Thursday, September 18, 2008

Accountability and Transparency

Another great read from the Sage of the Links:
The gut tells you now is not the time to enter the equity markets, but the mind says that when you do, you better do your homework. Investors are scared, and running for the exit door...the DOW tumbled -449.36 to close at 10609.66 (I stand by my "gut" feeling 10500 bottom).

Lack of liquidity, and lack of credit are symptoms of the problem...not the cause of the problem. In my humble opinion, transparency and account-ability are the cause(s) of the problem. Every time we hear about another collapse (Lehman, AIG...) everybody starts talking about "unknown counter party risks"...the creation of unfettered derivatives is what "broke the system"...and the sooner we "grab that bull by the horn", the sooner we will turn the corner...unfortunately, I don't hear either "the Street" or "the Govt" doing enough about it. Here's a simple solution...transparency and accountability...create a single global clearing desk for all credit swaps (transparency), and impose limits on public entities (banks, dealers, and companies) in relation to tangible capital (account-ability). I'll go one further...a nice FASB rule that will account for "active income" and "passive income" in financial reporting...if and when I buy a share of Wells Fargo, I want to know if they are making money by lending (margin income), or "engineering" income by trading of contracts based on "notional" off-balance sheet assets.

We are moving in that direction, just not fast enough. The SEC is imposing stricter regulations on "short selling" and requiring hedge funds to disclose positions. The Central Banks are coordinating overnight lending programs to add liquidity to their systems, and are now open 24/7...but just throwing cash at the problem is not going to solve's just a "sedative" to calm the nerves.
As far as market watching, keep your eye on the TED spread [difference between 3-month Libor (3.14%) and 3-month Bills (0.09%)] at a whooping 305 basis points...twice a "normal" level.

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