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Lessons Learned Trading Star Wars Cards

I have realized that everything I needed to know about the current mark-to-market debate, I had learned as an 8 year old. Back then, my friends collected baseball cards – but I invested in Star Wars cards.

Much to my surprise, I have become quite numb to billion-dollar write-downs in the past year. After the initial stigma transformed into passé, paltry multimillion dollar losses on bad debt seemingly were buried on page B3 of the Wall Street Journal. Throughout the current crisis, many fingers have pointed to fair value accounting requirements and illiquid assets as fueling a fire.

I have realized that everything I needed to know about the current mark-to-market debate, I had learned as an 8 year old.

Back then, my friends collected baseball cards – but I invested in Star Wars cards. Each Saturday, I took my 30 cents allowance and went to the local newsstand. I would buy 2 packs of Star Wars cards. First the Blue Set, then the Red Set, followed by the Yellow, Green and finally Orange. My passion for my investments grew and I was sure I was going to be rich.

Price guides confirmed my investment skills. For example, I found a Hans in the Millennium Falcon, Blue Set, #30 for $1.25 when the price guide had it at $2. I also convinced friends and family to sell random assortments of cards to me for pennies on the dollar. Then I grew up and turned 10. My interests changed from galaxies far, far away to the BMX bike for sale at the store down the street. Not to worry, I was certain I could sell a few assets and be riding in freestyle competitions within a week. That’s the day that I learned about mark-to-market.

As it turns out, the same people who sold the cards also published my pricing guides. My $1.25 deal on Hans Solo would only fetch 10 cents at the card shop. Most of my cards were practically worthless. All the bragging about my youthful net worth was now being thrown back at me. I put the cards into the local BWIC listing however the $200 paper empire could only get a single $20 sympathy bid from Mom.

I am not alone partaking in the exercise of taking mark-to-market from theory to practice. Investors have bought assets, from CMBS tranches to CDOs to whole loans, which are now being marked to mystery. Prudent funds and corporations used derivatives to hedge risk but did not anticipate the dilemma of counterparty risk.

Uncertainty abounds but Chatham Financial urges a consistent approach for evaluating appropriate credit spreads for both assets and liabilities. Chatham Financial is working to synthesize our FAS 157 accounting, our Capital Advisory due diligence, our Financial Management System valuation engine and our market execution knowledge. As we all take a hard look at the markets, Chatham is trying to apply the lessons learned long, long ago in a hometown far, far away: never use the pricing guide published by the card maker.

By Chatham Financial
Litigation Support, Consulting and Expert Witness Services in Derivatives and Hedge Accounting
ABOUT THE AUTHOR: Philip A. Weeber, Derivatives Advisor, Chatham Financial
Philip A. Weeber leads Chatham Financial’s Special Situations Group where he is involved in securitization workouts, derivatives valuations for litigation and dispute resolution, derivatives in bankruptcy and trustee advisory. Previously, Phil led the Structured Finance Team advising mortgage REITS and distressed debt funds. He has advised on over 2,000 interest rate and currency transactions, executing more than $70 billion of derivatives positions over the past six years.

Copyright Chatham Financial

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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