Words, Words, Words-- Show Me!

Posted on April 8, 2009 by Larry Salibra

Well, the accountants are going to show you—you are going to have to accept words not actions. The newest attempt to modify the mark to market rules is nothing more than a rather patent attempt to substitute words for reality. Now you can mark assets to their value in an “orderly” market. Let me translate it—that is in a market in which there are buyers who will pay what you think the asset is worth, not what they think it is worth.


Proponents have argued that this is justified because there is no market for these assets at the present time—really.  There is a market; it is just a lot lower than the banks wish it was. The banks point to the cash flow and say they can discount it to present value. However, like buying a company the dispute is how likely that cash flow will continue—it is all about a dispute over risk. Now the accountants have told us that risk is in the eyes of the seller. We have heard this in the housing market as prices fell there were those who said that buying last year was a great value—expecting that housing would rise.


 I know that there are performing loans out there that probably look really good to the bank, but the reality is that the debtors, who held out hoping for the housing market to improve, are burning up their cash and are now on a path to inevitable double defaults. There is former house they could not sell to cover the debt load on it and the new house they will no longer be able to afford. These people are all over the place. They have been painfully paying their mortgages. The question is for how much longer; that is what this market to market debate is all about.


I also understand why the labor market is no longer a trailing indicator, but a leading indicator – our economy is based 75% on the consumer and we are removing consumers as the unemployment and reduced compensation rates rise. Do not get fooled by the unemployment number—the huge reduction in wages and benefits is taking its toll on the prospects for consumption.


We should stop the charade—the latest FASB effort is nothing more than rather transparent attempt to reduce bank reserve requirements for lending—we are doing it again—trying to leverage ourselves out of a problem created by over leveraging.  I do not get feelings of confidence from this bizarre behavior and rather see it as a sign of hopelessness.
   
 

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Credit For Everything- Responsibility For Nothing

Posted on February 11, 2009 by Larry Salibra

Did you see the John Thain interview with Maria Bartiromo a short time ago? Every time Maria asked a troubling question, Thain simply blamed it on circumstances. For example, when she asked why he paid so much to hire new executives, Thain said that that was the market price last year and things were not bad yet! Apparently, he had not realized that the only reason he went to Merrill was that it was in a tenuous fiscal condition due to deterioration in the financial markets

When she asked him why he had said the company and its assets where in good financial shape, and shortly thereafter the assets the company held tanked, he explained that that resulted from circumstances that quickly changed.

In this turbulent time, when the issue of Wall Street bonuses is hitting the headlines, we are beginning to ask whether executive compensation levels were really justified by actual performance. The more we hear the more it appears they were not justified.

When results are good executives do not attribute that to circumstances or luck, but their unique skill and based that on that they demand ever increasing compensation. When things go bad, that is not a reflection of the fact that their skill was really quite mundane. Circumstances are to blame.

We lawyers are just as guilty. As a young lawyer at a large firm I was told by one of the partners that in the event we lose the case we tell the client that his case was just as great as we said, and we did a remarkable job, but the judge or jury was really bad. Those of you who have experience with test juries as I have you know that you can make the same presentation to numerous randomly selected jury panels at the same time and get quite different results.

Similarly, would a rigorous scientific study justify our assumption that the large prestigious firm to which we are paying a premium actually achieves statistically superior results; the existing studies suggest not; the only correlation with legal fees is the size of the firm. You do not necessarily get what you pay for, but you may certainly be paying for what you get!
 

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