Re: We will never agree on this and therefore it is pointless to talk about!
 

I think there should be a special valuation method for these mortgage backed securities that the banks are stuck with. They should start by figuring out exactly what the income stream would be with no defaults and then discount it based on today's default rate for simarly situated mortgages. A kind of mark-to-market-default rate method. It ain't perfect and it may change, day-to-day, but as far as finding the best method of determining the value of an illiquid asset on a bank's balance sheet, it's better than what they're doing now.

TM

Re: We will never agree on this and therefore it is pointless to talk about!
 

It's a problem with institutions that take huge positions in assets that they assume will always be liquid. This works until it doesn't, when there's a crisis and a flight to liquidity.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I think this hypo is flawed, but I'll go with it anyway.

My view is that markets are a much more reliable indicator than the individual holder of the asset. Is any system perfect? No, but I'd much rather have companies reporting based on the more objective valuation method.

Take this example. X owns revenue producing real property that it purchased for $100,000 in 2006. In 2008, all of the similar properties in the area sold for $80,000. X thinks his property is worth $105,000, but no one is willing to bid at that price. Where should the propety be valued on the BS?

Re: We will never agree on this and therefore it is pointless to talk about!
 

And I would say that at the measurement date, the company's financial condition is also in upheavel.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Agreed. Write downs should be tied to actual impairments, not to "market" prices in illiquid markets.

Re: We will never agree on this and therefore it is pointless to talk about!
 

What makes you think that these instituation thought the assets would every be liquid? Most of what we are talking about never really was.

Re: We will never agree on this and therefore it is pointless to talk about!
 

You are putting the cart before the horse. Markets don't go into upheavel for no reason. In your example, they go into upheavel beause there is serious questions regarding that reliability of that income stream.

Re: We will never agree on this and therefore it is pointless to talk about!
 

As to your first point, the assumption one party is wrong is not a sound assumption. Here, both parties are wrong to a degree. Real estate undeniably has a revenue stream and the underlying collateral value, so valuing an instrument tied to it at zero is simply not right. It has a value - at a minimum, what the home could fetch at auction by the Sheriff. And that can be determined from comps of both nearby properties and other Sheriff's sales in the area. Granted, valuing the macro instruments based on those micro valuations is a hell of a task, but one can make reasonable assumptions. Particularly under the involved eye of regulators who actually know something about the market (Read: Not career box-checkers, but new hires from the industry).

On your second point, the conundrum is that unless you allow some valuation of this shit on the banks' books, the financing that will create the market that leads to a broader aggregate valuation of this stuff, giving the banks the breathing room to lend more freely in all areas of the economy, will not restart for years. The fact is, you can approach this issue from any angle you want, but until there is a fledgling market for this stuff established, which will require a suspension of MTM, banking will remain in crisis and our recovery will drag on for months or years longer than it would have otherwise. Why else do you think Paulson's first move was to establish a market? The Lehman decision aside, the man wasn't a dithering idiot. He knew that the only way out of this was to create a market for this stuff. That hasn't changed.

Re: We will never agree on this and therefore it is pointless to talk about!
 

What you are saying is that the banks are correctly assessing the value of these assets and buyers are not. Analogously, you could say that all of the people who think their homes are still worth a lot and who won't accept a market price for them a right, and the buyers are all wrong, and the housing market doesn't really reflect the value of housing. I don't think you'll find many takers for that proposition. I'm not seeing a systemic reason to think that bankers are smarter than everyone else.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I agree with the general concept, but I'm not sure that marking to "market" is more objective when there isn't a market. Personally, I don't see what is wrong with book value, off of which I can make my own assumptions about future performance (assuming adequate disclosure of the nature of the portfolio).

It's real property. Isn't the rule $100,000?

Re: We will never agree on this and therefore it is pointless to talk about!
 

I appreciate your newfound faith in regulators, but what are they supposed to be looking at? You have a bunch of assets that the market doesn't like anymore. Maybe it will again someday, but it doesn't now. Hiring a bunch of central planners doesn't change this.

Re: We will never agree on this and therefore it is pointless to talk about!
 

It's not, for this reason:

Re: We will never agree on this and therefore it is pointless to talk about!
 

Apparently we have a fundamental disagreement, because yes, they really do.

Re: We will never agree on this and therefore it is pointless to talk about!
 

2. And as to the valuation volatility you cite, that would encourage trading in the stuff, which would goose up participation in the market.

Re: We will never agree on this and therefore it is pointless to talk about!
 

But they don't. That should lead you to question the existence of the upside.

If you have a pretty liquid market, and the stream of prices is 12, 12, 12, 12, 12, 12, 12, 3, I can see the argument that you price at 12 because the 3 is an anomaly. But if no one is buying, except at a fire sale price, that tells you that there is no demand at that prices that the sellers want. The crap that sells at yard sales when people move usually sells for very little. Because it's crap, and that's what it's worth. It's true that the people selling it are moving and have to sell. But it's still crap.

I'm not an accounting whiz. If there is some external reason to believe that an asset has that value -- say, a stream of payments that seems solid -- then that's fine. But if you're talking about a tranche of mortgage payments that modeled well in 2006, that's different.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Really? I think that is even worse. If you paid $100 for an asset in 2005, but can only sell if for $80 in 2009, you want to value it at $100?

Re: We will never agree on this and therefore it is pointless to talk about!
 

See TM's suggested structure. It's not foolproof, but it's as good as it gets in this scenario, and pretty safe.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Well we can agree to disagree. Do you think the present situation is a result of magic?

Re: how every ex-president but one behaves
 

I agree with Bush, and appreciate what he is doing now.

But -- the alternative to the "complete piece of shit" line of thinking is that Carter and Cheney are both principled men who believe that the principles/narrow issues they speak out upon are more important than that tradition of ex-Presidential silence.

[Ford, HW Bush, Clinton -- all silent -- all basically moderate pragmatists -- very different from Carter and Cheney. (Not sure how W fits into that yet.)]

S_A_M

Re: We will never agree on this and therefore it is pointless to talk about!
 

This is why mark-to-market is wrong. If Sebby is current, and I don't need to sell his paper, then who cares if I could sell it for face. As long as I'm meeting my obligations and have adequate reserves for my near-term liabilities, then it is irrelevant whether the market is undervaluing my asset.

On the other hand, if I don't have adequate reserves, or if I am including Sebby's obligation in my reserves, it may be a valid exercise to require me to increase my reserves and, for that limited purpose, to mark any obligation to market, that may be a different argument.

Requiring me to book a theoretical loss on an asset I have no intention of selling and have no need to sell, however, doesn't increase transparency, it decreases it. What happens next year or the year after when Sebby's paper goes up in value? Am I entitled or obligated to book a gain?

Re: We will never agree on this and therefore it is pointless to talk about!
 

This is the wrong analogy, unless you are renting your house out for a certain amount of money each month. You can't remove that from the question. With that income stream, I can say that all the people who are offering me way below the lump sum value of that rental stream are not valuing my home properly and they can fuck off.

And it's not about being smarter than everyone else. You are acting like we are not in a tumultuous economic climate. It's not about being smarter and it's not about information being free and it's not about speculators seeing an opportunity because there is no funding, people are panicking and not acting rationally and no one wants to buy these toxic assets.

TM

Re: We will never agree on this and therefore it is pointless to talk about!
 

If an asset is unique, then there's no market to price it with. If there is a market but it's distressed, then the lack of liquidity is an important aspect of value. You have the classic flight to liquidity because the market knows that liquidity is valuable in a crisis. Pretending that this is not happening in a market is just self-delusion. And misleading investors relying on a company's books.

Re: how every ex-president but one behaves
 

It may be that I just haven't tracked his every word the way Hank has, but has Carter explicitly come out and criticized a sitting President, as opposed to, for example, writing a book and taking a fairly complex but controversial position on Israel and Palestine (an area where he does, after all, have some particular credibility, to the chagrin of many), or giving his opinion on a general matter of public policy? I seem to remember him saying some things critical of Clinton that Clinton was unhappy about. Did he come out against the Iraq war as well?

Cheney, of course, leveled a direct attack. Luckily, his aim isn't so hot.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I'll say again -- for the third or fourth time -- if there's some reliable external reason to think that an asset has value -- such as reliable incoming payments, then use that to value. If those payments are coming, they should be reflected on the books.

But we're in a situation where firms were doing valuation based on statistical models that don't hold anymore. They don't know the payments are coming. They don't really know what's coming, e.g. because many of the valuations assumed indefinitely rising housing prices. And there are no buyers for the stuff. There are no buyers because the payments are uncertain, and them with money would rather buy Treasuries. In those situations, Adder's hypothetical about assets based on reliable payment streams is a little fiction we can tell ourselves to deny that we're in a recession.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Because other people may or may not be investing in you, or lending to you, etc., based on your representations on how much your business is worth. Is this even an issue for private companies? Not unless they're regulated.

You may not have an intention or need to sell, but in down markets many firms are leveraged and have to start selling to cover their positions. That's why this stuff matters to the banks, no?

Re: We will never agree on this and therefore it is pointless to talk about!
 

The flight to liquidity here was induced by MTM rules that didn't allow for fair valuation of illiquid assets. That is, the capital requirement rules treated tbills at par but did not do the same for CDOs.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Or they're acting quite rationally in declining to buy into a falling market. If you want to just saying that all the buyers in the market are panicky and irrational, I agree that it then follows that you should disregard market prices, but market crashes are often driven by behavior that is entirely rational.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Your first paragraph basically agrees with TM's proposed structure. If we can value "reliable" payments, we can likewise value "semi-reliable," "not too reliable" and "unreliable" payments. We can assign values to each of the discrete categories of assets. With elbow grease, there can be transparency in this.

Without doing what he suggests, which requires a relaxation of MTM, the r/e market will not restart and banking will remain in crisis, and the spiral will continue. This isn't a "You have two options..." situation. MTM is going.

Re: how every ex-president but one behaves
 

when was Cheney president again? Perhaps Bush is signaling cheney to stfu.

I won't repeat Carter's shit, but it happened.

Re: We will never agree on this and therefore it is pointless to talk about!
 

No one wanted to buy CDOs because they aren't liquid, and they aren't liquid because no one wanted to buy them. They turned unattractive for reasons that have nothing to do with marking to market. They turned unattractive because the housing market turned downhill. And then no one wanted to buy them, in part because of the outlook for the housing market, and in part because once you buy them you can't sell them, and in this kind of market that's a big problem, even though it wasn't three years ago and hopefully won't be three years hence.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I don't understand the benefit of your method when the goal is valuing a bank's assets to keep their books balanced. In fact, even though there is a stream of revenue coming in on the assets at issue, you would be perfectly happy valuing them at 2% of the lump sum of that stream if that's what they were sold at by Citibank before they received the latest infusion of government cash so they wouldn't have to. And you'd be happy with that even if (i) it requires us to throw another trillion dollars to keep these banks afloat because a screwy market has assured us that there are no buyers, (ii) it continues the credit freeze and (iii) it knocks out more banks.

It seems like you're arguing that the current market price is the accurate reflection of what the stream of money from the mortgages will yield. I don't think this is true and I don't think you really believe it. The banks will be holding these assets to collect that stream, so why should we value that asset for what they can get for it today and force banks to hold on to cash as a result?

I don't get it.

TM

Re: We will never agree on this and therefore it is pointless to talk about!
 

Bullshit on both points. As long as you disclose your method of valuation to your investors, buyer beware.

And it's an issue for private companies who want to borrow (99.9% of private companies) and when they have different methods of accounting, banks require them to lay it out and/or change it.

But how much they are leveraged depends on how you value the assets! You are arguing in circles.

TM

Re: We will never agree on this and therefore it is pointless to talk about!
 

If there's a reliable stream of revenue, why doesn't the market price reflect this? I take the market price to be the best measure of what the asset is worth. I am more than willing to listen to stories to explain why the market isn't working well, but I don't buy the idea that everyone is panicking. Wall Street is full of smart, rich people who make money when other people are doing dumb things.

Instead of the panic story, what I'm seeing is a parallel to LTCM, which put a lot of money into assets that did well when they were doing well and liquid, but which they then could not get out of when Russia defaulted on some debt and things turned south.

Re: We will never agree on this and therefore it is pointless to talk about!
 

But that's the point, right? No one is saying, let's replace mark-to-market with X, where a buyer can look at X and figure out how it makes a difference. They just want to get rid of mark-to-market. "Buyer beware" indeed. Who would buy a pig in a poke? That's why this is misguided -- it's papering over a problem.

I was trying to refer to the vicious circle I described earlier.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Can we try to view this from a different angle? Perhaps a weighing of risks...

Let's assume relaxation of MTM would kick start a recovery in banking. What concern with removal of MTM do you suggest outweighs the need to do that?

Re: We will never agree on this and therefore it is pointless to talk about!
 

If you assume that's the case, then by all means, go for it. If what I've been saying is correct, the opposite will be true, because the underlying problems won't be addressed and people will be more reluctant to lend and invest out of an added fear that a firm's books don't reflect reality.

Re: We will never agree on this and therefore it is pointless to talk about!
 

There was a time when irrational religious worship of market forces was a disease that plagued blue-blood Republicans with stiff upper lips in NY and Connecticut. That the market is omniscient and inscrutable was the only universally held belief among Episcopalians.

Now, suddenly, the world is turned upside down. I blame Clinton.

Re: We will never agree on this and therefore it is pointless to talk about!
 

This is my view too. The other view on this board would have us believe that there is no market due to lack of liquidity. That is bullshit. There are trillions sitting on the sidelines looking for a decent (or any) return. The reason why the assets are valued so low is based on the uncertainty and risk that those assets actually will perform in the future. They may, or they may not, and that uncertainty is priced in. I also don't believe that the current holders are valuing that risk any differently, but given the deep discount, they are willing to take the holding risk.

ETA - Duck for cover. When Ty and I are in violent agreement, the sky is sure to fall.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Hey, I'm Episcopalian.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Two things about most of the buyers in this market: (1) they were mostly highly leveraged, and can't be now, b/c no one is lending (or they require AAA assets, which the subject (MBS, CDO) assets aren't anymore), and (2) without leverage, 5% interest (with significant and unpredictable payment defaults) is very unappealing to them, so to get their returns, they need to reduce the offer price to get their desired return. Other than 2d lien MBS*, there is significant cashflow value in almost all of the subject assets, even if there isn't sufficient alpha to attract unleveraged buyers. MtM means that these assets are valued at the prices vulture investors will offer, which is probably fair for REO, but not so much for hold-to-maturity bonds, even with increased default risk**.

*at least among simpler structures. I'm unsure what's happening with synthetic CDOs, etc. Slave?

**which is why TM's proposal would be a reasonable alternative to MtM, using updated default profiles on a quarterly or monthly basis. The difficulty would be in controlling the accurate designation of assets as hold-to-maturity v. held-for-sale and possible games with switching designations.