A Different Comparison

To begin with, I apologize for my extra long hiatus. Save today, the financial markets have been taking a beating largely due to the unknowns in asset valuations held on the books of a variety of institutions. As referred to in a previous post, the sooner we get to accurate and full disclosure on the situation, the sooner that all the markets can return to normal function. It has been posited by many, including myself, that the current credit market problem has parallels in the LTCM crisis of 1998. Certainly from liquidity standpoint, there were segments of the market that suffered from a liquidity seizure this summer, although I would make the case that liquidity in general was worse in 1998, but the issue wasn't dragged out as long as it currently has been. Of course, the size and scope of the problem is much larger. That leads us to make a different comparison, one whose size is more in line with the dilemma.

The NASDAQ market index peaked in 2000 at a level over 5000. Back then, after an 80+% increase in prices in 1999, fear/greed coupled with the reality that companies with no revenue should have market capitalization greater than most of the Dow 30 came roaring back into the market and the bubble burst. The current market of SIVs, CDOs, ABCP, and every other acronym you can think of is no different than the NASDAQ was in 2000; just an overheated market where valuations (and value, for that matter) got way, way ahead of itself. The credit risk component was ignored and thrown out the window. Goldman announced today that they are net short this market. It wouldn't surprise me in the final review of all this that it was when Goldman went short and set up hedges in this market that the other market participants realized what was going on and tried to get out. The window, however, closed very quickly. Think of it like a game of musical chairs, where there are four chairs, one hundred players and one of the players controls the music.

There is one significant difference, which is why the NASDAQ comparison isn't made. When the price of Pets.com fell from $100 to 2 cents (or whatever) there was price transparency and the markets functioned well. In the current market for all the acronym products, there is not price transparency nor an agreement on what methodology should be used in determining value. Here's my suggestion on how to speed up the resolution of the problem (this won't happen, by the way). Get all the players, the top 50 say, to disclose in an unambiguous manner what they hold and how they are valuing it and let the chips fall where they may. This may create a sharp dislocation in the market, but it should go a long way toward transparency. The equity markets traded sideways for years until recently, but the bubble needed to burst and sound valuations needed to return to the market. Remember, the NASDAQ today at 2650 is still only half the level of March 2000.

P.S. In the giving credit where credit is due category, yesterday I had the privilege of attending a ceremony at the French consulate in New York where nine US WWII veterans, including my father, were inducted into the Legion of Honor for their service to France. It took a "regime change" in Paris and came 63 years after D-Day, but, still, the ceremony was moving and the words of President Sarkozy and his representatives were heartfelt and genuine.