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.


The Blackstone Group, Since IPO
(daily chart, one year)




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? 
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



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Category: Corporate Management, Credit, Derivatives, Finance, Valuation

Look Out Below

Category: Markets

The Atlantic on Rupert Murdoch

We looked at what Murdoch was altering at the WSJ not too long ago in Murdoch’s WSJ Changes Creates Opening for NYT, FT.

Rupert Murdoch: The Last Hope for Journalism?

Part I: Murdoch’s Methods

Parts II & III after the jump.

Murdoch’s WSJ Changes Creates Opening for NYT, FT (April 2008)

Mr. Murdoch Goes to War    
Mark Bowden 
Atlantic, July/August 2008

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Category: Financial Press, Video

Book Review: Confessions of a Subprime Lender

Category: Books, Real Estate

Lehman Brothers $20 Price Target Complete

Category: Quantitative, Short Selling, Trading

Why the Disconnect: Population vs Pros, part II

Category: Commodities, Inflation, Psychology

Who Killed Bear Stearns?

Category: Credit, Derivatives, Financial Press

Who is Right: Professionals or the Populace ?

Portfolio has an interesting discussion on what they term the “He-Said-She-Said” economy: “Inflation, energy, home prices, and tax rebates. Ordinary Americans and Wall Street professionals are at odds on issues like these and others at the center of the current economic malaise, according to the CNBC/Portfolio Wealth in America survey. And these differences have implications…Read More

Category: Credit, Economy, Employment, Energy, Investing, Psychology

Crude Oil = $143+

Category: Energy, Trading

Chinese Oil Conundrum

China’s subsidized fuel prices worked miracles in the past, but because they hurt energy stocks, they are now a major policy concern.   

click for video




For Chinese, the Reality of Higher Gas Prices   
NYT, June 21, 2008

Category: Commodities, Energy, Markets, Trading, Video