Bionic Man - Part 2

Hmmmm. blogger just did something to my post so I hope it isn't too screwed up. However.....

Yesterday I got the measurements done to have my second cataract operation. In two weeks I'll have my second bionic part. Don't it sound great. Jeez, next I'll be blogging about my kids & grandkids (none yet, thank you!). Anyway, I'll try to keep relatively quiet about the details.

Last night I went to a meeting of the local chapter of AAII - the American Assn. of Independent Investors. Basically it's just a company that offers a forum for discussing how people invest. They have a magazine, website (www.aaii.com amazingly enough) & local groups. This was the monthly meeting which consists exclusively of a guest speaker. This guy was a chartist. He looks at a chart of what is happening with a stock and thinks he can tell what will happen to the stock based on what has already occured. Do I buy it? Well, certainly he had interesting examples and he claims he is simply interpreting what the marked is doing. That may be so but it seems to me that the interpretation is pretty open to discussion. It was an interesting presentation and I'm probably going to email the guy a few questions. (There is no discussion period!)

In other financial news here's what one of my advisory newsletters has to say about how Wall Street does business. This is in regard to all the major investment houses BUT ONE losing money on the sub-prime lending fiasco. Skip it if it's boring but do take care.

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one of Wall Street's "paper mills" has remained
strangely untouched by the mortgage crisis – Goldman
Sachs. By now, you must be familiar with our argument:
Like a rubber ducky floating in a toilet, Goldman's
stock must soon spiral down into the cesspool of the
mortgage debacle.

What might explain Goldman's curious immunity from a
big mortgage-related charge against its book value?
We've learned the firm is setting aside more than $16
billion for this year's bonus pool. But... how big
would the bonus pool be if Goldman were to take a big
($5 billion to $10 billion) write-off before the end
of the year? We don't know exactly, but we would
venture to guess: several billion dollars less.

Reuters reports that if Goldman doesn't take a big
loss on its mortgages, Blankfein will get a $75
million bonus this year, up $20 million from last
year. Goldman's co-presidents, Gary Cohn and Jon
Winkelried, will get $70 million each. It's hard to
believe shareholders would agree to pay one president
$70 million... and Goldman's got two of 'em!
Shareholders are about to get what they deserve...

Now that we've identified Goldman's motive for
masking the size of its mortgage losses, we've been
searching for the weapon. How has Goldman hidden its
losses, we wonder? We've been playing a game of Wall
Street Clue. "It was Colonel Mustard... in the
library... with the wrench..." No, it was CEO Lloyd
Blankfein, in the boardroom, with illiquid bonds that
can't be priced.

An entire category of financial assets (called "Level
3 assets") are so illiquid they can't be accurately
priced. To make up for the lack of a true market for
these assets – which include certain kinds of
securitized mortgages – Wall Street uses computer
models. (Reminder: When your broker starts talking
about a computer model, grab your wallet.) Or, in
other words, these big banks are allowed to "pick a
number" for the value of these Level 3 assets. Guess
which big Wall Street bank has the largest pile of
Level 3 assets as a percentage of its equity? That's
right, Goldman Sachs.