Now You See It

Now you don't. How do you buy something when no one knows what it's worth? Bloomberg (10.25.07):

"The collapse of confidence in Merrill Lynch & Co. after the world's biggest brokerage lost six times more than it forecast earlier this month helps explain why Treasury Secretary Henry Paulson's attempt to rescue SIVs [ed. - via the Master Liquidity Enhancement Conduit (what a great name)] is troubled."

O'Neal's Subprime Shakeout Shows Peril of SIV Bailout

Merrill took a huge hit earlier this week "after reducing the value of mortgages and asset-backed bonds. Those are the same hard-to-trade securities owned by structured investment vehicles, or SIVs, that Paulson is attempting to keep afloat with a new $80 billion fund."

The idea is for the fund "to purchase assets of SIVs and prevent the possibility they might be forced to dump them on markets at fire-sale prices to raise money."

The problem is how much are these damned things worth? As Bloomberg points out, "there's no central trading system or exchange", and believe it or not, buyers don't seem to be willing "to rely on estimates by Wall Street traders to value these bonds". Fancy that, eh?

Which means that "(m)any of the 30 SIVs worldwide can't find buyers for their commercial paper -- debt that comes due in 270 days or less. The concern is that without the funding, the SIVs would have to sell their investments and might have to accept fire-sale prices. That would force owners of similar securities to assign new, lower values to their holdings, causing losses to spiral."

The clock is ticking, and the big guys are nervous as hell. Why? Reuters (10.19.07):

"A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession."

SIV fund support grows with PIMCO, Fidelity: Draghi

Thus the effort to throw a lot of money at these things and hope to stem the tide. Good business? Nope. This is desperate business.

Warren's not overly sympathetic. Bloomberg (10.25.07):

"'One of the lessons that investors seem to have to learn over and over again, and they'll have to learn it over again in the future, is that not only can you not turn a toad into a prince by kissing it, but you also cannot turn a toad into a prince by repackaging it,' billionaire Warren Buffett said today to reporters in Daegu, South Korea, where he's visiting cutting-tools maker TaeguTec Ltd., a subsidiary of Berkshire Hathaway Inc."

O'Neal's Subprime Shakeout Shows Peril of SIV Bailout

"Buffett, called 'the world's greatest investor' by biographer Robert Hagstrom, has described derivatives as 'financial weapons of mass destruction.'"