Mar 10, 2009

A Week on Wall Street: Day 2

MSD Capital

Among other things, this group manages money for Michael Dell. They have recently started buying equities again. An observation: bank debt is trading like equity, equities are trading like options, and options are through the roof. Future inflation is an inevitability. We will not end up like Japan because the American consumer does not want to save - this is rooted in cultural differences. We'll be more like Hong Kong after the last crisis, although their nation is primarily based on pass-through transactions, so not sure how relevant the comparison is.

Primus Financial Products

This company pioneered credit default swaps that didn't require them to post any collateral based on changes in the underlying contract. Just as the monoline insurers have been hammered, so has Primus. Despite having several billion dollars of negative equity under GAAP, Primus is still alive, primarily because they did not have collateral requirements. In theory, as long as actual defaults stay low, most of these mark-to-market losses should reverse out as the contracts mature. Their portfolio of CDS is in run-off mode and they're trying to reinvent their business model. Our speaker was not very bullish on the concept of a CDS clearinghouse - but I believe it is only a matter of time before CDS companies are regulated as insurance companies (they are basically the same thing).

S&P, Structured Finance Ratings

Originally on the agenda, S&P's lawyers cancelled our meeting at the last minute since they are revamping the method they use to rate structured financial products. The phrase "a day late and a (billion) dollars short" comes to mind. I am amazed that the NRSROs have any credibility left at all.

Overall sentiment: slightly less bearish.

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