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

Actually, I agree with you. But a temporary fix is better than none.

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

But you didn't give me any reason to think that the one bank has any better information than the other three market participants you describe. Set aside the buyers, because perhaps they're different situated, since they don't own the asset. The other bank that owned the asset sold it for much less.

Well, I thought you were saying the bonds were the same. If the bonds are different, I don't know enough to say that you should disregard the differences are mark the one to the other's traded value. So then you've given me no market to mark to, and I have to go with the bank's own value.

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

This post says nothing. You don't get to define your method of valuation as "objective" just because it makes your argument sound better.

Look, I can do it too: Just because you base a product's value on what someone would buy it for in an almost completely illiquid market does not make it any less valuable in an objective sense. The option of selling it to you right now may bring you more value, but that doesn't mean we should measure a company's financial condition by that metric.

TM

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

To be honest, I don't know what the right valuation method would be all the time. I just know that right now, MTM is horrible and it's locking up the credit markets worse than they should be for no good reason.

TM

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

Whether or not you think the price is fair or that the risk is built in at a point in time does not dictate whether or not you sell, and if you don't, that you are acting irrationally. It should, however, dictate how you book.

Someone may have already posted this, but this gives a good summary of the mark to market pros and cons: http://econlog.econlib.org/archives/...to_market.html

And this is the point I've been trying to make (obviously unsuccessfully)

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

Lighten up, Francis. Substitute "help" for "unleash" if you don't like my internet chat board hyperbole, but I was entirely non-flippant. I would like it if it would help, but I've explained why I'm skeptical.

Yes. I've said again and again and again that that assets have a value of zero if they haven't been traded recently, regardless of the streams of money they bring in, and I've said it so often that even Adder understands now.

Seriously though, here are two questions:

(1) If assets are trading at 2% of what their current cash stream is paying, why isn't anyone buying, and

(2) Do you favor returning to MTM if liquidity returns and brings prices in excess of the current cash stream?

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

Sorry. I revised the "MTM works great" to "MTM works great for Sellers" in a highly liquid market.

I agree with you and Cletus that you shouldn't be able to pick and choose. I just don't know which method is best all the time (or I would have mentioned it by now). I liked the idea I proposed earlier, even if it would (presumably) take a lot of work, but I haven't applied it to every possible market situation.

TM

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

Now you are arguing just to argue. Replace "objective" with "anybody but you" and try again.

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

Because no one is selling at that price because, for a number of reasons, it is not an accurate reflection of their true value.

See my response to Cletus above.

TM

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

Replace "anybody but you" to "club and Ty" and try again.

TM

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

Sure, but--at a minimum--it needs to be a permanent election w/r/t the assets opting out of MTM with a minimum term (5 years? 10 years?) mandatory opt-out for any other assets in the same class held now or acquired during the mandatory period by the entity electing to opt out.

But cafeteria accounting isn't a solution, either.

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

The solution, if one exists, is to change the capital adequacy requirements, not the accounting rules.

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

If you're referring to a modified mark-to-model using upadted actual numbers, it should* w/r/t bond-type instruments result in increasing values when things are good and decreasing when times are bad but always teathered to the actual cashflow.

*non-accountant speculation

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

I said, if assets are trading at 2% of et cetera, and you responded, because no one is selling at that price. I'm not following you. Either trading is at that price or it isn't.

I'm going to guess that your answer is the only people trading there are distressed. If so, my follow-up questions is, at what point does one decide that distressed sales are actually the market price? I get the concept with distressed sales, but I'm seeing a market that is distressed. And if the whole market is distressed, then I think accounting should reflect that.

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

So change the capital requirements not to be based upon MTM valuations.

Isn't that what we're discussing? I don't think we're discussing the tax consequences of MTM.

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

Welcome! See you in the breadline!

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

Change from the current "we relax them case-by-case anytime a bank (1) whines about not being able to compete with (asian banks, euro banks, I banks, hedge funds, the pope) or (2) is on the verge of collapse"? Change it to what?

And isn't the relaxation of I Bank captial requirements (to "compete" with hedge funds) a large piece of why we got into this mess?

MTM is a mess anyway; it does not adequately provide the transparency it was intended to provide with the loopholes for Level 2 and 3. The best example I could quickly find is that Morgan Stanley, as of end of 2008, had 13% of it's total assets as Level 3 assets.

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

Do you draw the same conclusion if (without government infusions of cash), they are only* distressed because of the low valuation and the requirement to improve their balance sheet because of the flawed valuation method?

TM

*This is part of the hypothetical

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

By "understand" I take it you mean, "realize that Ty isn't really saying anything other than 'market prices are generally good'?"

Because no one is selling.

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

That may be right, and your link was excellent, but that ain't going to happen (or at least not in the ways that I inferred that article to be suggesting).

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

At the risk of going around the whole circle again, why? Why would we assume that the "right" accounting is to value them as though they all need to be sold in distressed sales? We don't do that for other types of assets.

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

Hell, distressed sales even get discounted in home appraisals. Not ignored, but discounted.

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

I'm not convinced they actually should be changed, especially based on the facts, rather than a bunch of lawyers making theoretical arguments out of thin air:

I also think we should be very concerned with the banks' liquidity at this point in time, and that allowing them to lend more based on current financial condition is not prudent. I know we need liquidity, but there may be better ways to do it than through the existing banks.

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

1. I'm not digging into this now, but I think that the election of "hold to maturity" has to be made at acquisition.

2. "derivative pricing model known as Black-Scholes". Yeah, the use (and misuse) of Black-Scholes hasn't caused any problems.

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

As to 1, it has been awhile, but that used to be the case. And could not be changed without dire consequences.

As to 2, there is lots of political (and other) pressure on the banks to keep writing these things down.

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

On 1, it does. On 2, Black-Scholes is itself a market based valuation method, and I don't think anyone (at least me) every said that the only mark-to-market is last trading price.

I know, we're a bunch of ignorant lawyers. But I managed to marry a banker. Who is still lending.

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

No. Because I think the low valuation reflects that something fundamental has changed in the markets.

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

And one more (non-sarcastic) thing about Black-Scholes--it's rock solid for pricing equity options, but not for pricing credit derivatives, despite the implication of club's cite.

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

This is no doubt true; the known unknown (in the context of this discussion) is whether that something is (or affects) the fundamental value of a Bond. Or if it is a change in the discount/premium a buyer applies to the attendant cashflow.

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

Why isn't she my client?* I mean, she's already used to ignorant lawyers.

TM

*(Law firm client.)

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

I'm not sure I was giving you that much credit, but I don't recall exactly what I was thinking.

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

A distressed sale is an aberration in a well-functioning market. If every sale is "distressed," at some point you've got to acknowledge that they are not aberrations, but that you're in a different market.

The lure of easy money has a very strong appeal.
 

Apro . . . uh, by the by, there was a poster on Infirm named "mark to market."

He was boring, too.

I keed, I keed. He wasn't. You people are, though. Jesus H. Christ! Why isn't someone blaming Dodd for crafting the AIG bonus loophole? Or Geithner for asking him to? Or Obama for hiring Legolas in the first place?

Re: The lure of easy money has a very strong appeal.
 

Just thank God we haven't been talking about AIG all day. Dodd should be toast, no?

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

We will call you when it's time to lend in NY. Still a few years away. You have the other qualification as well - not just ignorant, but stubborn and ignorant.

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

It comes up with pretty funky results when pricing private company equity options (which it wasn't designed for, obviously). Also when pricing equity options in severely distressed situations. The intense variability of a stock in near free fall drives the value up without the formula really focusing on the fact that the variability is heading inexorably one way.

Re: The lure of easy money has a very strong appeal.
 

Perhaps because the AIG bonus thing is a ridiculous much ado about nothing?

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

A banker that prays for early withdraw, or is used to it at least. Wild.

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

Marking to market will not correct the problems that arise when a big player in the market goes south. That is what happened to LTCM, and it is what happened to AIG and Lehman. The rest is panic.

I don't really think you believe the markets function rationally. Humans don't act rationally in any other part of their life, as you are fond of noting. Furthermore, the big, precipitous drop was the result of irrational overleveraging and overbuying in real estate and derivative markets.

The FASB will significantly alter FAS 157, the mark-to-market pronouncement, if they don't withdraw it entirely. If the FASB doesn't do this, the PCAOB will. It's bad accounting policy. It fails to provide transparency or reflect economic reality.

By way of comparison, take a look at FAS 141 I think that's the right statement), which deals with writing down goodwill on a business enterprise's books. The statement requires a business to reduce goodwill when a business's value as a going concern in excess of the intrinsic value of its assets decreases relative to what is currently carried on the books. However, the statement requires that a business determine it is more likely than not that the impairment of goodwill is permanent. Temporary changes in the enterprise value are not a basis for writing down goodwill.

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

That's not true. There are people who aren't buying because they can't borrow. There are people who aren't buying because they don't think the market ahs hit bottom, and there are people who aren't willing to offer X because they are bottom-feeding and looking for unrealistic returns.

If the discounted cash flow of the payment stream on an asset is X and the obligor is continuing to make those payments, then the market has a problem, not the party valuing the asset. And the big reason we're in such a shithole is because the market does have a problem right now.