No More Credit Suisse Writedowns!?

Credit Suisse claims they won't have any more writedowns ahead of them:

From Dow Jones (2007-11-14): Credit Suisse's Calello: Our Markdowns Are Accurate

Let's see if the market believes that.

Unlike UBS and DB they did not "disclose" their exposure. Well, they say now, they are short on CDOs.

Prosper

The Internet makes new inroads, this time into the credit business. Have a lookk at prosper.com. I think it is incredible.

Here you see how loans have recently performed.

Here is a Deutsche Bank Research paper on Web 2.0, which has a section about prosper.com and similar sites at page 8.: Be a driver, not a passenger - Implications of Web 2.0 for financial institutions

Such person-to-person (P2P) lending aims to save costs by cutting out the middleman – i.e. the retail banks (see chart 7).4 Examples include Zopa in the UK, Prosper in the US, Boober in the Netherlands and most recently, Smava in Germany. Another outlet, Kiva, specialises on loans to entrepreneurs in developing countries.
...
Regulatory hurdles are steep but not insurmountable. Lenders are typically not allowed to lend commercially (otherwise they need a credit licence) and loans and/or investments are mostly limited to values between EUR 10,000 and EUR 35,000.5 In Germany, P2P loans are technically granted by a traditional bank which then passes these loans to the investors. As a consequence, transaction costs are higher and Smava only handles bigger allocations starting at EUR 500 (Prosper USD 50).

Lenders bear credit risk

To diversify, most loans are granted on a “one to many basis” – i.e. allocations are being spread across many loans so that the individual exposure to each loan is small. However, all models differ in detail. Zopa does not showcase individual borrowers, whereas most others let borrowers explain who they are and why they need the money. Prosper determines interest rates with an auction mechanism, others have fixed rates. Loans are typically unsecured and repayment is not guaranteed but German Smava offers a rudimentary insurance based on the default rates of a group of borrowers rather than any individual debtor. Borrowers at Prosper can improve their standing by joining (and being accepted by) a reputable group of borrowers, e.g. a group of MBA alumni. The group’s reputation depends on punctual payments being made by all members and hence there is peer pressure to conduct oneself reputably. Shame on those who do not pay on time! Kiva has a strong charity component while others are commercial.

Lenders ignore high-risk borrowers

For P2P borrowers it is easy to judge whether they are agreeing a good deal (compare the best rate offered by a bank with that of the P2P platform). For P2P lenders it is difficult because they bear the default risk and few of them are experts in risk management. Hence, the key challenge to further growth is to find more people willing to lend. Prosper, the Californian outlet which went online February 2006, has brokered loans worth around USD 70 m so far but had unfunded loan requests of more than USD 460 m. Loan requests from low-risk borrowers have the highest probability of being funded (around 45%) whereas high-risk borrowers are being ignored (less than 5% of loan bids are funded) (see chart 8).
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Evidence from Prosper illustrates the difference peer-review and peer-pressure can make: default rates are typically much lower if borrowers have joined (and were accepted by) a group of borrowers – this holds in particular for high-risk and non-rated borrowers.6

Many lenders are not primarily attracted by higher interest rates but rather by the community aspect: potential borrowers explain who they are and why they need the money and lenders can actually decide which loan requests to fund and which not. A compelling story or stirring plea can make a difference. Online P2P lending also has a strong non-establishment twist (“no banks, better deals”) and many users prefer doing business with other people rather than with an impersonal bank.

Mimicking Buffett's Picks

Below is a link to a paper by Gerald S. Martin and John Puthenpurackal about mimicking Berkshire Hathaway's stock picks (and exits), whenever they become publicly known.

BTW, the decisions could have been made by either Warren Buffett, Charles Munger, or Lou Simpson.

Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway

Actually they seem to show that this would result in an out performance of over 14 % of the S&P.

Buffett's Statement on Taxes

Buffett prepared an eloquent statement about taxes for a hearing in Washington DC.

From CNBC: VIDEO AND TRANSCRIPT: Warren Buffett's Statement to Congress on Estate Taxes

Berkshire Hathaway's Portfolio

Yesterday came out SEC form 13F-HR of Warren Buffett's Berkshire Hathaway, which lists all its public company stock holdings at the end of the third quarter 2007.

The total was USD 65.8 billion. In comparison, Berkshire Hathaway has today a market capitalisation of around USD 213 billion.

Have a look at the list (13F-HR form) for yourself.

Woman Quants

Woman in the quants field by Leah McGrath Goodmann: Women in Trading 2007 : Women on the Edge

You need an account first, but it is a longer article, has some names and gives an idea what is going on in the world of developing trading algorithms.

“Of the 7,000 quants we have in our global database, only about 3 percent are women,” says Dominic Connor, director of Paul & Dominic Quantitative Recruitment in London.

The STOCK BLOCK

Renamed the Clemens Investment Blog to The STOCK BLOCK. Please note also the URL change to http://stockblock.info/.

Gannon On Investing

Another blog for the watchlist: Gannon On Investing

The Big Picture

Have a look at this blog The Big Picture. On occasion, the comments might be interesting as well.

E*Trade Volatility

E*Trade bounced back +41%.

Bloomberg: E*Trade Bankruptcy Is `Highly Unlikely,' BMO Says (Update4)

Van K. Tharp

Van K. Tharp is a psychologist specialized in coaching traders.

A very good book is:
Trade Your Way to Financial Freedom

From No Requirements to Be Happy: Part II:

A critical difference between good traders and the average trader is that good traders thrive on simplicity and not knowing. They come from being and simply go with the flow of the markets. If the markets tell them it's time to go up, then they buy. They might be wrong 60% of the time, but that is part of the game. They'll get out when the markets are no longer going up. They do this by simply observing what is happening, and are much more joyful because they are going with the flow. They allow themselves to let their profits run, because it's okay to be in the market when it is going up. They also allow themselves to get out, because it's okay to get out when the markets start to do something else.

What I've just described is pure trading. Its essence is simple. It doesn't require a lot of time. Instead, it gives you lots of time to play. It also involves seeing all possibilities and being in the flow of what is happening right now. You cannot do this if you are preoccupied with being right, doing hard work, or having money or profits. You can only do this when your mind is pure and you can be at one with what is going on around you.

E*Trade -58 %

Another one bytes the dust... today 2007-11-12 E*Trade is down 58 % after announcing writedowns on asset backed securities. They have an investmen of around USD 3 billion in ABS. You wonder what an online broker has on its balance sheet.

Update on Bloomberg: E*Trade Shares Fall; Analyst Says Bankruptcy Possible (Update4)

Here is the wording from E*Trade itself.

Banking Blood Bath

Very interesting albeit scary article about what is on the balance sheets of the big investment banks.

Nouriel Roubini's Blog: The bloodbath in credit and financial markets will continue and sharply worsen (2007-11-05)

It also points to this FT article (from 2007-11-04) predicting more write downs at Merrill Lynch, Citigroup, and UBS: What’s the subprime damage to banks?

The first article also looks into how many structured product assets are valued on an internal model valuation method, also named 'Level 3' (level 1 means you just take market prices, level 2 means you base your valuation on other prices of similar asset classes - level 3 basically means you make up your own prices).

Look at the info Citigroup just filed with the SEC today: they have $135 BILLION in LEVEL 3 ASSETS.

I have a neat idea.

Why don't we take every single major financial institution out there and then divide their total Level 3 assets by their equity capital base and make comparisons?

This will give us a better idea as to which of them may really remain solvent at the end of the day. Shall we?

Let's have a look at Citigroup. Their equity base is $128 billion. Therefore, their Level 3 assets to equity ratio: 105%

How about Goldman Sachs? Level 3 assets are $72 billion, equity base is $39 billion. Their Level 3 assets to equity ratio is 185%.

Morgan Stanley: $88 billion in Level 3, equity base is $35 billion. Ratio: 251% (WOW!)


Bear Stearns: $20 billion in Level 3, equity base is $13 billion. Ratio: 154%

Lehman Brothers: $35 billion in Level 3, $22 billion in equity. Ratio: 159%

Merrill Lynch: $16 billion in Level 3, $42 billion in equity. Ratio: 38%

Here is the Level 3 assets to equity ratio summary:

Citigroup 105%

Goldman Sachs 185%

Morgan Stanley 251%

Bear Stearns 154%

Lehman Brothers 159%

Merrill Lynch 38%

This becomes very interesting now, doesn't it?

Looks to me like Goldman Sachs and Morgan Stanley are by far in the WORST situation among the investment banks.

And yet the media is focusing all of their attention on Merrill Lynch---which actually has by far THE LEAST EXPOSURE of all of them.

BTW, UBS reported in third quarter 2007 CHF 23.4 billion in 'level 3' assets. This in addition to another CHF 21.6 billion in MBS and CDO assets. UBS has equity (without Goodwill) of CHF 33 billion.