CIT and Goldman Sachs

Missmc is still on the Halloween theme. The deadline for the CIT debt exchange is October 29th. If it fails, bankruptcy would be filed in the days following. How fitting. The FT is also obsessing over the CIT thing and two articles appeared over the weekend which discuss the relationship Goldman Sachs has with all this. No doubt, the Goldman conspiracy theorists are chattering again. The FT held back, but, did slide in the adjective "perverse"...in a really polite way.

These articles are apt to cause confusion as there are two issues and two FT articles. Firstly, as stated here, Goldman provided rescue financing last summer with an agreement that they would be paid 1billion if the company goes bankrupt or defaults. The second FT article concerns itself with a second source of profit for Goldman should CIT file bankruptcy. They are indeed a large holder of credit default swaps on CIT. The amount, and who is standing on the other side of these holdings is unspecified. You may read about it on the FT website here.

Do accounting changes make economic changes?

This seems like old non-news to me, but here is an article on Bloomberg regarding AIG's credit default swaps and the ongoing risks of such things.  

An excerpt:

The $192.6 billion figure for the swaps is comprised mostly of $99.4 billion tied to corporate loans and $90.2 billion linked to prime residential mortgages, the insurer said in a May 7 filing. The combined total was reduced from $234.4 billion on Dec. 31.

Most of the home loans tied to the European swaps are first-lien mortgages for owner-occupied properties, the insurer said in March. The other transactions include secured and unsecured corporate loans.

The fair value of the derivative liability was $393 million as of March 31, compared with $379 million on Dec. 31, according to AIG filings.

But I think the new news part of it has to do do with the reclassifying of the reporting of these securities as "risks".  I could be wrong as the article is a bit shy on nitty-gritty-detail.  Missmc is confused because the last she heard on the topic was that the diminished value of these securities did not have to be accounted for as losses by the banks if they were held to maturity.  And that might be why Citigroup is still alive.  Murky murky murky complex changes.  Do accounting changes make economic changes?

When the loss is lost (but you can't say that), it is risk.  It does all make sense, but, only theoretically. 

The Gem of Tanzania Part II

The Gem of Tanzania is featured in today's FT.  More of the story is pieced together and a bit of movie style enhancement is included.  The stone's original owner, Trevor Michael Hart-Jones is quoted saying

"The stone is jinxed"..."It was bad luck and from the moment I bought it everything went wrong".

Did you know Missmarketcrash is a certified Gemologist?  Back in the early 90's during the recession I was unemployed.  I applied week after week for this and that.  Growing despondent, I invented a game to keep motivated whilst looking for a job. Each week, I would pick the job I was most unqualified for, and, re-write my resume and cover letter.  It provided good relief and a few laughs.  Until they called.  The Gemological Institute of America phoned to arrange an interview.  I kept a straight face whilst on the phone, and then, burst into laughter.  

Off I went to the interview on 47th Street, Diamond Row.  A very subtle door led through a labyrinth of security.  I was given a series of tests in a dimly lit room.  One involved a row of 12 diamonds, others involved different coloured pegs.  And there was a psychological exam.  A week later, I was called in for a second interview.  I accepted the job with a straight face though I was still in it for a lark.  Whilst employed I powered through a bunch of courses and became a certified gemologist.  It was a very odd world.  I evaluated stones from Christies and Sotheby's as well as from a host of diamond dealers.  Much of the job was spent in a dark room with a microscope, but, once a week we worked the front office and took gems in from the customers.  The dealers were primarily Hasidic Jews and the most marvelous things would emerge from pockets wrapped up in paper packets.  Once, a dealer lifted up his son's yamulke and plucked an astonishingly large blue star sapphire from underneath and handed it over.

Now.  Value is something that is never assigned by any expert gemologist.  A gemologist is concerned with the quality of gems, never the worth.  An uncut stone may be called a derivative product as its value is dependent on the value of it being something else.  And that something else is a bunch of cut stones.  The uncut stone can be best assessed by a master cutter rather than a gemologist, or an insurer.  At the end of the FT article, the original mine suggests that its value may well be accurate if it were cut unto hundreds of smaller jewels.  So, does the mine know it is not of sufficient quality to yield one amazing gigantic stone?  Well, you'd have to go ask them a bit more.  If it could be one amazing stone and a few little offcuts, it would deserve the title "The Gem of Tanzania".  But, as it is likely to yield hundreds of ordinary rubies of unknown color and clarity and size, it is perhaps not worthy of a title yet.

However, now that "The Gem of Tanzania" has been declared jinxed, it's value can forever remain in dispute. Somewhat like what has happened to credit default swaps.  Clever move, Mr. Trevor Michael Hart-Jones.

The Enchantress of Numbers...

There is a giant Black Hole at the center of our galaxy the BBC announced today.  What good timing.  Reading on, Dr. Massy said "Although we think of Black Holes as somehow threatening, in the sense that if you get too close to one you are in trouble, they may have had a role in helping galaxies to form - not just our own, but all galaxies"...."They had a role in bringing matter together...

Somehow all this chatter about black holes and bringing matter together brought Missmarketcrash back inside her brain again, to yesterday's mention of the enchanted Ada...

"What about a machine"?  Ada asked with a nervous quiver, one that reflected her naivety. 

"Yes - let's build a most fantastic sort of contraption with input from all types of data from all over the world" she continued breathlessly...."deriviatives trading, housing sales, lending, the equity market, management consultants, anything really".  Let's call the machine umm..."Ada's Box".  As she left the room, Missmarketplace reflected on the notion that Ada was a mathematically-inclined daughter of an Important Poet.   And this Important Poet was scandalous and beautiful on all fronts -- a reckless attitude toward money, promiscuous in all ways...the perfect man to be involved in such a mess...why he even wrote something about well, not really black holes, but darkness... once...

So Ada's Box could be open source free love and could entice bored computer programmers to send in data from wherever it is they are working.  This data could rely on the self-same computer programmers to spot Interesting Things and write more open source programs to spot Interesting Things.  It would not be run by economists, or governments, or companies.  Just a bunch of open-source programmers.

So - would that just inspire chaos?  Would anything reliable come out of it?  Would any company agree to such a thing?  It would have to somehow become anonymous data as soon as it went in, encrypted identities if you'd like.  There would certainly be villains as programmers are naturally inclined in that direction, but, would it actually function reasonably well - a la Wikipedia?  And then, in this black hole of data - high-speed star formations such as enormous growth in various derivatives or other invented things might be seen before they get too large?  Maybe?

Or has Missmarketcrash been fantasizing too much again?

Dopplegaenger

After a brisk and invigorating arctic tennis lesson with the lovely self-contented and incredibly boyish M. this morning Missmarketcrash started reading the Frankly-Disasterous news.  Hedge Funds?  Scissors please.  Unless you are in the industry you have probably never noticed just how ridiculous Hedge Funders look.  Missmarketcrash thinks a trim of all that silly long hair is in order to match the horrific returns on offer.  No wonder they have mistresses.  No self-respecting wife would ever ever ever get excited by that look.

Looking elsewhere for excitement, Missmarketcrash found herself wandering around her own head which is generally full of better visions.  And then she appeared.  The double of Missmarketcrash, her spitting image came waltzing through, a barely apparent swagger, those slightly opened lips, the same skeptical tilt to her left eyebrow - everything looked the same.  But ah, she was slightly different inside.  The dark laughter had been swept away.  Minor characters had been renamed with evocative names like Ada and Swin.  She was filled with the purest glee and had no knowledge of anything horrid.  She was the Good one.  She dismissed the news of two French and one German bank on the brink of major CDS disaster as pure scare-mongering.  She thought it was funny that a risk analysis company had a little game online where one could hypothetically merge banks and look at the outcome.  She delighted in the idea yesterday's meteoric stock market rise might mean something good.  

Then, like a bubble popping, she disappeared.