Moody's

MagicSean

I see in the news that Moody's are stirring the **** big time today. Making doom and gloom forecasts for everyone. Does anyone know why these companies are listened to? Have they ever actually gotten things right.

PS. Story is in the Journal but i can't link it at the moment.

nesf

Businessetc not The Journal: http://businessetc.thejournal.ie/credit-ratings-of-all-european-nations-under-threat-warns-moodys-290636-Nov2011/

Permabear

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listermint

Permabear wrote: »

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While all quite true, I dont understand how one can say Good for them. when agencies such as this appear to have their own vested interests noted by your own admission that they got it entirely wrong in 08-09 to who's gain ?

Permabear

This post has been deleted.

nesf

listermint wrote: »

While all quite true, I dont understand how one can say Good for them. when agencies such as this appear to have their own vested interests noted by your own admission that they got it entirely wrong in 08-09 to who's gain ?

Basically they got burned badly in that time period and now have become quite hawkish in response to try and rebuild their reputations.

Dirk Gently

The major problem I have with rating agencies is their announcements become self fulling prophecies once announced. They set trends. They have a poor track record, especially pre-bust. I also think there is massive potential there for reverse betting against a sovereign or a currency. As a tool, I think rating agencies are suspect in their accuracy, devastating in their negative outlooks ( as in whether or not the outlook is accurate, once they announce a negative it becomes so based solely on that announcement) and thirdly, they are potentially a trojen horse for inside trading.

nesf

Dirk Gently wrote: »

The major problem I have with rating agencies is their announcements become self fulling prophecies once announced. They set trends. They have a poor track record, especially pre-bust. I also think there is massive potential there for reverse betting against a sovereign or a currency. As a tool, I think rating agencies are suspect in their accuracy, devastating in their negative outlooks ( as in whether or not the outlook is accurate, once they announce a negative it becomes so based solely on that announcement) and thirdly, they are potentially a trojen horse for inside trading.

And the alternative is? I'd agree it's a flawed system but I've yet to see an example of a better one that's substantially different*.


*The best I've seen are alternative funding models proposed in the likes of The Economist for rating agencies. At the moment they're funded by their customers which isn't a great way to do business.

beeftotheheels

nesf wrote: »

And the alternative is? I'd agree it's a flawed system but I've yet to see an example of a better one that's substantially different*.


*The best I've seen are alternative funding models proposed in the likes of The Economist for rating agencies. At the moment they're funded by their customers which isn't a great way to do business.

Not entirely true. Egan-Jones are customer funded and were the first to downgrade the US from AAA but they're small and the model hasn't really taken off yet.

wiseguy

nesf wrote: »

And the alternative is? I'd agree it's a flawed system but I've yet to see an example of a better one that's substantially different*.


*The best I've seen are alternative funding models proposed in the likes of The Economist for rating agencies. At the moment they're funded by their customers which isn't a great way to do business.

@nesf
The commodities markets etc have the concept of a futures contract a form of a derivative, but of course the D word is now considered "dirty"
Same could be used for debt i suppose, if not already used (anyone from finance world clarify)?

liammur

Permabear wrote: »

This post had been deleted.

You don't disagree with their recent statement encouraging the US to raise the debt ceiling and print more $ ? Still giving the US a AAA ?

Worth a watch.

http://www.youtube.com/watch?v=QJXk8L22ACg

beeftotheheels

wiseguy wrote: »

@nesf
The commodities markets etc have the concept of a futures contract a form of a derivative, but of course the D word is now considered "dirty"
Same could be used for debt i suppose, if not already used (anyone from finance world clarify)?

You can draft a derivative for almost anything you want, a derivative is just a contract. So say you expect that Italian bond yields will surge such that if you buy a bond for €100 today it will be worth €80 next month then you short the bonds.

You borrow a bond for a month off a long term investor (like an Italian pension fund) and sell it with the expectation that you can buy it back more cheaply before you have to return it to the pension fund. Thus you profit from shorting the bond (by pocketing the difference between the €100 you got when you sold the bond, and the €80 you paid to purchase the bond a month later to give back to the pension fund).

CDS can be used similarly.

And every time regulators stop a particular activity investors come up with more and more ways to achieve the same, or similar returns.

wiseguy

beeftotheheels wrote: »

You can draft a derivative for almost anything you want, a derivative. It is just a contract. So say you expect that Italian bond yields will surge such that if you buy a bond for €100 today it will be worth €80 next month then you short the bonds.

You borrow a bond for a month off a long term investor (like an Italian pension fund) and sell it with the expectation that you can buy it back more cheaply before you have to return it to the pension fund. Thus you profit from shorting the bond.

CDS can be used similarly.

And every time regulators stop a particular activity investors come up with more and more ways to achieve the same, or similar returns.

What I was trying to say is that futures derivatives act as a sort of "ratings" where market participants can vote with their money on outcome, I dont see many trying to short well run countries such as Switzerland or companies such as Google [of course some will try and gamble but hey thats their choice]

Aren't ratings agencies a product of market regulation anyways, with limits being placed in law as to what rating certain parties can are allowed to invest in.

If someone here disagrees with for example Ireland being rated junk, well there is nothing stopping you for example on investing in the National Solidarity Bond and taking a 10 year gamble that the country wont go down the drain in that time, you could win or you could lose.

I am not trying to defend rating agencies or anything BUT what are the alternatives? A government run rating agency telling us that all is well, brought to you by the people who love words such as "soft landing" and the "bubble is getting bubblier"?? ha that would be something!

beeftotheheels

wiseguy wrote: »

What I was trying to say is that futures derivatives act as a sort of "ratings" where market participants can vote with their money on outcome, I dont see many trying to short well run countries such as Switzerland or companies such as Google [of course some will try and gamble but hey thats their choice]

If you'll allow that is a bit of a lay mans view of the markets. You can only short an asset for a period of time (as long as the long term investor is prepared to lend you the underlying asset) so even if you thought Switzerland would go t!t$ up next year you'd be daft to short it now.

However, shorting JGBs is known as a widow maker trade, if not "the" widow maker. Markets look at Japanese debt to GDP (225%), Japanese Growth (next to nothing) and so short the bonds. Japanese investors with no where better to put their money keep buying JGBs and the shorts keep losing money. It has been going on for decades now, intensifies after big shocks like the earthquake (investors think, now it is really time for the JGBs to fall), and yet widows continue to be made.

You're making the mistake of failing to grasp that in finance much more rests on faith than on fundamentals. No Italian fundamentals have changed this year relative to the last 20 years really yet their bonds have just blown up. Because of faith. And fear.

Or put another way. If Switzerland had to rescue her banks as a result of a eurozone melt down, her balance sheet would take a bigger hit than ours did when we rescued our banks. Over night Switzerland could go from haven to pariah.

wiseguy

beeftotheheels wrote: »

If you'll allow that is a bit of a lay mans view of the markets. You can only short an asset for a period of time (as long as the long term investor is prepared to lend you the underlying asset) so even if you thought Switzerland would go t!t$ up next year you'd be daft to short it now.

However, shorting JGBs is known as a widow maker trade, if not "the" widow maker. Markets look at Japanese debt to GDP (225%), Japanese Growth (next to nothing) and so short the bonds. Japanese investors with no where better to put their money keep buying JGBs and the shorts keep losing money. It has been going on for decades now, intensifies after big shocks like the earthquake (investors think, now it is really time for the JGBs to fall), and yet widows continue to be made.

You're making the mistake of failing to grasp that in finance much more rests on faith than on fundamentals. No Italian fundamentals have changed this year relative to the last 20 years really yet their bonds have just blown up. Because of faith. And fear.

Or put another way. If Switzerland had to rescue her banks as a result of a eurozone melt down, her balance sheet would take a bigger hit than ours did when we rescued our banks. Over night Switzerland could go from haven to pariah.

I "comprende" what you are saying but in the longterm high risk speculation is a fools game, sort of like gambling on horses is very inlikely to make anyone rich, the real money is made by bookies and other middlemen, in the finance world these middlemen are the likes of GS.

Take your example of Japan, has anyone actually gotten rich (and got out of the game in time) by betting against this economy?
There might be an small minority of speculators who do make some money and have the sense to cash out [sounds like a casino no :P] but in the long term its investors like Warren Buffet who invest in not so risky businesses and keep a diverse portfolio that become richer.

What I am trying to say is that let the speculators speculate, they are performing a function of sorts but in the end the will simply lose out if the country or a company is well run, the ones who will make money would be the middlemen who charge commission.

Anyways thats all going of on a tangent, lets go back to original point
If not rating agencies or speculators betting on futures then what else can be used by investors looking for information [its all about information in the end in the finance world!], I am highly sceptical that any government run institution can do much better. So yes what are the alternatives?

beeftotheheels

wiseguy wrote: »

I "comprende" what you are saying but in the longterm high risk speculation is a fools game, sort of like gambling on horses is very inlikely to make anyone rich, the real money is made by bookies and other middlemen, in the finance world these middlemen are the likes of GS.

Take your example of Japan, has anyone actually gotten rich (and got out of the game in time) by betting against this economy?
There might be an small minority of speculators who do make some money and have the sense to cash out [sounds like a casino no :P] but in the long term its investors like Warren Buffet who invest in not so risky businesses and keep a diverse portfolio that become richer.

What I am trying to say is that let the speculators speculate, they are performing a function of sorts but in the end the will simply lose out if the country or a company is well run, the ones who will make money would be the middlemen who charge commission.

Anyways thats all going of on a tangent, lets go back to original point
If not rating agencies or speculators betting on futures then what else can be used by investors looking for information [its all about information in the end in the finance world!], I am highly sceptical that any government run institution can do much better. So yes what are the alternatives?

Oh no, no, no, no, no, no.

You're still convinced, somewhere deep down inside, that there are fundamentals which drive finance. Fundamentals without faith means nothing in finance. When Buffet buys stock, that increases faith in that stock, it increases the price in the stock. Look at the pass the SEC gave him on not disclosing his stake building in IBM?

Hedge funds can make serious money, a lot more than any banker at Goldmans can make. They can also lose serious money, of course they can, even on bets which ultimately turn out to be right by shorting too soon, or being margined like LTCM.

Along the way the markets, including the hedgies, can wreak havoc. We can't just blame the hedgies, hell the only buyers for most eurozone bonds at the moment are the debt funds so they're probably putting some kind of floor on prices (until they explode like MF. Global)

It is gambling, but it can be hugely successful. In fact did you know who Ireland's most successful forex trader is? JP McManus.

But in finance fundamentals very much take second place to faith. CRAs go to faith. They overstated it in the CDO world, to some extent they're trying to make this right in the post CDO world.

But here's the kicker. If you take the ratings agencies out of the equation, then every investor has to do their own diligence, make their own decision on risk pricing and credit worthiness. So, you get rid of the ratings agencies, or scale them down, and yes, investing will get more expensive. But every investor will be making their own call instead of following like lambs to the slaughter.

As a longer term aim I'm not sure that would be a bad thing, shorter term disaster as the markets are volatile enough and pricing is skewed. Longer term...

wiseguy

beeftotheheels wrote: »

Oh no, no, no, no, no, no.

You're still convinced, somewhere deep down inside, that there are fundamentals which drive finance. Fundamentals without faith means nothing in finance. When Buffet buys stock, that increases faith in that stock, it increases the price in the stock. Look at the pass the SEC gave him on not disclosing his stake building in IBM?

Hedge funds can make serious money, a lot more than any banker at Goldmans can make. They can also lose serious money, of course they can, even on bets which ultimately turn out to be right by shorting too soon, or being margined like LTCM.

Along the way the markets, including the hedgies, can wreak havoc. We can't just blame the hedgies, hell the only buyers for most eurozone bonds at the moment are the debt funds so they're probably putting some kind of floor on prices (until they explode like MF. Global)

It is gambling, but it can be hugely successful. In fact did you know who Ireland's most successful forex trader is? JP McManus.

But in finance fundamentals very much take second place to faith. CRAs go to faith. They overstated it in the CDO world, to some extent they're trying to make this right in the post CDO world.

But here's the kicker. If you take the ratings agencies out of the equation, then every investor has to do their own diligence, make their own decision on risk pricing and credit worthiness. So, you get rid of the ratings agencies, or scale them down, and yes, investing will get more expensive. But every investor will be making their own call instead of following like lambs to the slaughter.

As a longer term aim I'm not sure that would be a bad thing, shorter term disaster as the markets are volatile enough and pricing is skewed. Longer term...

I do not disagree with many of your points, neither am I blaming anyone be it specualtors, hedge funds, banks etc ect. I understand well that all these agents have a role in the finance world just as earthworms and dung beetles play a role in my garden


But yes I do believe that in the longterm the fundamentals and investors who focus on these "do better" than those who take more higher risks and chase shorter term profits. Take Permabear here for example is his famous investment in Apple based on short term profit or a long term "faith" in the fundamentals of this company [Or was it belief in business acumen of its now dead leader?]. Or take JPMcManus you mentioned what will make him more money in the long term his gambling on horses [aside: horses are a good way to launder money cough cough] or his investment in bookies businesses?


Regarding your point of abolishing rating agencies and letting investors do their own research, aint that pretty much what happens already? The ones that do have to follow what rating agencies are funds that are tied down by laws and regulations telling them that they must rely on agencies for decisions and risk assesment. Smaller agents such as many readers here can go and disregard what Moodys say if the want and go and invest in lets say Irish Solidarity 10 year savings thingie.

beeftotheheels

wiseguy wrote: »

But yes I do believe that in the longterm the fundamentals and investors who focus on these "do better" than those who take more higher risks and chase shorter term profits. Take Permabear here for example is his famous investment in Apple based on short term profit or a long term "faith" in the fundamentals of this company [Or was it belief in business acumen of its now dead leader?]. Or take JPMcManus you mentioned what will make him more money in the long term his gambling on horses [aside horses is a way to launder money cough cough] or his investment in bookies businesses?

You may well believe it but it is just not borne out by fact.

Lets say tomorrow there is a small FTSE 100 company ABC Plc which makes something people buy, even in a recession. Bread. It has market cap of €5bn and debt of €2bn which gives it a pretty sound balance sheet.

Now let's say the market gets wind that Soros is shorting the stock (although no one knows why but rationalizes it as a lack of faith in management). The markets also know that Soros has the fire power to move the stock so suddenly many other savvy investors, knowing the stock will fall because of Soros also decide to short the stock, which causes further falls.

One month later the company has a market cap of €1bn and leverage of €2bn and has just breached its banking covenants which it separately tries to renegotiate. But the banks "know" that the equity markets have a lack of faith in management, so suddenly the price of refinancing the debt goes right up, interest payments go up, lenders enforce security over some of the assets.

Two weeks later ABC Plc seeks bankruptcy protection from its creditors.

Soros has made a killing, the other shorts have made a killing. The longs got out as quickly as they could but they made a loss. And a business which was fundamentally sound no longer exists.

Now assuming he wasn't engaged in flagrant market abuse something triggered Soros's original short. But it might have been as simple as expecting the company to under shoot its profit target by a couple of percentage points. He might have expected a 10% drop in MV, but his presence in the market caused at 80% fall once known.

You might think this is an exaggeration, but this is what is happening to eurozone member states on a daily basis. Liquidity problems are causing solvency problems. Long term investors are being burned left, right and centre.

Long term investors can do very well over a prolonged bull market. They cannot do well in a cyclical bear market or heaven forbid an untradeable market such as that we're in at the moment. Only hedgies and other, more nimble investors can.

Yes, as part of dealing with CRAs we need to stop their ratings being hardwired into the financial system. But bear in mind that while pension fund A can only invest in e.g. investment rated bonds, Pension fund A can also invest x% of its assets in alternative investment classes, including hedge funds and debts funds etc. So indirectly, Pension Fund A can invest in sub investment grade bonds based on the analysis of the hedgies they invest in. They should just be allowed to do it directly if they do proper diligence.

ps Mcmanus has made most of his money from investing in forex and equities, not horses, not gambling at bookies, and not through owning bookies. Gamblers can and do win, it all depends on the time period you look at, and some, win over the course of their careers, some win, for longer than any one thought was possible and then loose, as Legg Mason's Miller did recently.

wiseguy

beeftotheheels wrote: »

You may well believe it but it is just not borne out by fact.

Lets say tomorrow there is a small FTSE 100 company ABC Plc which makes something people buy, even in a recession. Bread. It has market cap of €5bn and debt of €2bn which gives it a pretty sound balance sheet.

Now let's say the market gets wind that Soros is shorting the stock (although no one knows why but rationalizes it as a lack of faith in management). The markets also know that Soros has the fire power to move the stock so suddenly many other savvy investors, knowing the stock will fall because of Soros also decide to short the stock, which causes further falls.

One month later the company has a market cap of €1bn and leverage of €2bn and has just breached its banking covenants which it separately tries to renegotiate. But the banks "know" that the equity markets have a lack of faith in management, so suddenly the price of refinancing the debt goes right up, interest payments go up, lenders enforce security over some of the assets.

Two weeks later ABC Plc seeks bankruptcy protection from its creditors.

Soros has made a killing, the other shorts have made a killing. The longs got out as quickly as they could but they made a loss. And a business which was fundamentally sound no longer exists.

Now assuming he wasn't engaged in flagrant market abuse something triggered Soros's original short. But it might have been as simple as expecting the company to under shoot its profit target by a couple of percentage points. He might have expected a 10% drop in MV, but his presence in the market caused at 80% fall once known.

You might think this is an exaggeration, but this is what is happening to eurozone member states on a daily basis. Liquidity problems are causing solvency problems. Long term investors are being burned left, right and centre.

Long term investors can do very well over a prolonged bull market. They cannot do well in a cyclical bear market or heaven forbid an untradeable market such as that we're in at the moment. Only hedgies and other, more nimble investors can.

Yes, as part of dealing with CRAs we need to stop their ratings being hardwired into the financial system. But bear in mind that while pension fund A can only invest in e.g. investment rated bonds, Pension fund A can also invest x% of its assets in alternative investment classes, including hedge funds and debts funds etc. So indirectly, Pension Fund A can invest in sub investment grade bonds based on the analysis of the hedgies they invest in. They should just be allowed to do it directly if they do proper diligence.

ps Mcmanus has made most of his money from investing in forex and equities, not horses, not gambling at bookies, and not through owning bookies. Gamblers can and do win, it all depends on the time period you look at, and some, win over the course of their careers, some win, for longer than any one thought was possible and then loose, as Legg Mason's Miller did recently.

You are making an assertion that market participants are somehow "collectively evil". They are not, the fact that there are new companies such as Google that are doing very well is evidence.

You are also assuming that a new company with new product/service will go public straight away, more than likely they would be under a wing of a group of venture investors before they go public (Pandora Media) or simply remain private for long time (Facebook/Google).

going on a tangent again:
I am not denying that shorting could destroy a company and it does happen. But shorters like parasites in biology can not get too virulent since it would lead to their own demise, in biology over time parasites get "milder" and develop more of a symbiotic relationship (take bugs in our stomachs)

Same happens in politics, parasitical goverments that are repressive of their subjects meet a violent end rather quickly, while those who tax their taxpaying host less survive longer.

beeftotheheels

wiseguy wrote: »

You are making an assertion that market participants are somehow "collectively evil". They are not, the fact that there are new companies such as Google that are doing very well is evidence.

Where did I say that? I simply explained how they work. I make no moral judgement whatsover, each investor is obliged by law to generate the best returns for their clients.

wiseguy wrote: »

You are also assuming that a new company with new product/service will go public straight away, more than likely they would be under a wing of a group of venture investors before they go public (Pandora Media) or simply remain private for long time (Facebook/Google).

Where did I say that? I really cannot fathom where you dreamed this position up to assign to me. But for the record given you brought up venture capitalists you might like to see Peston's thoughts on the refinancing glut coming through the Private Equity portfolios this year http://www.bbc.co.uk/news/business-15889136

wiseguy wrote: »

going on a tangent again:
I am not denying that shorting could destroy a company and it does happen. But shorters like parasites in biology can not get too virulent since it would lead to their own demise, in biology over time parasites get "milder" and develop more of a symbiotic relationship (take bugs in our stomachs)

Let us try to explain the hedge fund model here.

Hedgie 1 raises capital from certain sophisticated investors, they may be pension funds, Sovereign Wealth Funds, High Net Worth individuals etc because most jurisdictions have rules to prevent ordinary individuals making risky investments such as investing in hedge funds Let us say they raise capital of 100m, which is not paid over, the investors promise to pay it over as and when the capital calls are made by the fund (i.e. it has identified assets to invest in it asks the investors to stump up the cash).

Hedgie 1 decides it wants to short XYZ Plc to the tune of €100m (it thinks that the price of those shares will fall) and wants to go long on Irish sovereign debt to the tune of 100m (it thinks that those bonds will rise in value).

1. It makes capital calls of let's say 40m from its investors.
2. It borrows from banks, other hedgies etc the balance of 160m for 1 month.
3. It borrows 100m worth of shares in XYZ Plc for a month off Life Company A and immediately sells them.
4. It buys 100m of Irish 9 year bonds.

At the end of the month the shares in XYZ Plc have gained 25% and Irish bond yields have fallen by 20% (the opposite of what the fund thought would happen).

5. It buys 125m worth of XYZ Plc shares to return to Life Company A.
6. It sells the Irish bonds for 80m.

Having spent 200m (160m of which was borrowed) it now has 155m. It owes the banks more than it has. So it has to ask its investors for more capital to make up the short fall. But the investors put in 40m which is now gone so they don't want to put in more. So they exit and the hedge fund, on the basis of two relatively small bad deals finds its investors fleeing and thus collapses.

It doesn't matter if the following month the shares in XYZ tank, or Irish bonds fly through the roof. Leverage (borrowing) and timing destroy the hedge fund. So hedge funds don't have time to take a long term view, their version of darwinism requires them to generate what returns they can, now, or risk being destroyed. They cannot, on their own, get milder. We can regulate them more to make them milder, but they cannot do this on their own, their business model just does not allow it.

This is not a moral judgement, just a statement of fact.

tara73

Permabear wrote: »

This post had been deleted.

would be very interested in knowing this as I never heard them loudly announcing serious warnings to the general public about Lehman and the others in pre-crisis, do you have a reliable source to back this up?

the recent 'little' mistake of degrading france is not really in favor of their respectability and trustworthyness either imo.

beeftotheheels

tara73 wrote: »

would be very interested in knowing this as I never heard them loudly announcing serious warnings to the general public about Lehman and the others in pre-crisis, do you have a reliable source to back this up?

He said the opposite. He was saying that they were too benign in 08/09 and not warning loud enough and are, to some extent compensating for this now.

nesf

beeftotheheels wrote: »

Where did I say that? I simply explained how they work. I make no moral judgement whatsover, each investor is obliged by law to generate the best returns for their clients.



Where did I say that? I really cannot fathom where you dreamed this position up to assign to me. But for the record given you brought up venture capitalists you might like to see Peston's thoughts on the refi glut coming through the PE portfolios this year http://www.bbc.co.uk/news/business-15889136



Let us try to explain the hedge fund model here.

Hedgie 1 raises capital from certain sophisticated investors, they may be pension funds, SWFs, HNW individuals etc. Let us say they raise capital of 100m, which is not paid over, the investors promise to pay it over as and when the capital calls are made by the fund (i.e. it has identified assets to invest in).

Hedgie 1 decides it wants to short XYZ Plc to the tune of €100m and wants to go long on Irish sovereign debt to the tune of 100m.

1. It makes capital calls of let's say 40m from its investors.
2. It borrows from banks, other hedgies etc the balance of 160m for 1 month.
3. It borrows 100m worth of shares in XYZ Plc for a month off Life Company A and immediately sells them.
4. It buys 100m of Irish 9 year bonds.

At the end of the month the shares in XYZ Plc have gained 25% and Irish bond yields have fallen by 20%.

5. It buys 125m worth of XYZ Plc shares to return to Life Company A.
6. It sells the Irish bonds for 80m.

Having spent 200m (160m of which was borrowed) it now has 155m. It owes the banks more than it has. So it has to ask its investors for more capital to make up the short fall. But the investors put in 40m which is now gone so they don't want to put in more. So they exit and the hedge fund, on the basis of two relatively small bad deals finds its investors fleeing and thus collapses.

It doesn't matter if the following month the shares in XYZ tank, or Irish bonds fly through the roof. Leverage and timing destroy the hedge fund. So hedge funds don't have time to take a long term view, their version of darwinism requires them to generate what returns they can, now, or risk being destroyed. They cannot, on their own, get milder. We can regulate them more to make them milder, but they cannot do this on their own, their business model just does not allow it.

This is not a moral judgement, just a statement of fact.

Thanks for your posts, very interesting. The one thing I'd ask is to refrain from using jargon acronyms because a lot of readers on here won't have a clue what they mean.

Tipp Man

beeftotheheels wrote: »

You're making the mistake of failing to grasp that in finance much more rests on faith than on fundamentals. .

Isn't this the problem in a nutshell - ignoring (or not paying enough attention to) the fundamentals??

If more attention was paid to fundamentals over the last 10 years and less to faith (blindless??) then i think the world would be in a financially much more stable place than it currently is

nesf

Tipp Man wrote: »

Isn't this the problem in a nutshell - ignoring (or not paying enough attention to) the fundamentals??

If more attention was paid to fundamentals over the last 10 years and less to faith (blindless??) then i think the world would be in a financially much more stable place than it currently is

That ignores that all markets everywhere are driven mostly by sentiment. We're herdish as a species after all.

Scofflaw

nesf wrote: »

And the alternative is? I'd agree it's a flawed system but I've yet to see an example of a better one that's substantially different*.


*The best I've seen are alternative funding models proposed in the likes of The Economist for rating agencies. At the moment they're funded by their customers which isn't a great way to do business.

Everybody does their own due diligence? The market seems to have managed for a couple of centuries without the ratings agencies...

cordially,
Scofflaw

nesf

Scofflaw wrote: »

Everybody does their own due diligence? The market seems to have managed for a couple of centuries without the ratings agencies...

cordially,
Scofflaw

The market used to be a lot less complex and worked a lot worse. It's a balance between complex instruments that (in general) are useful when used properly and the need for oversight of said instruments. Rating agencies lower the barrier to entry to the market too which can't be overstated. Big outfits could do their due diligence without any problem but small companies would struggle to do so profitably so we'd see the re-emergence of rating agencies by a different name doing pretty much the job we see them doing now except for groups of paying small companies splitting the cost of doing the due diligence.

wiseguy

Scofflaw wrote: »

Everybody does their own due diligence? The market seems to have managed for a couple of centuries without the ratings agencies...

Rating agencies are a result of attempts to regulate the market [Something that you support loudly and want more of] by legislating that some investment agents need to follow their ratings.
Square that circle.

@beefoftheheel
We would just have to disagree on the subject of short vs long investing, short term + risky investing is a mugs game, the real winners from that are the middlemen who take a cut at each step [Hence why some government are now so keen on a financial transaction tax!] As TippMan has said above, ignoring the fundamentals is what partly got us here.

Permabear

This post has been deleted.

Scofflaw

wiseguy wrote: »

This post had been deleted.

I think that manages to misapply my position on regulation by misunderstanding what the agencies do and who sets the investment rules. I congratulate you.

nesf wrote:

The market used to be a lot less complex and worked a lot worse. It's a balance between complex instruments that (in general) are useful when used properly and the need for oversight of said instruments. Rating agencies lower the barrier to entry to the market too which can't be overstated. Big outfits could do their due diligence without any problem but small companies would struggle to do so profitably so we'd see the re-emergence of rating agencies by a different name doing pretty much the job we see them doing now except for groups of paying small companies splitting the cost of doing the due diligence.

Permabear wrote:

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Good responses. So as long as they're not simply repeating the mistakes in question on a larger scale, they're useful. What efforts were made to ensure that was the case?

cordially,
Scofflaw

Hayte

Permabear wrote: »

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Agreed but the key is independently. I can't remember the name exactly but I think there was a joint committee commissioned by Congress that looked into ratings agency practices with regards to Countrywide, New Century and Washington Mutual. You can watch all of the panels on CSPAN's video archive but the key one is the ratings agency panel.

The committee was co chaired by Senator Kauffman if I recall correctly and they found that the overriding concern of senior management at Moody's and Standard and Poors was market share. They had good analysts and techs, some of whom testified and highlighed flaws in their mathematical modelling as early as 2001. This was supported by internal memoranda but some of these models were never updated. Its well worth watching but its long.

At that time I believe there was a sector wide fear that if you didn't provide favorable ratings to whoever was structuring mortgage based financial products, then they would simply go elsewhere and take their fees with them. Now Moody's and S&P don't seem to give a damn, but their management practices/high level decision making have been exposed by the joint committee as being almost totally arbitrary, so they have zero credibility and fail at the job we desperately need them to do in our financial system.

At this point the life and death of global institutional investors, even sovereign nations is so predicated on small market movements (due to the amount of leverage in the system), that a chimpanzie could smash random buttons labeled by Eurozone country to predict who will fall next. They will all fall eventually because they all have substantial international debt holdings and being hedged doesn't mean squat if its with Greek CDS.

liammur

beeftotheheels wrote: »

You may well believe it but it is just not borne out by fact.

Lets say tomorrow there is a small FTSE 100 company ABC Plc which makes something people buy, even in a recession. Bread. It has market cap of €5bn and debt of €2bn which gives it a pretty sound balance sheet.

Now let's say the market gets wind that Soros is shorting the stock (although no one knows why but rationalizes it as a lack of faith in management). The markets also know that Soros has the fire power to move the stock so suddenly many other savvy investors, knowing the stock will fall because of Soros also decide to short the stock, which causes further falls.

One month later the company has a market cap of €1bn and leverage of €2bn and has just breached its banking covenants which it separately tries to renegotiate. But the banks "know" that the equity markets have a lack of faith in management, so suddenly the price of refinancing the debt goes right up, interest payments go up, lenders enforce security over some of the assets.

Two weeks later ABC Plc seeks bankruptcy protection from its creditors.

Soros has made a killing, the other shorts have made a killing. The longs got out as quickly as they could but they made a loss. And a business which was fundamentally sound no longer exists.

Now assuming he wasn't engaged in flagrant market abuse something triggered Soros's original short. But it might have been as simple as expecting the company to under shoot its profit target by a couple of percentage points. He might have expected a 10% drop in MV, but his presence in the market caused at 80% fall once known.

You might think this is an exaggeration, but this is what is happening to eurozone member states on a daily basis. Liquidity problems are causing solvency problems. Long term investors are being burned left, right and centre.

Long term investors can do very well over a prolonged bull market. They cannot do well in a cyclical bear market or heaven forbid an untradeable market such as that we're in at the moment. Only hedgies and other, more nimble investors can.

Yes, as part of dealing with CRAs we need to stop their ratings being hardwired into the financial system. But bear in mind that while pension fund A can only invest in e.g. investment rated bonds, Pension fund A can also invest x% of its assets in alternative investment classes, including hedge funds and debts funds etc. So indirectly, Pension Fund A can invest in sub investment grade bonds based on the analysis of the hedgies they invest in. They should just be allowed to do it directly if they do proper diligence.

ps Mcmanus has made most of his money from investing in forex and equities, not horses, not gambling at bookies, and not through owning bookies. Gamblers can and do win, it all depends on the time period you look at, and some, win over the course of their careers, some win, for longer than any one thought was possible and then loose, as Legg Mason's Miller did recently.

A sound FTSE100 company would and could not be driven to bankruptcy in such a manner. Shorters had a good go at Admiral recently, but fundamentals inevitably win out, for a variety of reasons, none more so than takeovers. If a company becomes too cheap it will be taken out.

Scofflaw

Hayte wrote: »

Agreed but the key is independently. I can't remember the name exactly but I think there was a joint committee commissioned by Congress that looked into ratings agency practices with regards to Countrywide, New Century and Washington Mutual. You can watch all of the panels on CSPAN's video archive but the key one is the ratings agency panel.

The committee was co chaired by Senator Kauffman if I recall correctly and they found that the overriding concern of senior management at Moody's and Standard and Poors was market share. They had good analysts and techs, some of whom testified and highlighed flaws in their mathematical modelling as early as 2001. This was supported by internal memoranda but some of these models were never updated. Its well worth watching but its long.

At that time I believe there was a sector wide fear that if you didn't provide favorable ratings to whoever was structuring mortgage based financial products, then they would simply go elsewhere and take their fees with them. Now Moody's and S&P don't seem to give a damn, but their management practices/high level decision making have been exposed by the joint committee as being almost totally arbitrary, so they have zero credibility and fail at the job we desperately need them to do in our financial system.

At this point the life and death of global institutional investors, even sovereign nations is so predicated on small market movements (due to the amount of leverage in the system), that a chimpanzie could smash random buttons labeled by Eurozone country to predict who will fall next. They will all fall eventually because they all have substantial international debt holdings and being hedged doesn't mean squat if its with Greek CDS.

So the answer to my question:

Good responses. So as long as they're not simply repeating the mistakes in question on a larger scale, they're useful. What efforts were made to ensure that was the case?

is basically "not much"?

cordially,
Scofflaw

Permabear

This post has been deleted.

beeftotheheels

liammur wrote: »

A sound FTSE100 company would and could not be driven to bankruptcy in such a manner. Shorters had a good go at Admiral recently, but fundamentals inevitably win out, for a variety of reasons, none more so than takeovers. If a company becomes too cheap it will be taken out.

In a market where entire nations are being taken out I disagree.

Also, your analysis that Admiral is out of the woods when the issue is their provisioning (or lack there of) when claims have a tendency to rise in a down turn (don't know why crashes produce more or less whiplash depending on the economic conditions) has not yet been played out. The concern is that their relatively light provisions to date won't see them through the claims of this year and next.

So a) Admiral is a company where the issue is fundamentals and not perception because they are fundamentally under-provisioning relative to their peers, and
b) The Admiral story has not yet ended. I'd remain watching this space.

beeftotheheels

Tipp Man wrote: »

Isn't this the problem in a nutshell - ignoring (or not paying enough attention to) the fundamentals??

If more attention was paid to fundamentals over the last 10 years and less to faith (blindless??) then i think the world would be in a financially much more stable place than it currently is

That's about the nub of it yes.

In the world of finance an insolvent company can keep going almost indefinitely if they have financing, whereas a solvent company can be rendered insolvent very quickly if they don't. Liquidity and solvency are, to a financial, two sides of the one coin and perception trumps fundamentals.

I agree that it shouldn't and that the world of finance must alter in the coming years and decades to address this. But this is the reality of the current world in which we live at this moment in time.

beeftotheheels

nesf wrote: »

Rating agencies lower the barrier to entry to the market too which can't be overstated.

Of course it can, in fact I believe that you just did.

Should my local credit union be investing in complex financial instruments which no one at the Credit Union can understand? No.

Does the fact that those instruments are AAA rated change this? No

If you're not a sophisticated investor capable of taking on your own advice then perhaps that indicates that you shouldn't be investing directly in those products?

By all means allow unsophisticated investors invest in exotic products via intermediaries, but intermediaries with the economies of scale to do the diligence, and intermediaries with a suitable duty of care to, and portfolio balance for, unsophisticated, retail investors.

Pension funds which are too small can enter into pension pooling arrangements like a CCF to gain economies of scale, or they can invest in companies and products that they know. Both of which strike me as preferable to relying on the word of one of the players in an oligopolistic market who, crucially, has no duty of care to the end investor.

nesf

beeftotheheels wrote: »

Of course it can, in fact I believe that you just did.

Should my local credit union be investing in complex financial instruments which no one at the Credit Union can understand? No.

Does the fact that those instruments are AAA rated change this? No

If you're not a sophisticated investor capable of taking on your own advice then perhaps that indicates that you shouldn't be investing directly in those products?

By all means allow unsophisticated investors invest in exotic products via intermediaries, but intermediaries with the economies of scale to do the diligence, and intermediaries with a suitable duty of care to, and portfolio balance for, unsophisticated, retail investors.

Pension funds which are too small can enter into pension pooling arrangements like a CCF to gain economies of scale, or they can invest in companies and products that they know. Both of which strike me as preferable to relying on the word of one of the players in an oligopolistic market who, crucially, has no duty of care to the end investor.

I don't disagree with any of that. However, lower barriers to entry to the market are not necessarily a bad thing because of the above and all I said was that rating agencies lowered the barriers I didn't say there wasn't problems with doing this. Similar to how there are problems with FOREX spread betting aimed at the common man etc.

liammur

beeftotheheels wrote: »

In a market where entire nations are being taken out I disagree.

Also, your analysis that Admiral is out of the woods when the issue is their provisioning (or lack there of) when claims have a tendency to rise in a down turn (don't know why crashes produce more or less whiplash depending on the economic conditions) has not yet been played out. The concern is that their relatively light provisions to date won't see them through the claims of this year and next.

So a) Admiral is a company where the issue is fundamentals and not perception because they are fundamentally under-provisioning relative to their peers, and
b) The Admiral story has not yet ended. I'd remain watching this space.

It is simply impossible.

Take YELL, the most heavily shorted stock in Europe, with over 500 million shares out on loan. Can the shorters make YELL go bust? No.

What they have done, is prevented the company from raising money from shareholders via a cash call. As long as YELL can service it's debt the shorters can do no more damage.

This is as extreme as it gets.

Debt, £2.6bln, market cap £125 mln.

There has to be a fundamental reason for the company to go bust, what the shorters do is speed up that process. In Yell's case, that may be they can't service their debt, but if you can't service your debt, you will go bust with or without shorters.

NIMAN

With Moodys and S&Ps, I always wondered why super powerful governments like those in USA, UK, Germany, France, Italy, Spain etc cannot simply have a little word with these ratings agencies and tell them to stop all the downgrading.

Then we could all return to less panicky times, we could all get our jobs back, keep our houses etc.

And we'd all live happily ever after.

carveone

NIMAN wrote:

With Moodys and S&Ps, I always wondered why super powerful governments like those in USA, UK, Germany, France, Italy, Spain etc cannot simply have a little word with these ratings agencies and tell them to stop all the downgrading

Would be nice but then trust in the rating agencies would go out the window, everyone would assume that the current rating is a lie and assume the worst and rate them as BBB or under themselves. Bye bye Europe.

I'd like to comment further but I don't know enough the rating agencies other than I believe that their people did try to rate appropriately, even giving their software to the banks. I'm reading John Lanchester's book, "Whoops!" which has a lot to say on the topic

beeftotheheels

nesf wrote: »

I don't disagree with any of that. However, lower barriers to entry to the market are not necessarily a bad thing because of the above and all I said was that rating agencies lowered the barriers I didn't say there wasn't problems with doing this. Similar to how there are problems with FOREX spread betting aimed at the common man etc.

I don't disagree that lowering barriers is necessarily a bad thing. But what you actually said, which I took issue with, was

nesf wrote: »

Rating agencies lower the barrier to entry to the market too which can't be overstated.

and it can, of course, be over stated. Barriers, whether physical or otherwise can and do serve purposes. In the real world they can prevent small children falling down stairs, or cars from driving into pot holes.

In the financial world they can and do serve to protect investors (and in case my previous post could be misinterpreted I don't think all oligopolies are de facto evil), investors like credit unions, from investing in instruments that they have no business investing in.

The barrier to market access to a new magic circle/ white shoe law firm is not cash. It is the depth and breath of skills and global connections required to deal with the need of the clients that those firms deal with. If someone else skills and scales up they should be able to join the club. But skill and scale are the barriers, and skill and scale protect their clients (along with the size of their Professional Indemnity Insurance cover obviously). Were anyone to suggest that BP should use John Smith and son of Wrexham, Wales for their global legal services I think most of us would choke.

But unlike the CRAs the MC/WS firms don't just offer one service. They can lose out in M&A yet reap large fees in litigation in any given year. They can afford to turn work down for reputational reasons, they have many, completely distinct, service offerings with fundamentally different client bases. Ditto numerous other oligopolies in the financial sphere.

Where the CRAs stand apart is that

a) Their power is relatively recent so they don't seem to understand "the force" as yet,
b) they're a one trick pony which gives them less ability to turn work down, and
c) they owe no duty of care to the investors who can find themselves bound by their ratings.

beeftotheheels

liammur wrote: »

It is simply impossible.

Take YELL, the most heavily shorted stock in Europe, with over 500 million shares out on loan. Can the shorters make YELL go bust? No.

What they have done, is prevented the company from raising money from shareholders via a cash call. As long as YELL can service it's debt the shorters can do no more damage.

This is as extreme as it gets.

Debt, £2.6bln, market cap £125 mln.

There has to be a fundamental reason for the company to go bust, what the shorters do is speed up that process. In Yell's case, that may be they can't service their debt, but if you can't service your debt, you will go bust with or without shorters.

Let us go back to what I said as maybe I assumed too much knowledge.

beeftotheheels wrote: »

One month later the company has a market cap of €1bn and leverage of €2bn and has just breached its banking covenants which it separately tries to renegotiate. But the banks "know" that the equity markets have a lack of faith in management, so suddenly the price of refinancing the debt goes right up, interest payments go up, lenders enforce security over some of the assets.

Two weeks later ABC Plc seeks bankruptcy protection from its creditors.

Absent any financing put in place, and still in place, from early summer 2007 any corporate financing will come with something called debt, or banking covenants.

These are certain criteria, set in stone, which the company must comply with in order for their financing facility to be valid.

The most usual ones include, amongst other things, the "gearing" i.e. the debt to equity ratio of the group.

So, when ABC Plc organized its facility (overdraft plus loan if you will) then banks said that "you can borrow €1bn for 5 years at 5% provided that during that time you fulfill conditions x, y and z. Condition y is the one about gearing and if you check the detail it provides that at all times ABC Plc must have equity at least equal to the value of the debt being €1bn.

So, when the market cap of ABC Plc falls below €1bn that covenant is breached, which means that the bank (in our simplified universe, the syndicated lenders in the real world) can call in the loan.

Since the equity markets are giving ABC Plc a tough time ABC Plc will find it almost impossible to get a replacement loan on similar terms, because at this moment in time its gearing is above 1:1. So it has to refinance the loan, and no one lends to a company with less than 1 euro of equity per euro of debt on the same basis they might lend to a company which has 2 parts equity to every one part debt.

So the interest rate goes up. So suddenly the company has to generate more cash to pay more interest, out of the same profits.

Now the extra interest is involved, the company is struggling to service its debt.

One of the senior lenders is nervous, and has security over a prime piece of central London real estate (ABC Plc HQ). Since the covenants are still being breached they enforce their security and seize the building.

Now a chunk of value has left the group, which makes the group's equity worth less, which means that the gearing breach has grown worse... And thus a perfectly sound and solvent company can find itself filing for bankruptcy.

Google Yell and banking covenants. Yell may well yet go bust, and if it does so it will be precisely because of the banking covenant issue I have outlined above, not the gearing covenant in their case but the EBITDA multiple cover (another common covenant). The main thing which is protecting companies like Yell at the moment is the reticence of lenders to trigger a fire sale which has, in recent years, led to an increased appetite to refinance debts in breach of the covenants. But as banks need to deleverage that appetite to refi is seriously waning so the fire sales are going to start coming through thick and fast next year.

nesf

beeftotheheels wrote: »

I don't disagree that lowering barriers is necessarily a bad thing. But what you actually said, which I took issue with, was



and it can, of course, be over stated.

Ok, I can agree that my wording made it look like I thought lowering the barriers to entry could only be a good thing but that was not my intention when writing it and I wouldn't read it that way.

liammur

beeftotheheels wrote: »

Let us go back to what I said as maybe I assumed too much knowledge.



Absent any financing put in place, and still in place, from early summer 2007 any corporate financing will come with something called debt, or banking covenants.

These are certain criteria, set in stone, which the company must comply with in order for their financing facility to be valid.

The most usual ones include, amongst other things, the "gearing" i.e. the debt to equity ratio of the group.

So, when ABC Plc organized its facility (overdraft plus loan if you will) then banks said that "you can borrow €1bn for 5 years at 5% provided that during that time you fulfill conditions x, y and z. Condition y is the one about gearing and if you check the detail it provides that at all times ABC Plc must have equity at least equal to the value of the debt being €1bn.

So, when the market cap of ABC Plc falls below €1bn that covenant is breached, which means that the bank (in our simplified universe, the syndicated lenders in the real world) can call in the loan.

Since the equity markets are giving ABC Plc a tough time ABC Plc will find it almost impossible to get a replacement loan on similar terms, because at this moment in time its gearing is above 1:1. So it has to refinance the loan, and no one lends to a company with less than 1 euro of equity per euro of debt on the same basis they might lend to a company which has 2 parts equity to every one part debt.

So the interest rate goes up. So suddenly the company has to generate more cash to pay more interest, out of the same profits.

Now the extra interest is involved, the company is struggling to service its debt.

One of the senior lenders is nervous, and has security over a prime piece of central London real estate (ABC Plc HQ). Since the covenants are still being breached they enforce their security and seize the building.

Now a chunk of value has left the group, which makes the group's equity worth less, which means that the gearing breach has grown worse... And thus a perfectly sound and solvent company can find itself filing for bankruptcy.

Google Yell and banking covenants. Yell may well yet go bust, and if it does so it will be precisely because of the banking covenant issue I have outlined above, not the gearing covenant in their case but the EBITDA multiple cover (another common covenant). The main thing which is protecting companies like Yell at the moment is the reticence of lenders to trigger a fire sale which has, in recent years, led to an increased appetite to refinance debts in breach of the covenants. But as banks need to deleverage that appetite to refi is seriously waning so the fire sales are going to start coming through thick and fast next year.

I can't recall 1 instance of where shorts have driven a company bust. What they do very effectively is target weak companies with serious issues like Anglo, and make a killing. When the 08 crisis struck, and the authorities banned short selling, these companies continued their decline as investors at that point saw the game was up.

The banks will have to be very selective in who they let go, in Yell's case they have little choice, £125 market cap, the assets are worth very little, against £2.6bln debt. I believe they have to give management the chance to turn it around.
In premier foods case, the assets are worth a lot more, so I would remain short/neutral on this.

beeftotheheels

liammur wrote: »

I can't recall 1 instance of where shorts have driven a company bust. What they do very effectively is target weak companies with serious issues like Anglo, and make a killing. When the 08 crisis struck, and the authorities banned short selling, these companies continued their decline as investors at that point saw the game was up.

The banks will have to be very selective in who they let go, in Yell's case they have little choice, £125 market cap, the assets are worth very little, against £2.6bln debt. I believe they have to give management the chance to turn it around.
In premier foods case, the assets are worth a lot more, so I would remain short/neutral on this.

Again with the anthropomorphisms...

It feels a bit like you have decided that I think all hedgies are evil, that I think shorting of stocks is the biggest evil in the universe, and therefor if you can prove one example where shorts didn't sink a company that you'll win this argument.

I don't think all hedgies are evil.

I don't think shorting stock is evil and in fact I brought up shorting as an illustrative example of why fundamentals don't necessarily mean anything in finance.

Shorts do not set out to drive a company under, they set out to make a profit given the facts and circumstances with which they are dealing.

No one knows why or how any particular company fails. We rationalize it after the event, frequently as a failure of management, or that the business was "unsound" regardless of whether or not the business had previously been sound, but we don't "know".

Looking at eurozone economies which domino should have fallen (based on fundamentals) after Portugal? It is a no brainer. Belgium. They will yet fall, but they didn't fall next. Why? Because the markets attention was drawn to Italy, and Spain. That doesn't make Belgium sound, it doesn't even make Belgium sounder than Italy. It means nothing more than Belgium wasn't next.

At the moment the banks are not foreclosing on Yell. That doesn't mean that they won't. And please, please, please, bear in mind that Yell was a PE portfolio company which means that it will have some of the loosest banking covenants around. Because that is what Apax and co do. They negotiate banking covenants better than corporates because it is the bread and butter of their industry.

If you want an example of market perception (not shorting, because I only ever brought up shorting as an illustrative example) destroying an otherwise sound business then the really obvious one would be Guinness Peat Aviation. While collapsing it created an entire aircraft leasing industry in Ireland, the centre of aircraft leasing in the world. But their timing, and their failed IPO meant that they sank into oblivion. Yet their core business, run by their employees in other employment, generates billions annually for GE etc

Another example of leverage destroying an otherwise sound business (with global repercussions) would be LTCM. Because much as you probably like to assume that I hate hedge funds, their bets were ultimately right. The markets moved as Meriwether and co expected them to move, just after LTCM got margined.

It is all about faith, it is all about trust. The mechanics of destruction don't necessarily involve the shorting of stock. But many, many businesses have been destroyed by losing the faith of their investors. It wouldn't surprise me if in 5 years time BOI was considered more sound than many of its European peers. That doesn't change the fact that we had to bail them out because of perceptions of the Irish banking sector which understated the impact of the credit crunch on foreign banks as at that moment in time.

Numerous banks priced as safe at that time, from BNPP, Soc Gen through Barclays and Santander may yet fall in a market where their fundamentals are vastly improved upon what they were back in 2008.

Scofflaw

Again, it's funny - nobody would be slightly surprised that a small business went over because even though it was sound it had a cash-flow problem, and the bank refused to lend because of a perception issue. But it doesn't appear that people believe that scales up to large companies.

cordially,
Scofflaw

beeftotheheels

Scofflaw wrote: »

Again, it's funny - nobody would be slightly surprised that a small business went over because even though it was sound it had a cash-flow problem, and the bank refused to lend because of a perception issue. But it doesn't appear that people believe that scales up to large companies.

cordially,
Scofflaw

It's the markets mate!

When you take a bucket load of debt, bad and good, and slice and dice it and scatter it to the four winds the bad stuff and the risk disappears. So you take thousands upon thousands of fallible human beings, slice and dice 'em and scatter 'em to the four winds and all the bad stuff and risk disappears.

Simple innit?

liammur

beeftotheheels wrote: »

No one knows why or how any particular company fails. We rationalize it after the event, frequently as a failure of management, or that the business was "unsound" regardless of whether or not the business had previously been sound, but we don't "know".

.

This is where I disagree with you. We do know certain models are flawed. For instance, we know that the HMV's and Thomas Cooks of this world are doomed for failure. We know that the internet is killing the high street, and not shorting, as many investors believe.
I agree with many of your other points.

Scofflaw

beeftotheheels wrote: »

It's the markets mate!

When you take a bucket load of debt, bad and good, and slice and dice it and scatter it to the four winds the bad stuff and the risk disappears. So you take thousands upon thousands of fallible human beings, slice and dice 'em and scatter 'em to the four winds and all the bad stuff and risk disappears.

Simple innit?

On the same lines as "it doesn't matter if I take a tile from this ancient mosaic - I mean, it's just one tile!" or "what's the point of me making a contribution to solving climate change - I'm just one person!".

cordially,
Scofflaw

beeftotheheels

liammur wrote: »

This is where I disagree with you. We do know certain models are flawed. For instance, we know that the HMV's and Thomas Cooks of this world are doomed for failure. We know that the internet is killing the high street, and not shorting, as many investors believe.
I agree with many of your other points.

But we don't know anything. We believe them to be flawed, we don't know them to be flawed. In a parallel universe tomorrow the internet dies. I don't know why, I don't know how, I know nothing about computers. But just as leverage dies, the internet can die. Or Amazon could be exposed as a massive fraud and implode as Enron did.

Based on the best of our knowledge at this moment in time their business models may appear to be flawed. That may or may not mean that in fact they are flawed when you consider that after the bursting of the dot com bubble amazon's business model appeared to be pretty flawed yet has with stood the test of time.

In reality you'd need to be looking at a business model over 5 to 10 years to determine whether it was sound or not, but the markets and market players just don't have that kind of time.