could get more ugly, page-11

Nova

Many thanks for the feedback!

I am not arguing previous valuations or attempting to look in my rear vision mirror when trying to estimate the current value of the enterprise. That said, the "$10 stock" that people seem hung up on was a momentary blip and shouldn't be used as the basis for all valuations going forward (there are plenty of examples out there of businesses becomuing unstuck despite their shares rallying to new highs: I'm sure the guys over at Countrywide Financial can give you some background on that).

As you know, any leveraged business can ramp up the value of an enterprise in good times: take for example the Japanese banks in the late 1980's who had gearing against property at ridiculous levels - and they too came unstuck - ref: Yasuda, Tokai, Mitsui, etc.). When borrowing margins are thin, and interest rates low, anyone can generate a somewhat-momentary PV (of future cashflows) by borrowing short and lending long (cash v equity, cash v property, cash v fixed interest, etc). In banking circles this problem was addressed through the capital charges levied by Basle2 which in effect penalised banks (in capital terms) for the risk associated through their asset-liability gaps. For investment companies, however, their is no prudential governance preventing such gearing, and it is left in the hands of lenders (banks) to determine the "borrower worthiness" of any given company. What we have witnessed in the last 8 months is an unwinding of the credit contraction, leading banks and lenders to wake-up to the fact that the A-L gaps are presenting serious threats to come companies.

The "$10 company" you refer to is just one of many who are currently under pressure to restructure the asset-liability mismatch in their books. If you remember Rams cam unstuck from the same proposition: lending long (average asset around 8.9 years) and borrowing short. There are other examples out there yet to come to the fore, but I am sure we will hear about them soon enough.

Best regards
Kit