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Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into th

Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it clear that major investors either didn't read or didn't understand the data in the public filings. Fun fact 1: My bank WaMu which was itself was maybe $0-$10B in the red so I immediately withdrew $2K in panic. I found that money hidden in my filing cabinet about 5 years ago. Fun fact 2: What was even more crazy is that a famous private equity firm (I think TPG) had just dumped in billions of dollars into WaMu but that still didn't fill the hole (and why would such a big firm be less sophisticated than a nobody like me?) Fun fact 3: FDIC had ~$50B at the time, which maybe wouldn't cover the losses at the pessimistic end of my estimates. Fun fact 4: In accounting classes, I identified 3 very shady areas of accounting: options, off-balance sheet entities, and pensions. I believe the first two have since been fixed but I think pension accounting is still very shady so... beware. Disclaimer: I studied finance and accounting in school and read 10-Ks in my spare time in the early 2000s so I have some knowledge of accounting shenanigans. I also had some experience in real estate. But that's about all the expertise it took. (Several edits made to improve readability.)

vanderZwan 9y ago
I guess that when you say "all the expertise it took", you're comparing yourself to hedge-fund managers and major investors?
- thedevil 9y ago
  Yeah, I assumed that some large investors (e.g. hedge funds) would have someone skilled in accounting shenanigans and would make big bets to move the market to reflect the information that was publicly available.
  - charlesdm 9y ago
    Every single public company is well versed in accounting shenanigans, often to the tune that you almost can't figure out anymore whether someone is making a profit or not. Also, an accounting loss isn't always a "real" loss. For example, with the recent tax overhaul, some companies booked unexpected losses because they had significant carry forward losses. Those were reduced in value because the corporate tax rate went down. But essentially nothing changed -- yes the tax base and book value of these losses were adjusted, but no cash was lost. They can also push revenue or profits back or pull it forward. It really is a jungle out there.
padobson 9y ago
Are there any possible holes in the making you see now? I was curious for a while if crypto was going to pose a systemic risk, but the total market cap[0] was never really high enough. [0]https://coinmarketcap.com/ https://coinmarketcap.com/
- charlesdm 9y ago
  You say that as if it's over. I'm willing to bet a significant amount of money that it will pose a systemic risk in a few years.
  - ojr 9y ago
    there are CFTC regulated bitcoin futures (CME/CBOE) where you can bet on the price dropping in a scenario where it becomes a systemic risk
    - charlesdm 9y ago
      Before the price can drop like that, it needs to become a systemic risk first. Meaning I think it will first still go up significantly before coming down.
- thedevil 9y ago
  I don't know much about crypto. I do know that 1) a payment system with transactions that take more than a few seconds and cost more than a few pennies is not a good payment system for most things. 2) I've never heard anyone talking about using crypto for anything but speculation or paying for ransomware. Even on the internet, I've mostly heard of speculation, ransomware prostitution and buying drugs. 3) Regulators don't like payment systems for ransomware, prostitution and buying drugs. 4) Assets whose prices are based on speculation eventually fall. I could be missing something. As I said, I don't know much about crypto-currencies. Please nobody bet on my comment alone. Also, timing collapses is difficult. Bubbles can last for more than a decade.
- dumbass123 9y ago
  The market cap of Crypto doesn't really have much to do with a systemic risk. System Risks, like what we saw from certain mortgage backed securities, arose from investors thinking something was safe when it really wasn't safe. There isn't really anyone professional who thinks Crytos are a low risk asset. The way certain mortgage backed securities were advertised, professional investors thought they were low risk and dumped a large amount of money into them. Banks and other investors also structured different products that also depended on them (with the assumption that they were low risk). In the end, we found out they got the math wrong and those investments weren't really low risk. That's what created a systemic risk.
nugget 9y ago
If there were less political intervention into financial markets then solid financial analysis would win almost every time. Maybe that's the way the world should be. Since the GFC a lot of macro bets in both US and EU have been bets on political will and central bank actions. In late 2010 Bank of America was technically insolvent (based on analysis similar to yours), but the Fed went to work and backstopped the market in a multitude of ways and the valuation soared. In 2012 I would have bet the farm that Greece was headed into bankruptcy, but the Greek people didn't revolt (as much as anticipated) and so the ECB effectively nationalized most Greek debt across the rest of the Eurozone. I'm no expert but I try to apply these lessons to all new modern crisis I hear about. Underfunded pensions will destroy certain states, or social security will be broke and unable to pay out benefits? Sure; we'll see.
- gameswithgo 9y ago
  >If there were less political intervention into financial markets then solid financial analysis would win almost every time What empirical evidence exists to support this belief?
  - mfoy_ 9y ago
    "Bailout"
    - ChrisLomont 9y ago
      You mean loans that were repaid? That were forced on many banks to prevent signaling, to lessen the chance of a run on the banks? That's not the evidence requested.
  - nugget 9y ago
    My understanding is that if it weren't for TARP several more publicly traded investment banks would have collapsed not to mention wider collateral damage in the market.
    - buddylw 9y ago
dsacco 9y ago
> Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it clear that major investors either didn't read or didn't understand the data in the public filings. That's impressive work, but I interpret that a little differently. There was definitely irrational exuberance going on, but plenty of major investors understood what was happening well before 2008. The reason the valuations were still out of whack is because having the correct data and the correct analysis isn't enough, you have to correctly forecast how the market will react. So there was an unfortunate feedback loop: many investors savvy enough to see the problem were not betting against it because there are far easier and more consistent ways of trading profitably. This is why the most successful funds don't really try to replicate the process you're talking about. Their process is data and hypothesis agnostic. A lot of their work happens to align with the sort of analysis you've described here, but they don't start from the same place.
- 3pt14159 9y ago
  Eh. It works if you're a bear. You get in early, you sell in 2006 while shaking your head. Maybe you leave a bit in with extra exposure to volatility so you win either way, maybe not. Then when 2009 hits you pile in again. It's pretty easy to make way above average returns on the stock market. Just look for the classic signs that it is peaking (low unemployment, high P/E, high leverage, bad demographic trends, etc).
  - ghfbjdhhv 9y ago
    It’s easy in hindsight, that’s for sure.
  - chollida1 9y ago
    2 things about this. 1) if you are a fund you just cant' sit out 3 years. Your fund will shut down as everyone will yank their money,. if its your own money then people will leave as you won't pay bonuses. 2) If you went short in 2006 then you wouldn't have survived until teh crash of late 2008. > It's pretty easy to make way above average returns on the stock market. This is just an absurd statement along the lines of its easy to build a billion dollar company just mimic what all the other billion dollar companies do. Sorry for being so negative to your comment, but come on. That statement can't be seriously defended in any resonable manner.
RivieraKid 9y ago
What's your opinion on Tesla? Many people who read their financial documents say their situation is really bad.
- otalp 9y ago
  Not OP but Tesla's stock is certainly overvalued(Musk said so himself). Their future depends on if they can scale without QA issues - so far even producing a few hundred model 3s a week they seem to be struggling with defects and problems in the delivered cars. The one distinguishing factor is that they have terrific brand value because of Musk, and this could mean that consumers would want their cars despite all the troubles they have. I think this unusual level of brand value is the confounding factor that muddies predictions and is unquantifiable. Brand value makes consumers make non-rational decisions. If it was any other car company with Tesla's numbers you'd be crazy to bet on them succeeding. People who hear that say, Lexus are doing badly and have severe problems with their cars are going to go buy an Audi. People who want a Tesla so far are just waiting for a Tesla.
  - dsfyu404ed 9y ago
    >People who hear that say, Lexus are doing badly and have severe problems with their cars are going to go buy an Audi. If you're buying something where a large part of the value is in the image/brand it's usually not fashionable to complain about it. When a S10 breaks it's GM's fault. When a Tacoma breaks the owner didn't treat it right. When a Kia breaks it's unreliable. When a BMW breaks that's just part of owning a BMW. Tesla has cultivated an image (or rabid bunch of fanboys, depending on your perspective) where you're expected to put up with shoddy build quality and less than prompt service as part of the ownership experience so Tesla gets a pass on those things.
  - NotSammyHagar 9y ago
    Even if they succeed on the m3 they are overvalued. I have bought and sold it several times. I think they'll succeed, hard to see if they will justify their stock price because other car companies can slowly build reasonable evs. look at the bolt - it's a credible car. It apparently loses a lot of money, thats whey don't make enough to meet market demand (unlike other gm cars).
ram_rar 9y ago
assuming your account was FDIC insured. then why even bother taking out money less than minimum FDIC assured sum.
- thedevil 9y ago
  My more pessimistic estimates put the losses at more than the FDIC had at the time and I have no idea what happens when the FDIC runs out of money. It probably wasn't rational but I was really scared.
  - Consultant32452 9y ago
    Don't feel bad man, I remember there being a run on food staples. Things like 50lb bags of rice and beans were sold out at Costco. People were stocking up on guns and ammo preparing for fucking Mad Max. I am not ashamed to admit I participated in some of that myself by doubling up the emergency rations I keep for hurricane season. You withdrawing $2k was not irrational at all given the scale of what was going on.
x2f10 9y ago
I'm starting a career in accounting and would appreciate a recommendation or two on what outside-of-school resources you used to better your understanding. Recommendations?
- thedevil 9y ago
  Sorry, but I didn't actually make a career out of accounting (I only wanted the knowledge to understand investments and maybe as a backup career plan). I don't think I can give meaningful advice on this.
stephenSinniah 9y ago
Hi what accounting topics would you have to learn in order to read the 10-Ks? I have basic understanding in economics and CS. Thank you.
- JamesSwift 9y ago
  I have no economics background (well I guess I took a macroeconomics class once), but Martin Shkrelli (yes that Martin Shkrelli) has a pretty great playlist on youtube [1] that goes through exactly how to do fundamentals analysis. Warning: the videos are long and dense. [1] - https://www.youtube.com/watch?v=ARrNYyJEnFI https://www.youtube.com/watch?v=ARrNYyJEnFI
- thedevil 9y ago
  Sorry, I'm not sure I can give good advice on this because I got a bachelor's degree which is probably way more than needed. There's probably a more efficient way.
Ntrails 9y ago
Pension account is very hard to do properly because pricing the liabilities is, well, entirely dependent on your perspective. In the UK, at least, we might consider several different measures of what that liability number is (and what the deficit is under those measures). Buyout => What would it cost you to pay an insurer to take the liability off your hands (discount rate will basically be the replicating portfolio of government bonds). Accounting => Depending on standard, the discount rate might just be the expected return on your portfolio On a 30 year duration liability that could be a difference of over 200% between the different measures. Which is realistically right though?

vanderZwan 9y ago

I guess that when you say "all the expertise it took", you're comparing yourself to hedge-fund managers and major investors?

thedevil 9y ago
Yeah, I assumed that some large investors (e.g. hedge funds) would have someone skilled in accounting shenanigans and would make big bets to move the market to reflect the information that was publicly available.
- charlesdm 9y ago
  Every single public company is well versed in accounting shenanigans, often to the tune that you almost can't figure out anymore whether someone is making a profit or not. Also, an accounting loss isn't always a "real" loss. For example, with the recent tax overhaul, some companies booked unexpected losses because they had significant carry forward losses. Those were reduced in value because the corporate tax rate went down. But essentially nothing changed -- yes the tax base and book value of these losses were adjusted, but no cash was lost. They can also push revenue or profits back or pull it forward. It really is a jungle out there.

padobson 9y ago

Are there any possible holes in the making you see now? I was curious for a while if crypto was going to pose a systemic risk, but the total market cap[0] was never really high enough. [0]https://coinmarketcap.com/ https://coinmarketcap.com/

charlesdm 9y ago
You say that as if it's over. I'm willing to bet a significant amount of money that it will pose a systemic risk in a few years.
- ojr 9y ago
  there are CFTC regulated bitcoin futures (CME/CBOE) where you can bet on the price dropping in a scenario where it becomes a systemic risk
  - charlesdm 9y ago
    Before the price can drop like that, it needs to become a systemic risk first. Meaning I think it will first still go up significantly before coming down.
thedevil 9y ago
I don't know much about crypto. I do know that 1) a payment system with transactions that take more than a few seconds and cost more than a few pennies is not a good payment system for most things. 2) I've never heard anyone talking about using crypto for anything but speculation or paying for ransomware. Even on the internet, I've mostly heard of speculation, ransomware prostitution and buying drugs. 3) Regulators don't like payment systems for ransomware, prostitution and buying drugs. 4) Assets whose prices are based on speculation eventually fall. I could be missing something. As I said, I don't know much about crypto-currencies. Please nobody bet on my comment alone. Also, timing collapses is difficult. Bubbles can last for more than a decade.
dumbass123 9y ago
The market cap of Crypto doesn't really have much to do with a systemic risk. System Risks, like what we saw from certain mortgage backed securities, arose from investors thinking something was safe when it really wasn't safe. There isn't really anyone professional who thinks Crytos are a low risk asset. The way certain mortgage backed securities were advertised, professional investors thought they were low risk and dumped a large amount of money into them. Banks and other investors also structured different products that also depended on them (with the assumption that they were low risk). In the end, we found out they got the math wrong and those investments weren't really low risk. That's what created a systemic risk.

nugget 9y ago

If there were less political intervention into financial markets then solid financial analysis would win almost every time. Maybe that's the way the world should be. Since the GFC a lot of macro bets in both US and EU have been bets on political will and central bank actions. In late 2010 Bank of America was technically insolvent (based on analysis similar to yours), but the Fed went to work and backstopped the market in a multitude of ways and the valuation soared. In 2012 I would have bet the farm that Greece was headed into bankruptcy, but the Greek people didn't revolt (as much as anticipated) and so the ECB effectively nationalized most Greek debt across the rest of the Eurozone. I'm no expert but I try to apply these lessons to all new modern crisis I hear about. Underfunded pensions will destroy certain states, or social security will be broke and unable to pay out benefits? Sure; we'll see.

gameswithgo 9y ago
>If there were less political intervention into financial markets then solid financial analysis would win almost every time What empirical evidence exists to support this belief?
- mfoy_ 9y ago
  "Bailout"
  - ChrisLomont 9y ago
    You mean loans that were repaid? That were forced on many banks to prevent signaling, to lessen the chance of a run on the banks? That's not the evidence requested.
- nugget 9y ago
  My understanding is that if it weren't for TARP several more publicly traded investment banks would have collapsed not to mention wider collateral damage in the market.
  - buddylw 9y ago

dsacco 9y ago

> Around 2008, I read some public filings by banks. I made only two back-of-the-napkin adjustments: 1) I combined off-balance sheet assets and liabilities into the balance sheet, and 2) I changed the expected % losses to approximately that of Wells Fargo. With those two simple adjustments, I saw that some big banks were in the hole by (combined) tens of billions of dollars. The market prices for these banks made it clear that major investors either didn't read or didn't understand the data in the public filings. That's impressive work, but I interpret that a little differently. There was definitely irrational exuberance going on, but plenty of major investors understood what was happening well before 2008. The reason the valuations were still out of whack is because having the correct data and the correct analysis isn't enough, you have to correctly forecast how the market will react. So there was an unfortunate feedback loop: many investors savvy enough to see the problem were not betting against it because there are far easier and more consistent ways of trading profitably. This is why the most successful funds don't really try to replicate the process you're talking about. Their process is data and hypothesis agnostic. A lot of their work happens to align with the sort of analysis you've described here, but they don't start from the same place.

3pt14159 9y ago
Eh. It works if you're a bear. You get in early, you sell in 2006 while shaking your head. Maybe you leave a bit in with extra exposure to volatility so you win either way, maybe not. Then when 2009 hits you pile in again. It's pretty easy to make way above average returns on the stock market. Just look for the classic signs that it is peaking (low unemployment, high P/E, high leverage, bad demographic trends, etc).
- ghfbjdhhv 9y ago
  It’s easy in hindsight, that’s for sure.
- chollida1 9y ago
  2 things about this. 1) if you are a fund you just cant' sit out 3 years. Your fund will shut down as everyone will yank their money,. if its your own money then people will leave as you won't pay bonuses. 2) If you went short in 2006 then you wouldn't have survived until teh crash of late 2008. > It's pretty easy to make way above average returns on the stock market. This is just an absurd statement along the lines of its easy to build a billion dollar company just mimic what all the other billion dollar companies do. Sorry for being so negative to your comment, but come on. That statement can't be seriously defended in any resonable manner.

RivieraKid 9y ago

What's your opinion on Tesla? Many people who read their financial documents say their situation is really bad.

otalp 9y ago
Not OP but Tesla's stock is certainly overvalued(Musk said so himself). Their future depends on if they can scale without QA issues - so far even producing a few hundred model 3s a week they seem to be struggling with defects and problems in the delivered cars. The one distinguishing factor is that they have terrific brand value because of Musk, and this could mean that consumers would want their cars despite all the troubles they have. I think this unusual level of brand value is the confounding factor that muddies predictions and is unquantifiable. Brand value makes consumers make non-rational decisions. If it was any other car company with Tesla's numbers you'd be crazy to bet on them succeeding. People who hear that say, Lexus are doing badly and have severe problems with their cars are going to go buy an Audi. People who want a Tesla so far are just waiting for a Tesla.
- dsfyu404ed 9y ago
  >People who hear that say, Lexus are doing badly and have severe problems with their cars are going to go buy an Audi. If you're buying something where a large part of the value is in the image/brand it's usually not fashionable to complain about it. When a S10 breaks it's GM's fault. When a Tacoma breaks the owner didn't treat it right. When a Kia breaks it's unreliable. When a BMW breaks that's just part of owning a BMW. Tesla has cultivated an image (or rabid bunch of fanboys, depending on your perspective) where you're expected to put up with shoddy build quality and less than prompt service as part of the ownership experience so Tesla gets a pass on those things.
- NotSammyHagar 9y ago
  Even if they succeed on the m3 they are overvalued. I have bought and sold it several times. I think they'll succeed, hard to see if they will justify their stock price because other car companies can slowly build reasonable evs. look at the bolt - it's a credible car. It apparently loses a lot of money, thats whey don't make enough to meet market demand (unlike other gm cars).

ram_rar 9y ago

assuming your account was FDIC insured. then why even bother taking out money less than minimum FDIC assured sum.

thedevil 9y ago
My more pessimistic estimates put the losses at more than the FDIC had at the time and I have no idea what happens when the FDIC runs out of money. It probably wasn't rational but I was really scared.
- Consultant32452 9y ago
  Don't feel bad man, I remember there being a run on food staples. Things like 50lb bags of rice and beans were sold out at Costco. People were stocking up on guns and ammo preparing for fucking Mad Max. I am not ashamed to admit I participated in some of that myself by doubling up the emergency rations I keep for hurricane season. You withdrawing $2k was not irrational at all given the scale of what was going on.

x2f10 9y ago

I'm starting a career in accounting and would appreciate a recommendation or two on what outside-of-school resources you used to better your understanding. Recommendations?

thedevil 9y ago
Sorry, but I didn't actually make a career out of accounting (I only wanted the knowledge to understand investments and maybe as a backup career plan). I don't think I can give meaningful advice on this.

stephenSinniah 9y ago

Hi what accounting topics would you have to learn in order to read the 10-Ks? I have basic understanding in economics and CS. Thank you.

JamesSwift 9y ago
I have no economics background (well I guess I took a macroeconomics class once), but Martin Shkrelli (yes that Martin Shkrelli) has a pretty great playlist on youtube [1] that goes through exactly how to do fundamentals analysis. Warning: the videos are long and dense. [1] - https://www.youtube.com/watch?v=ARrNYyJEnFI https://www.youtube.com/watch?v=ARrNYyJEnFI
thedevil 9y ago
Sorry, I'm not sure I can give good advice on this because I got a bachelor's degree which is probably way more than needed. There's probably a more efficient way.

Ntrails 9y ago

Pension account is very hard to do properly because pricing the liabilities is, well, entirely dependent on your perspective. In the UK, at least, we might consider several different measures of what that liability number is (and what the deficit is under those measures). Buyout => What would it cost you to pay an insurer to take the liability off your hands (discount rate will basically be the replicating portfolio of government bonds). Accounting => Depending on standard, the discount rate might just be the expected return on your portfolio On a 30 year duration liability that could be a difference of over 200% between the different measures. Which is realistically right though?