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« Will Bear Stearns "Clean out the Garbage?" | Main | The Economy: Problems and Solutions »

January 10, 2008



Trends that might develop is our currency might one day be switched backed to gold



You ask a question on the minds of many.

First, let us keep in mind that these companies had many ways of earning profits before the advent of SIV's.

Next, most have laid off people to reduce costs in these areas. Their profits are geared to people and costs.

Finaly, the demand for yield continues. There will be a new era of SIV's, with less complicated structure and better agency ratings. How long will it take? Months, not years, I suspect.

Some may disagree with this viewpoint, but I think stocks like GS and MER reflect little of this upside.

Great question -- thanks.




Josh - Thanks for pointing this out. One of the biggest shortfalls in investor understanding is the big writedowns. If/when there is some real performance, the earnings will spike. There is a mindless approach to evaluating the forced marks.

Thanks for your comment, and I would welcome more discussion on this point. Few understand it.



Where are the profits going to come from for Ibanks and places like CITI?

Josh Stern

The dislocation of the AAA ABX index is even more extreme than you describe, since most if not all of those senior contracts start out with over 10% subordination - that's how they became an AAA tranche of sub-prime. So 10% have to default with zero recovery or 20% with 50% recovery before the AAA tranche even starts taking losses. So at 50% of par, that means at least 60% default with no recovery (or 100% default at 50% recovery and another 10% of par goes to a liability settlement with the municipality of Cleveland).

Luis Prieto

Hello, I have a new blog, and would be interested in exchanging links.
I am Spanish and my blog covers the analysis of many equity markets.
I think it could be beneficial for both.


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