580-Page Report

The report said that investigators “did not find sufficient evidence to conclude that New Century engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings.”

# by stupid-market | 2008-03-27 11:33 | Accounting

Leverage Doesn't Add Value

Oaktree Client Letterより:
First, leverage magnifies outcomes but doesn’t add value.
To simplify for my current purpose, risk comes from the combination of what you buy and how you finance it. You can buy very risky assets, but if you don’t lever up to do so, you’ll never lose them to a margin call. Or you can buy fundamentally safe assets, but the combination of enough leverage and a sufficiently hostile environment can cause a meltdown. In other words, investing in “safe” assets isn’t necessarily safe, particularly if you’ve borrowed to buy them.

# by stupid-market | 2008-03-25 10:41 | Asset Management

Cross Your Fingers

WSJ: How do you know what's safe?

Mr. Gross: You don't always. That's why you stick to the highest-quality investments. We were recently a big buyer of municipal bonds, one-billion-plus. How did we know we paid the best price? We didn't. What we did know was that these are double-A quality credits that have very little chance of going bankrupt. We jumped in and crossed our fingers.

# by stupid-market | 2008-03-24 12:55 | Economy

Fed Fund Question

Paul Krugmanのブログより:
But I have a possibly naive question: can the Fed really cut the Fed funds rate that far? I don’t mean “can” in the sense that other concerns will give them pause; I mean literally — does the Fed really have that ability?

# by stupid-market | 2008-03-21 12:28 | Monetary Policy

Un-Fair Value Accounting

For several quarters, all the investment banks have been taking gains on its liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million.

# by stupid-market | 2008-03-21 12:13 | Economy