Same As It Ever Was

Welcome to the second half of 2008.

We begin the second half pretty much the same way we finished the first half:  Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.

One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.

Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm’s one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.

You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.

No, it was the accountants’ faults. 

You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.

Therein lies the foible of Schwartzman’s Folly, for if you own marketable securities for which there is no market, then by definition, these are not really marketable securities.

How then to price all of this paper on the books? Why, just rely on the people who bought them in the first place! Never mind that they don’t understand what they own, they failed to do their due diligence before buying this garbage in the first place. Do not acknowledge these folks have an enormous personal incentives NOT to mark this junk down.

You can trust them! They’re good people.

Perhaps this helps to explain why Blackstone Group’s stock is off nearly 50% since the IPO: The foolish shareholders of BX have been making the mistake of marking the stocks-to-market. My suggestion: Forget that they are a private equity firm, and consider instead your own approximate fair value interpretation of what the company is worth!

Attention fund managers: Here is my new Stephan Schwarzman inspired idea. Y’all should be buying Blackstone in the open market today at $18, and at the four o’clock close, be marking it at $36. That will be not only be your fair value interpretation of what it’s worth, but it reflects a 100% gain instantly.

And, that’s before the $.30 dividend.

Indeed, for those investors struggling with the current selloff, I suggest you forgo mark-to-market accounting at present, and instead start implementing mark-to-subjective-self-interested valuations. Your portfolio returns, and you’re outside investors, will thank you for the immense improvements in your performance.


The Blackstone Group, Since IPO
(daily chart, one year)




Musical reference and soundtrack via the Talking Heads

FASB 157 — Delayed, or Not? (November 15, 2007)    

SFAS 157: Market Prices Too Low? Just Ignore Them!  (March 31, 2008)


Are Bean Counters to Blame? 
NYT, July 1, 2008   

Summary of Statement No. 157
Fair Value Measurements

Mohamed El-Erian Argues for Propping Up Asset Prices
Naked Capitalism, MARCH 18, 2008




:  Listening to self-interested CEOs is not
suitable for all investors and involves risk of loss. Although the information contained herein
has been obtained from sources believed to be sentient, its
reliability, accuracy and completeness cannot be guaranteed. This report has not been
reviewed by legal or accounting counsel or Harvey Pitt or anyone of even a modest
degree of competency. Followers of this advice may either make a lot of
money or go to jail or both. This
is for informational purposes only and under no circumstances is
it to be construed as an offer to rub, lick, massage, or touch you
there or here or especially here in an inappropriate manner. At various
times, we may mock various transactions in the securities referred to
herein. Any recommendation
contained in this report may be considered sarcasm, but if you failed
to recognize that you deserve to lose money.

Your mileage may vary.

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What's been said:

Discussions found on the web:
  1. VennData commented on Jul 1

    Great idea-er. I’m also going to slap back those Case-Shiller down ticks to my humble abode prior to the meeting with the refi people at Countrywide… er… a… Bank of America… er… a… the soon-to-be Federally-owned Bank America.

    Now, let’s see… about my Escalade…

  2. TheInvestingSpeculator commented on Jul 1

    Most people are bullish, no matter what is happening in this economy. I wonder if Schwarzman ever talks to his partner Peterson. He seems realistic.

  3. Philippe commented on Jul 1

    One may forget a new culprit the capital adequacy ratio, though this one may as well be construed against accountants whom were not foresighted enough to prevent bonus and dividends payments when losses were not booked and moving swiftly to the attic under FASB 157
    Why wonder there is credit crunch in this universe?

  4. cinefoz commented on Jul 1

    Let’s see. We need SarBox to protect us from liars and thieves (no argument).

    We need FASB 157 to protect us from liars and thieves (no argument).

    Oil and other commodity parabolic price increases are just due to honest folk experiencing forces of supply and demand. Just keep walking. Nothing to see here. (what a dumbass or a liar or a thief would believe.) It couldn’t be long only index funds or possible illegal collusion combining to form a ponzi operation. I pity the last fool in.

  5. dblwyo commented on Jul 1

    Here, here. Thanks for having the stomach to wade thru that NYT column – I couldn’t after two lines. And then putting this together. Nicely done.

    Roll it forward – how much of what Blackstone has invested in is based on the same faulty logic, bad data and unwillingness to face reality ?

    I’ve worked with a fair number of the mid-market PE guys and, by-n-large, they’re bright, not given to either maudlin sentiment (being polite there) and face reality every day. Let’s hope Stevoroni ain’t representative of his industry or firm. (Ironies intended).

  6. Cos commented on Jul 1

    I really love this site. keep throwing fireballs and educating the uninformed.

  7. cinefoz commented on Jul 1

    Psst …. wanna make some real money? Fast? A lot real fast? Listen up.

    Slowly withdraw your money from commodity index funds and put it in sectors that are having the shit kicked out of them because of high commodity prices. Then, after you have made the switch, announce it to the world and encourage others to follow you in.

    Having less money go into the index funds will do two things. There will be less upward price pressure. As a result, commodity futures will be shorted with confidence, as opposed to now where is it usually a sucker bet. This will eventually snowball into a massive decline in the index fund, which will probably cause commodity prices to rapidly fall.

    You win a bundle.

  8. Gary commented on Jul 1

    Phew! Thank god I read the disclosure before hitting the buy button.

    Very insightful; very funny; very sad. Don’t stop.

  9. Darkness commented on Jul 1

    Indeed, for those investors struggling with the current selloff, I suggest you forgo mark-to-market accounting at present, and instead start implementing mark-to-subjective-self-interested valuations. Your portfolio returns, and you’re outside investors, will thank you for the immense improvements in your performance.

    Kinda describes the dot com era, no?

  10. tomd commented on Jul 1

    This paragraph near the end of the article seems to take care of Mr. Schwartzman’s argument:

    But some say Goldman Sachs proved why FAS 157 works: Goldman has been marking its books to market for years, and as a result, its risk officers were able to hold back its go-go traders from making bad bets when everyone else was throwing down their chips last year into the subprime game.

  11. Andy Tabbo commented on Jul 1

    It sounds like Scwartzman’s still in the early stages of the grieving process. He seems stuck at the ‘anger’ phase. It tells me this market still has a few more levels to go down before we get to some ‘acceptance.’

    – AT

  12. mike e. commented on Jul 1

    Barry – if you can’t “realize” a gain until you sell a security (e.g. common stock held in an investment account) – why should you realize a loss when still hold the asset? They are called “unrealized” gains/losses for a reason.

    The loss is only realized when the instrument is actually sold on the market. I can see Scwhwarzman’s point.

    It is up to the pro investors/analysts to weed through the complex balance sheets and formulate their own opinions as to the value of a company. Much like they eventually did with Enron.

    I am not defending Schwarzman – FASB was enacted to prevent Enron blow ups…I can see his point though

  13. Philippe commented on Jul 1

    Point well taken but they are assets deemed to be held till maturities and assets hold for trading purpose, the same goes for derivatives books « management position versus trading« . The divergence occurs when assets hold for trading are all of a sudden moved in assets to be held till maturities and moved to level 3 under FASB 157. Goldman moved an additional 2/3 % lately in level 3 (read assets were no longer for short term trading) source Bloomberg.
    Throughout experience it is of human nature to consider that assets to be hold till maturities are short term speculation turning sour.

  14. Barry Ritholtz commented on Jul 1

    You are confusing a tax issue (realized gains) with a valuation issue (worth of held assets)

    Otherwise, how would Warren Bufffett be able to tell his shareholders how Berkshire’s perfromance is? BRK is holding all of these assets that have appreciated in value, and he marks them to their closing price.

    Realized gains do not occur until a sale takes place. Until then, they are unrealized gains.

  15. catman commented on Jul 1

    Why is everyone ignoring cinefoz these days?

  16. gunthestops commented on Jul 1

    I see Kudlow talked with Pres. Bush in the last couple of days about economic issues. Kudlow said Bush has some really good economic ideas and is for a strong dollar!!! This is from a guy who can’t string two sentences together (Bush) and from Kudlow who has been wrong on almost every economic subject he talks about!!!! Plezzzzz just shoot me!!!!!!

  17. daveNYC commented on Jul 1

    Best fine print ever.

  18. Douglas Watts commented on Jul 1

    It is up to the pro investors/analysts to weed through the complex balance sheets and formulate their own opinions as to the value of a company. Much like they eventually did with Enron.

    Eventually = too late.

  19. Ken commented on Jul 1

    So, if this change were to be allowed, would it apply across-the-board? Take the case of someone who mortgaged a house two years ago for $800,000, and now finds that the market only wants to give $500,000 for it. Could they self-evaluate it at, oh, 1.5 million, and the banks would have to accept that valuation for purposes of refinancing, equity loans, and so forth?

    Somehow, I suspect Schwarzman’s generosity would not extend quite that far.

  20. bdg123 commented on Jul 1

    Schwarzman may or may not be a brilliant person. Most likely not from what I see. But, the reality is society has misplaced value if they are listening to him anyway. All he did was schmooze his way to relationships that allowed him access to discounted capital that was applied against the inflation trade – that being private equity. He did the same thing every homeowner did in the last thirty years. Buy something and wait for the time value of money coupled with market enthusiasm to provide a return. WTF does that have to do with the real economy? Or knowledge of what is important to the real economy? He’s a moneychanger. And as such, his perspective on the world is a flawed view of what he knows. Which, it appears from the above post, isn’t much.

  21. cinefoz commented on Jul 1


    Too many here have fallen for the hype about commodity prices being a function of supply and demand and not a case of asset inflation, plus probably a little ponzi action. They possibly even rely on the assurance of industry experts who claim it just isn’t so.

    Parallels like experts who claimed no housing bubble here, or subprime is not a problem, or liar loans are good for poor people, or there will only be a couple of bucks in write downs and then it’s over, or credit ratings are sanctified truth, or credit default swaps are good riskless business, or mark to model work pretty well have no similarity … or so the experts claim.

    My personal belief is that the commodity bubble probably started several years ago and went hyperbolic only recently. Turnings commodities into an asset class capable of supporting long only investments was the beginning of the problem.

    The technical financial aspects of this scheme are complicated. I was curious and it took several books on derivatives, options, futures, and the like just to begin to understand the basics. The bubble has progressed for so long, and so gradually at first, that it seems normal and institutionalized. It’s not.

    Add in lazy thinkers who have seen Al Gore’s movie and read Matthew Simmons and now consider themselves experts on peak oil.

    Congress will probably burst the bubble created by long only index funds soon. Then, and only them will the correct magnitude of the problem become apparent.

  22. michael schumacher commented on Jul 1


    could not agree more……..kudos to you for a great POV.


  23. mhm commented on Jul 1

    “Followers of this advice may either make a lot of money or go to jail or both.”

    That is the point, you get a low security time off and keep most of the money (wages/bonus) unless it was an open fraud. It might be a good deal after all.

    Now ISM:
    – price index up -> bad
    – stable order amount in a price inflation environment -> actually down -> bad
    – employment index down -> bad
    – production up but so is inventory -> neutral to bad

    And somehow this is all good news…

  24. michael schumacher commented on Jul 1

    speaking of peak oil experts…try something based on science.


    read it and you’ll see peak oil is not a theory…..but that says nothing about the speculation aspect of it. We are just allowing the price to get ahead of what will happen very soon.


  25. clipb commented on Jul 1

    the nyt, as is so often the case, misses the sublties of fasb 157: the 3 levels. 1. mtm for liquid, actively traded stuff. 2. fair market estimates on somewhat illiquid stuff and 3. mark to model (or mark to myth to quote warren b) for highly illiquid secutities like (duh) cdo, cdo squared etc. the problem with the level 2, 3 is that the models were/are probably based on models similar to mhp, mco AAA model ratings on that stuff, which history has shown were totally bogus bs. add to that the leveraged owners of this stuff in liquidation mode and you have the nature of the problem. just look at the drop in abcp from last july to early winter: the market collapsed more than 500bn as siv type guys bit the dust. nyt, a waste of reading time, as usual.

  26. awoijtr commented on Jul 1

    The NYT has officially become a rag. It’s like the Old Gray Lady has been laid to rest and her incompetent newphew-in-law is now running the show.

    Anyway, people like Schwarzman -are- the problem. The billionaire hedge fund managers in NYC have a ridiculous amount of power and influence and have basically rigged the game to their favor, which is a small but illustrative part of why things are going crazy in our economy and why must of us are in trouble. Any advice from people like Schwarzman should pretty much be dismissed after the second word. In more radical times they’d be lynched.

  27. TCB commented on Jul 1

    Blaming FASB157 reminds me of this quote from the British comedy duo, Bird and Fortune on the sub-prime crisis . . . “What was stupid is at some point somebody asked ‘How much money are these houses actually worth?’ If they hadn’t bothered to ask that question, then everything would have gone on perfectly as normal” see

  28. patfla commented on Jul 1

    “Same As It Ever Was” (Talking Heads – movie “Stop Making Sense highly recommended).

    “This is not my beautiful bank”
    “This is not my beautiful market”
    “My God – how did we get here?”

    apologies to David Byrne.

  29. mike e. commented on Jul 1

    Barry – one last attempt to hold my weak ground.

    Buffet marks to market close to demonstrate portfolio performance. But, I think the value of the assets can only be truly determined when they are ultimately sold on the market (of course, analysts and pro investors can always peer into the balance sheets…also known as the BS…and mark to present market).

    I think “valuation” is different then selling and realizing. FASB forces the corporations to “realize” the losses before the asset is sold. Can they not take a tax write off on these losses?

    If there is no market for these securities, shouldn’t the “mark to market value” be $0? If that is the case FASB is exacerbating the crisis.

  30. mike e. commented on Jul 1

    what i mean to say is “the crisis is being exacerbated by FASB”.

    Banks are being forced to recapitalize to the detriment of existing shareholders. They are unwilling to lend because they need to fix their Balance Sheets.

    chicken or egg?

  31. zak822 commented on Jul 1

    “This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages;”

    The lenders were not incompetent. They were making deals that would earn them fat bonus’s and they did an excellent job of it. There was no money in it for them if they didn’t make the loans, therefore the loans were made.

    So what if it all blows up later, they got their bonus checks and they get to keep them. From that perspective, everything is fine.

  32. TCB commented on Jul 1

    Yeah I DID like the T Heads reference!

    As for the FASB thing . . . no market does not mean $0 value. There are ways of estimating values of securities based on the values of underlying (or at least highly correlated) assets, for which there hopefully is a market.

  33. wunsacon commented on Jul 1


    >> Congress will probably burst the bubble created by long only index funds soon. Then, and only them will the correct magnitude of the problem become apparent.

    The market will correct itself. Current prices are causing behavioral changes. My next car will be electric. (I was going to buy this year but have decided to wait until 2010.) SUV sales are tanking. BEHAVIOR will bring oil prices down. Or at least moderate them.

    Not Congress. They’ll TAKE CREDIT FOR IT. But, that will be coincidence without causation.


    Are you still bullish on oil? I’ve cut down on oil co’s, because I don’t see how we could get much more out of this run. I think we’ll instead see behavioral changes. But, of course, I’m not sure…

  34. jdogg13 commented on Jul 3

    First, to Mike E. When you buy securities on margin you have to mark to market. That’s why you get a margin call when your portfolio crashes.

    Second, why no mention of FAS 159? That’s the one where institutions can mark down (to market) their liabilities (debt) because their credit quality/rating has deteriorated. Yikes!

  35. be-mine commented on Jul 5

    Interesting article. I need to read it again in order to digest all the information correctly!

  36. mike e. commented on Jul 9

    Barry – different subject…I wanted to revisit the post on FAS 157 and Schwarzman and now Jamie Dimon.

    Schwarzman was ineffective at articulating what Jamie Dimon just recently said.

    FAS 157 forces private equity (or any acquirer) to write down the value of assests from the acquired company to the current depressed market values (even if the loans and assets are sound). “The target bank could emerge with negative value under mark-to-market accounting, thereby forcing the acquirer to raise more capital”…I add…to the detriment of existing shareholders.

    I think Dimon agrees with Schwarzman. He agrees…maybe for different reasons…but I think he agrees.

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