Thursday, October 18, 2007

Use Your Own Money

"The objective of this fund is simple: price discovery. ... When there is great uncertainty about a product's value, buyers back off because they can't assess the risks and would-be sellers fear unnecessary losses if they sell at too low a price. ... No one knows how much the pools of mortgages are actually worth. ... With a substantial wad of cash, the contributing banks can help to discover the price at which trading will take place. ... The discovery of a price for hundreds of billions of dollars of asset-backed securities and commerical paper is very much in the banks' interest. ... The losses will be larger than necessary--not because the value of the assets is low--but because they are being dumped at distress prices. ... Auditors ... will want asset-backed instruments to be marked down to the distress price, the only price they can find on the record. ... The bottom fishers who bought at distress prices would profit as others recognized the true value of the securities that were dumped", Peter Wallison (PW), in the WSJ, 18 October.

This is the worst piece of deception the WSJ printed since Norman Lamont's 4 October piece. The fund's objective is: to prevent price discovery. What is "too low a price"? A price below current market? PW claims, "no one knows how much the pools of mortgages are actually worth". So? No one "knows" what anything is worth. That's what markets determine. The "discovery of a price for hundreds of billions of dollars of ... securities" is not in the "banks' interest". The banks can sell now, without the fund. "The losses will be larger than necessary ... because [the assets] ... are being dumped at distress prices", claims PW. What is a "distress price"? A price PW dislikes? What is an "unnecessary" as opposed to necessary loss? PW claims "bottom fishers ... would profit as others recognized the true value of the securities that were dumped". What does PW think speculators do? Buy low and sell high. If PW "knows" the securities are worth more than others do, let him buy! PW, use your own money and offer Citigroup 95% of par for $100 million of these things, asking Citigroup to lend you $90 million to make the purchase. When your brilliance is revealed and the securities return to par, you will make a tidy profit. You could even suggest your friends do this. Or approach our Goldman Sachs (GS) friends with this idea: have GS create a $10 billion fund that will purchase these "undervalued" assets, having you run the fund and getting a mangement fee! GS should be able to sell the fund easily since PW can identify "undervalued" assets. That PW could have worked at Treasury is appalling.

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