jack-lambertIt is Super Bowl week for the National Football League.  It is also Super Bowl week for the market in my opinion.   In addition to a slew of earnings releases from market bellwethers in the pipeline, we will get economic news providing us some indication of just how bad 4Q08 was.   We know it was bad.   Retail data has been revealed, write downs have been announced and expectations have been slashed.   However, if it turns out to be worse than expected it will roil the markets and provide the television pundits plenty of fodder in which to claim that we are all going to go personally bankrupt, at least financially.  If we some how find a way to meet or exceed consensus estimates and market psychology does not pull us down much below the November 2008 lows, AND we end the week at 8000+, I expect that we will have established a bottom.  Small consolation, but you have to take what you can get right now.

Now to tie up a few loose ends:


Why are banks not lending?  This is the question my mother asks me on a weekly basis.  The good news, for me, is that she is not alone in asking me this question.  The bad news is that people don’t like my answer.   The reason, in my view, is that while TARP did neutralize the balance sheets of a handful of banks, it did nothing to remove the associated plutonium.   As such, when then portfolio companies of these lenders go Southern Hemisphere on their covenants, it sends the balance sheets back out of the alignment.  Further, as more companies are expected to experience financial distress, lending ratios will get further sideways.

In order to remedy this situation, the system is going to need a lot more money or a mechanism to move these bad assets of the balance sheets or to nationalize the banking industry.   This is probably the most difficult decisions to make, because there is no good answer.  Nationalizing the banking industry would basically put an end to the free market economy and market based capitalism as we know it.   Creating a liquidating asset management company like a Resolution Trust Corporation seems to make more sense on its face.  However, it creates a litany of questions that are vexing regarding pricing (face value, market to market) and who keeps gains and absorbs after the fact losses.  Clearly this would become a political issue resulting in the realization of the lowest cost denominator solution.  When is doubt print more money right?

That is FAScinating

Not really, unless you dig accounting issues, but I wanted to stick with the theme.

In November 2007, the Financial Accounting Standards (“FAS”) Board (“FASB”) issued Rule 157 (“FAS 157”).   FAS 157 dealt with the fair value measurement standard for assets whose value was, wait for it, hard to measure.  In developing FAS 157, FASB said it considered the need for increased consistency and comparability in fair-value measurements and for expanded disclosures about such measurements.  FAS 157 defines “fair value” as the price that the asset or liability would achieve in an orderly market transaction between informed participants at the measurement date.   I’ll spare you the rest of the accounting detail.

When FAS 157 was issued there was a litany of articles about how it was going to “rock the financial services industry to the core” or some such other derivative statement (most these “gloom and doomers” failed to recognize Goldman Sachs had been using mark-to-market accounting for years).   That didn’t quite happen, at least not at the time.  However, in light of the financial crisis many people are pointing at FAS 157 as the cause of unnecessary pain, as it has forced banks to market their assets to market in very troubling financial conditions.  Many of those who are complaining the loudest are private equity personalities, people who don’t like FAS 157 to begin with.  Historically, private equity firms would hold their investments at cost for at least a year unless a subsequent transaction justified marking it up or down.  They were negatively impacted, in their view, by FAS 157 as it would expose to the rest of the world, or at least to limited partners, their missteps.  Woe is me.

Well it turns out woe will be quite large.  This morning we learned that Thomas H. Lee partners wrote down $524 million worth of assets in order to comply with FAS 157.   With $8.1 billion under management, this is a healthy sum for a firm that is considered one of the oldest and most successful in the business.   I expect we are going to learn of significant write-downs across the industry.   On the plus side, this will give outsiders some insight into their valuation assumptions and view of the future, which will help inform companies as they consider their options for funding operations and achieving liquidity.


Okay, so I could not keep the streak going.

As expected, New Seasons Markets lost in their bid to not comply with the subpoena they received pursuant to the Federal Trade Commissions antitrust exploration regarding Whole Foods and Wild Oats.   However, New Seasons was able to come to an agreement with Whole Foods to limit its disclosure in certain areas so as to reduce the cost of compliance and limit the risk the company was taking in turning over sensitive information.   Through this process it also came to light that another company also sought a legal solution, but it is unclear who it was and what outcome their case has met.