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TMFAleph1 (94.86)

The Superfund Three-card Monte

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October 19, 2007 – Comments (4)

I’m intrigued by this planned ‘superfund’ that is meant to help inject liquidity into the credit markets and address the problem of the SIVs (structured investment vehicles). In truth, I haven’t read much about the structure, means or objective, but my initial reaction to the headlines is this: if superfund is backed by some of the largest US banks to purchase illiquid fixed-income instruments that have created a quagmire in normal financing by these same institutions, are we dealing with a closed system? Perhaps I’m mistaken and the superfund is meant to purchase the debt of other institutions exclusively. Still, the situation reminds me of a classic brainteaser, which I’m reprinting here, courtesy of numericana.com

Three men go into a motel. The receptionist tells them the room will be $30. Each man pays $10 before going to the room. The clerk then realizes that they were given only a $25 room, and sends the bellhop to the room with $5. The bellhop keeps $2 as a tip and each man gets $1 back, ending up paying only $9 for the room. Three times $9 is $27. With the $2 the bellhop kept, that's only $29. Where's the missing dollar?”

If you haven’t heard this brainteaser before, post your answer as a comment, and I’ll post the solution tomorrow.

Have a great weekend!
 

Total: 223 words

Time: 13.5 minutes

*** The above text was written in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize preemptively for any errors, omissions and misrepresentations. ***

4 Comments – Post Your Own

#1) On October 19, 2007 at 2:31 PM, klaracat (27.11) wrote:

30-5=25

25+3=28

28:3=9.33333.....

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#2) On October 19, 2007 at 3:47 PM, TMFHelical (98.72) wrote:

Its 27-2 not 27+2.  The dollar is not missing.

But answering 'Taxes' is also accepted.

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#3) On October 19, 2007 at 7:16 PM, TMFAleph1 (94.86) wrote:

HelicalZz has it right.  The fallacy is contained in this sentence:

"The bellhop keeps $2 as a tip and each man gets $1 back, ending up paying only $9 for the room"

This is incorrect -- $9 doesn't represent the per person room cost. The net cash ouflow for the three men is indeed $27 ($30-$3), or $9 per man. However, those $27 have funded the $25 cost of the room and the $2 tip for the bellhop. In arithmetic terms:

$30 - $3 = $25 + $2

No a difficult puzzle, but it's easy to get caught up in the fallacy initially.

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#4) On October 20, 2007 at 6:50 AM, StockSpreadsheet (71.77) wrote:

I don't think that the new Superfund is being set up to buy investment products from other institutions exclusively.  Read my blog post on this subject and follow the link.  About 1/3 of the SIV's out there were set up by Citigroup, which is heading up this group buying products from SIV's.  That means that on average a lot of this money will go to buy products from Citigroup's SIV's so that Citigroup can keep the junk off of their balance sheet and won't have to bail out their failing step-children.  As you said, it is a shell game meant to entice investors to buy junk that they won't buy from the current owners of that junk.  Citigroup is hoping that by renaming the owner of the junk that it will make the junk more palatable.  (Think as an example of the airline that had a plane crash in the Everglades due to some oxygen containers, (forget the exact type of cargo).  After the crash, nobody would fly their planes, so the company renamed itself, called itself a new airline and then people once again started booking flights on them.  Same airline, new name, removed the media taint and their business recovered.  This is what Citigroup is hoping for.  Get a new name for their junk and maybe investors will come back, saving Citigroup from posting massive losses by having to take possession of what nobody else wants.)

Craig 

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