Monday, October 22, 2007

Reinforcement for My M-LEC & SIV Comments

In this recent post, I discussed the wisdom of the proposed M-LEC fund, to alleviate the difficulties in the commercial paper markets resulting from the much-feared, possibly imminent defaults of various SIV funds.


On Saturday, I happened upon a friend at my fitness club. He manages some fairly sizable institutional funds for a large, diversified financial services firm which resulted from the acquisitions of his old company.

In discussing the M-LEC and SIV situation, he agreed with my assessment of the situation, as well as my questions regarding the difficulty of exiting the M-LEC solution.

To that, he added that nobody knows what is the nominal value of the bad SIV assets. Thus, the time involved to either write down the assets 'safely,' or declare their return to nominal value, is unknowable.

He didn't find fault with my analysis of the need for market-clearing prices. Only that nobody knows how badly equity markets could be damaged, for a time, by the loss of capital in the fixed income markets, as commercial paper is in default and CDO losses are realized.

Which is to say, another seasoned professional, looking at the same situation, sees essentially the same picture. And expresses doubts that anyone really knows how large the problem may be, nor just what will occur if/when we see the true marking-to-market of the complex instruments which triggered this entire situation.

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