[FoRK] Reports from the war...

Jeff Bone <jbone at place.org> on Mon Aug 6 10:00:56 PDT 2007

On Aug 6, 2007, at 11:24 AM, Adam L Beberg wrote:

> Well since nobody has been doing it in the debt markets for years,  
> we've got that real trouble now.

I seriously doubt that this particular issue is as common or  
significant as you're making it out to be.  I would imagine all those  
asset managers with large debt holdings pay *very* close attention to  
mark-to-market value.  Otherwise, there's no way to hedge the risk,  
much less trade it (which is of course what all those guys  do.)

Agreed that we've got problems now, but I seriously doubt it's  
because a whole *industry* full of guys woke up recently and said  
"holy crap, I wasn't paying attention to the market and my giant  
portfolio of debt just ran completely away from me."  That isn't my  
part of the business, though, so I can't speak authoritatively on  
common practice.  If what you say is true, it's (very) bad practice.

In any case, yes, there is a lot of bad paper out there --- paper  
that should never have been written in the first place.  But any real  
collapses that occur as a result are going to be because the paper  
holders were playing high-risk / high-reward games with said paper.   
And yes, you're right, the net result is going to be some oddness in  
the market over the next months and years.

It is worth noting, though, that *nobody* seems to have a handle on  
the "right thing to do."  Inflation rumors (and signs, and rumors of  
signs ;-) abound, yet the scuttlebutt on the street is that the Fed  
may well *lower* by 25 bp next time around.


Interesting times indeed.


jb


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