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  • 5 Things the Treasury Should Clarify Now
    Actually, there is a way to figure out the hold-to-maturity value of these securities. Step 1: Mark the collateral to market. Step 2: Assume that every debtor who owes more than the collateral is worth will default. Step 3: Assume that every insolvent (liabilities exceed assets) debtor will default. Step 4: Assume that the remaining securities will perform in line with historical norms. Step 5: Add up all the numbers.

    Oversimplified, certainly, because of the difficulty of computing the cash flow from CDOs based on the cash flow from the underlying loans. But none of these steps requires much guesswork and the approach is clearly reasonable. Given that my money is to be spent buying toxic paper (a use of it which is outside the legitimate scope of government and unconscionable in any case), I would not object to the prices paid being based on this approach.

    The biggest problem is that tens of millions of American households are insolvent and any who purchased a residence in the past 5 years is likely to have negative equity. The collateral is likely worth less than two-thirds of its appraised value at origination. And thanks to ultra-loose Fed policy and mortgage rates artificially depressed by Frannie, most of the coupons are at rates well below inflation. So the true discounted hold-to-maturity value of the underlying mortgages might well be no more than 40-50% of par, making most subordinated paper ultimately backed by these loans worthless. And in any case, the more inflationary the bailout, the less valuable these long-term fixed-income securities become. It seems unlikely that giving the banks anything resembling an objectively fair price for this paper would actually improve their solvency. So any reasonable observer is forced to conclude that the intent of the bailout, indeed its purpose, is not to provide liquidity to holders of unmarketable securities but a simple and permanent transfer of money from the Treasury to the banks. If the eventual discounted losses are less than half the amount "invested", it would be a pleasant surprise. There is simply no possibility that any reasonable model-based pricing strategy would result both in full recovery of value and an improvement in bank solvency, although by sufficiently understating the devaluation of the dollar for a sufficiently long time, it may be possible to come close. No doubt this is their plan; indeed, it's the plan they've been executing for decades already.
    Sep 25 11:31 am |Rating: 0 0 |Link to Comment |View article
  • Buffett: I Was Wrong on Anheuser-Busch
    granger, Owen, et al hit the nail right on the head. Nobody ever went bankrupt taking profits, and he even kept some skin in the game in case he was wrong. His shareholders made money; when you're in a position in which you win big if you're right and win even bigger if you're wrong, you've done your job very well indeed.
    Aug 27 00:11 am |Rating: 0 0 |Link to Comment |View article
  • Yet Another Reason Not To Sell Your Berkshire Hathaway Shares
    I saw a similar thing with new and thinly-traded PST a couple days ago. It appears that someone placed a market buy order at open with no active trades occurring; the best ask was 399.99 for a share worth maybe 72. Either 200 shares changed hands at a price more than 5x fair value or this was a bad print. Either way, these anecdotes serve as reminders to investors to be wary of market orders - and market data - in illiquid issues. I find it hard to believe an experienced trader would ever fall victim to such an error but one never knows.
    Jun 05 12:11 pm |Rating: 0 0 |Link to Comment |View article
  • Buffett Reflects on Great Businesses: Raising Prices
    Pricing power is a wonderful thing, and in places like Brazil and China where people have real wealth, it would be a powerful attraction. But in poor countries like America, I'll stick with commodities. Nobody there has any pricing power, but you can have all the pricing power in the world over your candy or your white plastic computers and it won't do you a bit of good if your potential customer just maxed out his credit card buying a loaf of bread and a tankful of heating oil.
    May 17 00:08 am |Rating: 0 0 |Link to Comment |View article

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