (just take my word for it). 

Quote of the Day

Not trying to copy LoSC, but this quote - in an entirely unsuspected place - sums up what I've been trying to explain to several friends and colleagues who have yet to grasp the severity of our current economic woes.  From the NYT Digital Domain Section:

If the recession is severe, “eventually, everybody gets slaughtered at some point."
--Tavis McCourt, Analyst, Morgan Keegan

There will be firms that may benefit from the carnage over the long-term (Best Buy's inevitable dominance once Circuit City bites the bullet, hedge funds that successfully profited from the insane vol we've been seeing, etc).  However, a rising tide lifts all ships, and vice versa.  Watch out for beta, kids.

Lies, Damn Lies, and The New York Times

We generally try to maintain a reasonable level of tact and respect for fellow writers here, but sometimes we come across something so disappointing that the gloves simply must come off.  With that disclaimer in mind, I can't help but ask:

Floyd Norris, are you freaking kidding me?  As if the quality of financial journalism (especially over the past year or so) wasn't already a virtual oxymoron, we have to deal with "the chief financial correspondent of The New York Times and The International Herald Tribune" writing crap like this?

The CFA Institute, the organization of certified financial analysts, distributed a questionnaire to its members on Thursday, and so far has received more than 5,000 responses from people whose job it is to review financial statements and make investment recommendations.

A College newspaper could do better, jeeze!  Seriously, the 1st line man?!?!  CFA = Chartered Financial Analyst, this isn't rocket science buddy.  Lets not even talk about how you can write about a survey without providing a single, solitary link or other reference to prove that it actually, ya know, exists.  After reading your post, for all anyone knows you might as well have made the whole thing up (and kind of did anyway, ironically enough).  Are you seriously that much of an interweb n00b?  Hell, any armchair blogger worth their weight in ratings reports could do better, from their Blackberry none-the-less. 

For the record, the CFA Institute actually did publish the details of its survey (learn to use the Google Machine, son), and there are some salient details Mr. Norris failed to point out, like, oh, it was actually a "global member poll on governments’ attempts to stabilize the markets and liquidity," a fact Mr. Norris conveniently omits, among several others...

The End is Nigh': Estrogen Edition

Tyler Durden: We're a generation of men raised by women. I'm wondering if another woman is really the answer we need.

or

And so I went in secret off to Delphi.
Apollo sent me back without an answer,
so I didn't learn what I had come to find.
But when he spoke he uttered monstrous things, strange terrors and horrific miseries—
it was my fate to defile my mother's bed,
to bring forth to men a human family that people could not bear to look upon,
to murder the father who engendered me.

In case no one noticed, the end may be near.  Number six on my checklist (below Republicans Lose South and above Krugman Wins Nobel) is "Major Financial Publication Run by Women". 

Difficult as it is to admit, the domination of venerable Financial Tabloid, Dealbreaker.com (is that an oxymoron?) by estrogen in the forms of Bess Levin, Equity Private, and Muffie Benson-Perella has forced me to concede that the end may in fact be near. 

For years the Wall St. archetype has been that of a chauvinistic, sex-driven, middle-age male making up for his lack of high school social rank (ARS we're looking at you).  He held numerous secret affairs, with helpless women, whose only shot was to sleep their way to the top.  Women were ghosts on Wall St.  Afterthoughts. 

Not any longer.  Now, just as mother used to with Cinnamon Toast Crunch on Saturdays they spoon feed us our news, gossip, and channel our intellectual curiosities where they see fit. 

Once upon a time one could rebel against the Oedipisian complexes festering in the male Wall Streeter's heart, for once we left our nests we were free to be men--at least until some slog convinced us we needed their protection yet again. 

Now there is no respite, no escape, no "happy little cave"  for us to hide in.

We, fellow Wall St. males are now a thing of the past, obsolete, and merely an appendage of the female new world order. 

The end is near friends, the end is near.

PS - You ladies can bathe me in your liquidity any time.

The Great Obama!

Looks like ol' Rupe (Murdoch) isn't sitting idly as we head towards election day.  Reprinted in full from the WSJ, in all of its sarcastic, bullshit-calling glory:

And now, America, we introduce the Great Obama! The world's most gifted political magician! A thing of wonder. A thing of awe. Just watch him defy politics, economics, even gravity! (And hold your applause until the end, please.)

To kick off our show tonight, Mr. Obama will give 95% of American working families a tax cut, even though 40% of Americans today don't pay income taxes! How can our star enact such mathemagic? How can he "cut" zero? Abracadabra! It's called a "refundable tax credit." It involves the federal government taking money from those who do pay taxes, and writing checks to those who don't. Yes, yes, in the real world this is known as "welfare," but please try not to ruin the show.

Guest Post: The Year 2058

From The Man Upstairs:

This morning, as I watched banks around the world cut interest rates and market participants recognize the move as if it were a handjob proffered at the prom (in the immortal words of Turtle, "Who the f*** wants a handjob?"), it struck me that even if the global economy isn't f'd, a lot of people think that it is.  But like I've said previously, the world's been a pretty stuck-up place over the last decade; maybe a good f'ing is exactly what it needs (I would like to see the Journal describe the global correction as such).

 

Anyway, despite considering myself an optimist, it's pretty hard not to let this sort of thing bring you down when all you do is read about it, talk about it, and literally watch it happen all day, five days a week.  So this morning I did what any good analyst does when he's faced with a set of facts that he doesn't enjoy - I buckled down, and let my mind steadily wander away from reality.  At one point, I had the thought, If the me of 50 years from now could say something to me today, what would he say?

Securities & Exchange Commission: Dropping the Ball Since '04

Great piece in the NY Times about the 2004 SEC ruling which allowed the Investment Banks to substantially increase their debt load. (HT Francine @ re:the auditors).   I strongly suggest you read the entire article to get the full story, which is essentially one of complete and utter regulatory ineptitude.  For those of you with some time to kill this week, you might even want to check out the complete 55-minute audio clip of the actual meeting from the Times as well.  (Ed: if anyone actually gets through it let me know )

This is one of my favorite (among many) choice bits from the article:

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”

Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.

Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.

Uh, so the most prescient thing to come out of that meeting, Mr. Goldschmid's quote above, was received with "nervous laughter"?  Seriously?  And their brilliant idea to "hire the best minds"?  Really?  How the hell did the SEC expect to hire the brightest minds when the very banks they're supposed to be watching over pay 10+ times more? 

Maybe step 1 should have been to take a good look in the mirror:

“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”

Best minds and those with strong quantitative skills indeed! 

I don't doubt Campos' intellectual capacity, but having a former prosecutor/small business owner decide on complex financial regulations is akin to an Investment banker trying to diagnose cancer.  Sure, both may have the raw mental capacity and some tools with which to partially understand whats going on, but that hardly makes either an expert on the subject.  This of course is to say nothing of the fact that several people at this infamously historic meeting seemed to be acutely aware that they were tempting fate. 

A regulatory philosophy based on a hope and a prayer (or crossed fingers) does not a good strategy make (duh?).

Its almost cliche at this point, but what this comes down to is just another classic case of regulatory hubris, of no one stepping up to question what would happen if, or when their best laid plans (inevitably) went awry.  I hate pointing fingers, and its something we consciously try to avoid here, but there appears to be indisputable evidence that the SEC had its head shoved firmly up its ass on this one. 

Too bad "main street" will never understand.  Call me a cynic (true), but inevitably most of the MSM will continue to focus on the "Wall Street Bailout" angle, not that I expect the layman to particularly understand or care about how badly the SEC let them down. 

Golf Clap to Stephen Labaton and the Times on this one.

Presented Without Comment...

SEC, FASB, FAIL

Earlier today, the SEC and FASB issued a press release meant to address concerns about the effects of mark-to-market accounting, specifically FAS 157, as they relate to the current financial "crisis".  I’ve been working on this in much greater detail for the past week or two (check out the re:the auditors for some interesting perspectives until I get around to finishing, eventually) but below I’ve presented an easily-understandable translation of the SEC’s responses to their own FAQ’s:

Q: Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

A: Yes, no, maybe, sometimes.  It depends.  Really, we're just clarifying the already vague language of FAS 157 (etc) with even more vague, open-ended language.  Thats just how we roll (, dawg).

Q: How should the use of "market" quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?

A: Yes, but only if it represents an actual transaction price and/or a binding offer.  Unfortunately, since auditors and internal valuation groups have been using pricing services as the de facto source for the past few years as if it was level I-type information (when in fact the price may come from the service’s models or other data), this doesn’t much help now. Add to the fact that per Deloitte's own survey on Fair Value Pricing (2008),

"Over 46 percent of survey participants stated they have at least two full time resources focused on fair valuation as compared to 29 percent last year."

Uh, so 54% use 2 (or fewer) sources?  How encouraging...

Q: Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

A: Last line of their explanation pretty much sums it up:

“Determining whether a particular transaction is forced or disorderly requires judgment.”

Oh, thanks for clarifying.  Read the press release (or the original FAS 157 guidelines), FAsb's means of defining terms here is a serious clusterf*ck of the most circuitously ambiguous kind.  Worse than interest expense (#ERROR) in a merger model, I shit you not.

Q: Can transactions in an inactive market affect fair value measurements?

A: Again, last line sums it up:

” The determination of whether a market is active or not requires judgment.” 

No shit, sherlock.

Q: What factors should be considered in determining whether an investment is other-than-temporarily impaired?

A: Uh, I’ll take D – all of the above?; Again, lots of ambiguity and words in “” marks like “Rules of thumb” and “reasonable judgement”.

Summary: More ambiguous bullsh*t from some of the same schmucks whose bright idea(s) played no small part in getting us into this mess in the first place.  Who knows, they’ve got a “meeting” coming up shortly, maybe (hopefully) they’re just saving the big reveal (step 1: remove head from ass…) for Friday?