I wish I never learned about all this stuff. I wish I was like 95% of the population and had no idea what level 3 assets were. I wish I could move my house to level 3 and get a 400K HELOC on the value as I see it, not the market. I wish someone would call the cops and out a stop to all the lies.
I wish the foundation of the housing market wasn't based on the hope prices stop declining.
Could not agree more. Creating L3 was such a fortuitous invention..pretty good for an entire industry that "never saw this coming". Add in the B'ruptcy law change and you have the makings of a good novel......problem is that it's non-fiction.
I remember hearing that one of Ben's criticisms of Japan's deflation was that it kept financial institutions alive than were not solvent i.e. zombie institutions (Balance sheet recession). Now Ben along with FASB and the gov't in general are doing the exact same thing. It makes me wonder if he doesn't realize the value of what Japan did. Japan kept the gov't in power and everything generally as it was. It seems we are copying their playbook exactly.
How is it possible that OFHEO gets a different result (no significant declines for the whole country) from Freddie using roughly the same data? It seems these data support Case-Shiller vs OFHEO.
My attitude as a former California housing developer has become to vote with my feet. I AM NOT funding a taxpayer bailout. I am leaving tomorrow for a couple of interviews in Dubai. F*ck this crooked country.
What the heck is going on in South Dakota to cause a 3% rise in home values. Are these numbers being subtly polluted by the price of associated farm land ?
Unfortunately we can't copy the Japan playbook and get Japanese results over the long term. Japan is an export powerhouse, and runs a perennial current account surplus. They could keep rates low, print all the money they wanted, and not worry about crashing the yen. They could keep rates low for as long as they wanted, enabling the banks to earn operating income to offset their credit losses and gradually work themselves back to health.
Does anyone think we can do that forever without crashing the dollar??
The Federal Reserve as other central banks is obviously taking onto its balance sheet a lot of mortgages these days,'' Volcker said.Well, the creators of the Federal Reserve system would be rolling over in their graves if they knew the Federal Reserve is buying mortgages.'
[i]How is it possible that OFHEO gets a different result (no significant declines for the whole country) from Freddie using roughly the same data?[/i]
The results are a value weighted index of FRE single family mortgages. It's idiosyncratic to FRE and not representative of the total loan pool.
One interesting thing I noticed in a quick run through of the slides is that a substantial portion of the write offs to date are Alt-A. This might indicate that they are collapsing the riskiest section of their book already ahead of the big resets to come.
Another point was taking $5B in new capital on now would seem to get them a bit ahead of the write down curve for next quarter.
yuck - the chart on p23 says a lot, imo, 27% of $92B in subprime paper's rolling 60+del, and overall 1/5th of Freddie's ABS portfolio is rolling 60+. that's $30B - estimate maybe 2-30% of that keeps rolling downhill (?) ... so on the low end that pushes Freddie just below OFHEO's surplus target. nice
I'm not convinced Japan is out of the woods with regard to the Yen. If the carry trade blows up and Yen had to be repatriated, I think they could see (hyper)inflation.
Also, the CR post of the radio show had an interesting stat in it. ~2001 the world had $36 trillion. Today that number is ~$70 trillion. IMO, the money that hasn't evaporated in MBSs will seek out hard assets as everyone realizes it's paper. Also, Fiat Currency Inflation in France is a good read to get some idea of what can happen to a country willing to keep issuing currency. Eventually, it turns into a hard asset grab.
sure is discouraging isn't it? i'm dumbfounded at the lengths the pigmen will go to rape the system of every last dollar. i'm ashamed to be an American.
ZIRP - USA, good luck with the interviews. Please post how they went when you get back. I'm in CRE and thinking about looking at jobs over there myself. Just worried about being 6,000 miles away from family.
In all seriousness, I do not know what to even say anymore about all this. I am finding it hard to even joke about what is going on now. 157 billion of crap onto level 3? Count this to the mega bailout of Freddie and Fannie.
yuck - the chart on p23 says a lot, imo, 27% of $92B in subprime paper's rolling 60+del, and overall 1/5th of Freddie's ABS portfolio is rolling 60+. that's $30B - estimate maybe 2-30% of that keeps rolling downhill (?) ... so on the low end that pushes Freddie just below OFHEO's surplus target. nice
It's easy to envision the monolines blowing up looking at the wrapped numbers. It's easy to see that they will need more capital based on their own estimates as well. I suppose the good news is they don't have to blow up today and that as long as they can take losses over time the situation is under control. I still don't see why anyone would buy the stock in the face of ongoing dilution but hey there's a lot about this situation I don't understand...
Crazy statistics: the CPI rose less than expected "because higher food prices (and I presume gas prices too) were offset by lower furniture prices." So as many people buy furniture as buy food. Figures; furniture is a daily necessity of life, without it where would you sit? LOL.
Chris writes:
Crazy statistics: the CPI rose less than expected "because higher food prices (and I presume gas prices too) were offset by lower furniture prices." So as many people buy furniture as buy food. Figures; furniture is a daily necessity of life, without it where would you sit? LOL.
Chris,
You forgot about lodging costs! How could you forget about lodging costs?!? Without lodging, where would we stay when we go on vacation?
"May 14 (Bloomberg) -- U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs that offset the biggest jump in food expenses in 18 years."
tim, level 3 refers to the level of liquidity for the asset, it is not a measurement of value.
Hogwash. Level 3 = low or no bid = low or no market value. Period. And since we're talking about interest paying debt/paper, it's pretty clear what this says vis-a-vis the market's appraisal of it.
You forgot about lodging costs! How could you forget about lodging costs?!? Without lodging, where would we stay when we go on vacation?
Oh, wait a minute. I just thought of something. Maybe lodging costs have gone down because nobody can f#@^ing afford to go on vacation and there is an excess of lodging. Maybe that's not so good.
I'd be cautious about describing as "successful" the Bank of Japan's measures to deal with the collapse of the bubble economy in the 1990s. Interest rates at zero caused a decade of excruciating pain for a graying nation of savers.
People do have a point when they say that a devaluation of the Yen did boost their export driven economy whereas the US depends mostly on domestic consumption of foreign made goods. It was a positive consequence of bad policy overall. Also Japanese were not overly leveraged as Americans are. US savings rate is 1% whereas Japans was 25%
OT, to Kevin R, will let you know how things go with the Dubai interviews. Typically they will move your family as well and if married depending on the company can find work for your wife also. I already received an offer from one of the big fishes over there, and I found the company culture problematic, but things with this second group are going significantly better and they seem to have a very thoughtful and considerate corporate culture.
To Anonymous, thanks for your kind, well-informed words. I'm willing to bet as a housing developer me or one of my competitors has probably build the roof over your head. Anyways, I've been working in the development business now since 1998, and the only time I've seen real estate built is during periods of massive bubble inflation and credit expension. Last time I checked developers can't control credit supply. As for trashing California, I spent most of my time there building environmentally friendly urban infill projects near public transportation locations so people can live near where they work an minimize their use of cars. Would be doing the same thing in Dubai doing projects on the new metro line there. In California, considering all of the ridiculous misallocation of financial resources present in the housing bubble, I found that to be a better than average use of resources.
Hmmmm, I shorted a couple of brokers, banks and investment banks and don't like the market price. So I'm moving my entire trading portfolio in level three and assiging my own values to them. (Hehe)
ZIRP-USA writes:
My attitude as a former California housing developer has become to vote with my feet. I AM NOT funding a taxpayer bailout. I am leaving tomorrow for a couple of interviews in Dubai. F*ck this crooked country.
ZIRP-USA | 05.14.08 - 11:36 am | #
Sorry, your worldwide income is taxable by the U.S. govt.
Zirp,
Good luck over there! The internet sure has a way of letting small clueless people think thier big and extremely brilliant. Kind of like OZ..
Seems you were doing some good for Cali..I used to love it when Irvine was full of strawberry fields and orange trees..The water sure was cleaner at Newport too..
In California, considering all of the ridiculous misallocation of financial resources present in the housing bubble, I found that to be a better than average use of resources.
Doesn't change the fact you were here to smoke a fatty with the gang, but you ducked out the kitchen door when the keg tapped. After all, gotta look after you and yours & etc. There to make the baby, not there to change the diaper, everyone knows the type.
tim, how about this: level three is what someone's business acumen suggests the asset is worth. Now if CR says his shower curtain is worth two hundred dollars, you might believe it, if I say mine is worth one hundred dollars, you might wonder who would buy it at that price.
Inflation under control (of the BLS models that cap any increases)
[Rising global grain prices helped spark the largest increase in monthly food costs in nearly 20 years, as consumers paid more in April for cereals, baked goods, and the dairy, meat and other animal products that rely on feedstocks, the government reported today...
The Federal Reserve and other economic policymakers watch inflation closely]
Your worldwide income is taxable by the US gov't over $82,000 with additional exemptions for other items last I checked. It's a total shelter of about $100,000 to $110,000, so yes, I will be paying a good amount of taxes when all is said and done, but at least I'll be doing something to mitigate my loss. The catch is that you can't be in the US more than 5 weeks that year. The way our country is behaving, that is fine by me.
Level 3 is an original Picasso, valued at $1,000,000.
Sorta. Level three is a Picasso that may or may not be a forgery. The owner values it at $1,000,000 but refuses to allow anyone to inspect it in case it turns out that you could buy the same thing at a starving artist sale down at the airport Holiday Inn.
Rich,
If you are a rubber baron with tons of money and little else to do, why not build an opera house? Gives you something to do. At least, some people might argue that it is better than licking hallucinagenic mushrooms all day. Although, I suspect licking those mushrooms and then going to the opera would have its own beneficial effects.
Zirp, you don't pay US income tax on earnings from abroad, just so you know.
And yes, a Picasso would be a level 1 asset. The Thomas Kincaid prints, the subprime mortgages of the art world that would be hard to value or sell, would thus be level 3.
Level 3 is associated w/ liquidity, meaning the ability to turn something into cash, which is the essence of value. You place an asset in level 3 saying it is hard to value but in fact what you mean is that it won't fetch the value that you wish at that moment in time. It is "illiquid" and that's a very bad thing for companies that need cash, but level 3 designation makes it seem it's just hard to value, instead of impossible to sell.
"Level 1 is a bunch of crates (200,000 in all) framed Thomas Kincaid prints, valued at $1,000,000."
ROFL! That may be the funniest thing I've heard all year. Just need to move that decimal point over to .05 or maybe gesso over the print and sell the frames for .50 on the craft market.
Probably unintentially, seems like you're saying Dubai is (morally? financial-allocation wise? IQ-wise?) better than the USA. But does the Dubai build-up really make more sense than, say, the Inland Emipire build-up?
I can't imagine why anyone wants to live in Dubai. It is HOT there. Probably hotter than in Las Vegas. Plus there's nothing scenic about a flat desert with nothing but sand for miles and miles. The water temp. at the beach there is over 80 degrees F. Yuck.
I don't know about you but I wouldn't want to be an equity shareholder in this company. A negative $16.9 billion common shareholder equity at fair value. A minus $5.2 billion when combined with the preferred. Year over year net interest income growth of 3.5%. How do you earn your way out of that and why on earth would anyone want to give them fresh capital.
On the home price front, it's most interesting that analysts at neither Freddie Mac nor Fannie Mae use the national or regional OFHEO home price indexes to model mortgage credit performance or project losses -- mainly because they know that the dataset is just too small, especially in some regions (you need "paired transactions" for homes with mortgages purchased or securitized by Fannie and Freddie, and in many parts of the country that's a small sample of total home transactions). Rather, Freddie/Fannie analysts supplement the OFHEO dataset with data from third party vendors and/or state/local info.
"When you stop and think about it, every major REAL EVENT in the U.S. economy over the last year or so has been negative."
All economic 'events' are negative. The constant drip of knowledge accumulation which is the real driver of economic well being is rarely seen as an 'event' even in the cases where it will lead to the most dramatic positive changes for the economic well being of the planet.
Remember the page one headlines when the transistor was invented? How about the laser? High temp superconductors? Internet?
The huge life changing discoveries that are happening at this very moment are unknown to virtually everyone on the planet.
My guess is that the next big thing is going to be advances in electrical energy storage either in chemical batteries or ultracapacitors which will pave the way for the electrification of ground transport and end the fossil fuel era. This will change the planet in many ways and will happen way way faster than anyone is currently anticipating.
Right. Like I said, every real estate project I've been involved in the last 10 years has been the indirect result of some crack-up asset bubble. Must be because the economy since I got out of grad school has been almost in its entirety a result of a crack-up asset bubble. I'm really not sure if any of the growth created in the US since 1998 is real or is just the result of financial engineering. If so, then as a little real estate developer in a big pond of fraudulent financial engineering who cares where the money comes from? What are my options....are you saying I should have invested that money not into real estate into something more "worthwhile"....you mean like Pets.com.....what's "worthwhile" if you acknowledge that none of the economic growth in 1998 was real anyway? What I'm saying is that those bubbles have created some great projects of "moral", as you it, value at least for me; projects near public transportation, projects that are environmentally friendly. And these projects included hundreds of units of affordable housing. The higher thinking, you could say, of the urban planning community.
So your reference to "morality", and another post's reference to "sneaking out the bank door" must have to with where my money is coming from for the deals. I've long learned not to think too hard about where the money comes from this; the Wall Street crowd I've met in the absence of Wall Street seem to be the type of people that could make a perfectly fine living running cocaine up from Colombia. Don't think you're ever going to find too much morality on the Street....the next bubble in commodities seems to be forming up nicely and is anyone standing in the way of that freight train? What frustrates me is that this time, different from previous bubbles, you've really never had such a coordinated effort from the public and private sector to create fraud on such a massive scale. Maybe I'm naive but I always saw the US as holding a sort of moral high ground in world leadership growing up; didn't even Machiavelli argue that holding the moral high ground up until the very last necessary moment was a important component of leadership? It's like the US doesn't even try any more. I'm not arguing Dubai is more moral than the US, I'm just arguing that the US, my native country, seemingly used to care about moral leadership and in my adult life really doesn't even appear to want to try to care anymore.
The other fact is that the global economy is too large to manage and too large to regulate, and deals of all kinds will be increasingly complex to underwrite. And, like we did in California, people are going to take whatever aggressive capital they can get, extract upfront fees, and do the deals that they know how to do in order to make a living. That is going to create more risk in the marketplace, increasing interest rates and cap rates, and in my mind that is the risk that you see the market pricing in now. If you believe in market forces like many on this blog do, it is difficult to argue that the fact of the matter is fact global growth is an increasingly powerful force that is occurring faster than any entity's ability to regulate it. And that means greater risk premiums in deals. The market is solving this mess, but no one said it wasn't going to be painful.
david_in_ct, we already have the biggest electrical storage container in the world right above our heads, the ionosphere. Now will any government allow us to get to the energy of that great solar collector is another story.
Forget it, Shnaps, you're never going to convince this crowd that Level 3 is anything other than "junk you lie about."
Nobody is paying any attention to what got said here: basically, they had that stuff in Level 2. They were getting huge variation in the (observable) pricing they were getting from the dealers. How come? Because all the dealers have it in Level 3.
If the dealers have it in Level 3, and that's where the dealer prices are coming from, then at what point is it so weird for Freddie to just stick in Level 3? They say they're still using the mean dealer price.
As far as I can see, if all the dealer prices are coming out of some crazy model, then everyone has to put ABS in Level 3.
Since early '03 I've been transfixed by the spectacle of these trillions of dollars of mortgage paper stabilized by a few tens of billions of capitalization in the GSEs. What were these people thinking? So far today, FNM & FRE are up about 8 percent, but presumably in three days the gains will have been given back (again) and someone will have to pull yet another rabbit out of the hat. Some wise person once said that things that can't go on forever don't. But it takes a long time for something this big to fall over.
cd writes:
Zirp,
Good luck over there! The internet sure has a way of letting small clueless people think thier big and extremely brilliant. Kind of like OZ..
Hey, cd, if you're so smart, trying writing more than two sentences and getting all of the spelling correct.
This is how Freddie defines the levels (page 86 of the financials):
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; inputs other than quoted market prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets; and
Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.
Freddie owns almost nothing in Level 1. All MBS are "similar" instead of "identical" (they aren't Treasuries) to other MBS; you always have to adjust for something. Per Freddie (page 88):
Our Level 1 financial instruments consist of exchange-traded derivatives where quoted prices exist for the exact instrument in an active market. Our Level 2 instruments generally consist of high credit quality agency and non-agency mortgage-related securities, non-mortgage-related asset-backed securities, interest-rate swaps, option-based derivatives and foreign-currency denominated debt. These instruments are generally valued through one of the following methods: (a) dealer or pricing service inputs with the value derived by comparison to recent transactions or similar securities and adjusting for differences in prepayment or liquidity characteristics; or (b) modeled through an industry standard modeling technique that relies upon observable inputs such as discount rates and prepayment assumptions.
Our Level 3 assets primarily consist of non-agency mortgage-related securities backed by subprime and Alt-A mortgage loans and our guarantee asset. While the non-agency mortgage-related securities are supported by little or no market activity in the first quarter of 2008, we value our non-agency mortgage-related securities based primarily on prices received from third party pricing services and prices received from dealers. The techniques used to value these instruments generally are either (a) a comparison to transactions of instruments with similar collateral and risk profiles; or (b) industry standard modeling such as the discounted cash flow model.
If you play golf, remember to take a couple of rolls of Astroturf. You can roll them out and use them when teeing off in the desert. It worked for the geologists and roughnecks I knew who were working in Oman.
If all of the ABS assets are put at L3 does that qualify as an observable input even though none of them want to admit it??
Not if nothing trades.
The thing is, while everybody might be makin' up the quotes, they aren't all makin' up the same quotes. It is that very wide variation in the quoted dealer prices (for stuff that doesn't end up trading) that gets you to Level 3.
Now, maybe if everyone made it up consistently, we could all take it back to Level 2.
Here's something that negative equity affects: estate planning. According to my will, my debts get paid first. Two years ago my kids would have actually inherited a little something after selling the house. And the life insurance goes to my estate - I plan to change that ASAP and make sure it goes directly to the beneficiaries.
Your comment that Freddie owns almost no Level 1 assets makes sense and is reasonable. Unless one owns "on-the-run" Treasuries, most fixed income portfolios price bonds and fixed income securities using some sort of "matrix" where Treasuries and active trades provide reference yields and prices.
Thanks to all for the clarification on Level 1-2-3 assets. Even I had (mistakenly) assumed that the designations were based purely on credit quality. Serves me right, and now I'm absolutely convinced the Fed did the right thing and am even more up-beat and bullish than before. (Imagine.)
I was particularly taken with Tanta's reference to Freddie's stance: "While the non-agency mortgage-related securities are supported by little or no market activity in the first quarter of 2008, we value our non-agency mortgage-related securities based primarily on prices received from third party pricing services and prices received from dealers."
What this suggests to me is that if "some" market activity occurs, even if it's only modest, conditions can suddenly get a lot better.
If they are pricing at the mean of price s they get from the dealers then that is market pricing and should be level 1 or at worst 2. No need for level 3. So why did they do it unless the answer is bs.
Perhaps you could do us all the favor of explaining what benefit you think Freddie Mac gets from treating these securities as Level 3 instead of Level 2.
I'm a bit confused about the "mark to model" aspect. Do they value these Level 3 assets at what they bought them for, what their model said the future value would be, or something else?
"I'm not convinced Japan is out of the woods with regard to the Yen. If the carry trade blows up and Yen had to be repatriated, I think they could see (hyper)inflation."
Japan is already on the verge of hyperinflation, thanks to near 0% interest rates. They need to make a tough decision to raise them, or risk committing hari kari. When that happens, the carry trade unwinds big time, and look out below for US stocks.
I'm a bit confused about the "mark to model" aspect
Mark to model is Level 2
Level 3 is what you believe they are worth.
Most everyone here don't trust the evaluator and so they think the assets must be lied about, but what Tanta and Shnaps are saying is that in this case it's the "correct" category to place these assets in and not a scheme to hide problems.
Let's say you have something that was sold for 5 dollars three days ago, 1000 dollars two days ago, one hundred dollars this morning, and 1,050 an hour ago,...but you're not allowed to sell for a year,...what do you value it at?
Not that suprising. The underlying prices are so volatile, and so many mortgage operations have shut down, that it must be getting hard to get reliable quotes.
Some people on the board get mad and think it is a conspiracy that things become level two or three. If it isn't on an exchange, it is very hard for something to be level one (most derivatives and all mortgages are off-exhange). While if you call dealers and can't get a quote on something, it is automatically level 3. What should they do, just burn the mortgages and call them worthless because they couldn't get three traders at three different firms to give a consistent price to them? It is much less of the firms saying, "We don't like the price we are getting, lets make it level three" and more "we can't get pricing, so level three is the only way we can acknowledge that we have these assets on our balance sheet.
Another thing that I say earlier in this thread is someone said you had to hold level three to maturity. This isn't true. The asset levels (I, II, III) are for Basel II accounting, the asset held-to-maturity is for GAAP accounting. Financial firm usually do three forms of accounting: Basel II for the regulators (Fed, OCC, OTS), Tax accounting for the IRS, and GAAP accounting for financial reporting for the SEC.
I am so sorry I couldn't have returned earlier. Thanks Tanta for elaborating, I thought my art analogy would help, but that just confused people, apparently.
Either that, or they just have convinced themsleves that L3 must mean something sinister.
Garçon à la pipe sold for $104 Million in 2004. Only one d00d has it, and he isn't selling at the moment.
In contrast, a print of one of Thomas Kincaid's masterworks, "Gingerbread Cottage", can be got for $898 + shipping from a seller with excellent feedback.
From an accounting perscpective, 115,812 of the latter has the same book value as 1 of the former, the only difference being the "level" at which they'd be classified.
Even if the high-end art market was 'disconnected' at the moment, I'd rather be holding the L3 if I were looking at the long term. But that's just me.
As much as you think banks are hiding crap, there aren't a whole lot of people siting on piles of money who want to buy whole Alt-A mortgage loans right now. Freddie can't just send a dealer the loan sizes, DTI and weighted average FICO and have him give a firm quote, a higher level of due diligence goes into any mortgage or MBS deal now.
Without as many observable market deals it is harder to justify the soundness of a level two model.
So we essentially moved the entire abs portfolio into level three.
Seems to be this year's modus operandi.
cough......bullshit.....cough...
Utterly ridiculous how these people continue to remain employed.
"we didn't like the price so we marked it up and then put it into fantasyland"
read the translation
Ciao
MS
Circle the wagons... there's always level 4,... right?
I wish I never learned about all this stuff. I wish I was like 95% of the population and had no idea what level 3 assets were. I wish I could move my house to level 3 and get a 400K HELOC on the value as I see it, not the market. I wish someone would call the cops and out a stop to all the lies.
I wish the foundation of the housing market wasn't based on the hope prices stop declining.
I... have become... Comfortably Numb.
W.A.A.S-
Could not agree more. Creating L3 was such a fortuitous invention..pretty good for an entire industry that "never saw this coming". Add in the B'ruptcy law change and you have the makings of a good novel......problem is that it's non-fiction.
Ciao
MS
I remember hearing that one of Ben's criticisms of Japan's deflation was that it kept financial institutions alive than were not solvent i.e. zombie institutions (Balance sheet recession). Now Ben along with FASB and the gov't in general are doing the exact same thing. It makes me wonder if he doesn't realize the value of what Japan did. Japan kept the gov't in power and everything generally as it was. It seems we are copying their playbook exactly.
How is it possible that OFHEO gets a different result (no significant declines for the whole country) from Freddie using roughly the same data? It seems these data support Case-Shiller vs OFHEO.
My attitude as a former California housing developer has become to vote with my feet. I AM NOT funding a taxpayer bailout. I am leaving tomorrow for a couple of interviews in Dubai. F*ck this crooked country.
What the heck is going on in South Dakota to cause a 3% rise in home values. Are these numbers being subtly polluted by the price of associated farm land ?
Unfortunately we can't copy the Japan playbook and get Japanese results over the long term. Japan is an export powerhouse, and runs a perennial current account surplus. They could keep rates low, print all the money they wanted, and not worry about crashing the yen. They could keep rates low for as long as they wanted, enabling the banks to earn operating income to offset their credit losses and gradually work themselves back to health.
Does anyone think we can do that forever without crashing the dollar??
Bloomberg news:
The Federal Reserve as other central banks is obviously taking onto its balance sheet a lot of mortgages these days,'' Volcker said.Well, the creators of the Federal Reserve system would be rolling over in their graves if they knew the Federal Reserve is buying mortgages.'
[i]How is it possible that OFHEO gets a different result (no significant declines for the whole country) from Freddie using roughly the same data?[/i]
The results are a value weighted index of FRE single family mortgages. It's idiosyncratic to FRE and not representative of the total loan pool.
One interesting thing I noticed in a quick run through of the slides is that a substantial portion of the write offs to date are Alt-A. This might indicate that they are collapsing the riskiest section of their book already ahead of the big resets to come.
Another point was taking $5B in new capital on now would seem to get them a bit ahead of the write down curve for next quarter.
Does anyone think we can do that forever without crashing the dollar??
Forever? How about even the rest of the year???
So we essentially moved the entire abs portfolio into level three.
Oh my God / I was wrong / It was Earth / All along!
yuck - the chart on p23 says a lot, imo, 27% of $92B in subprime paper's rolling 60+del, and overall 1/5th of Freddie's ABS portfolio is rolling 60+. that's $30B - estimate maybe 2-30% of that keeps rolling downhill (?) ... so on the low end that pushes Freddie just below OFHEO's surplus target. nice
I'm not convinced Japan is out of the woods with regard to the Yen. If the carry trade blows up and Yen had to be repatriated, I think they could see (hyper)inflation.
Also, the CR post of the radio show had an interesting stat in it. ~2001 the world had $36 trillion. Today that number is ~$70 trillion. IMO, the money that hasn't evaporated in MBSs will seek out hard assets as everyone realizes it's paper. Also, Fiat Currency Inflation in France is a good read to get some idea of what can happen to a country willing to keep issuing currency. Eventually, it turns into a hard asset grab.
The second quote, that should be Dick with a capital 'D'.
No offense to Mr. Syron.
Why is "dick" lower-case?
Is dick being used here as a noun or a verb?
sure is discouraging isn't it? i'm dumbfounded at the lengths the pigmen will go to rape the system of every last dollar. i'm ashamed to be an American.
This should be the theme song for them
YouTube - Thom Yorke - Black Swan
Ciao
MS
This news can only be bullish for stocks!! DOW up 200 today.
"That is all that is."
Pretty much says it all.
ZIRP - USA, good luck with the interviews. Please post how they went when you get back. I'm in CRE and thinking about looking at jobs over there myself. Just worried about being 6,000 miles away from family.
In all seriousness, I do not know what to even say anymore about all this. I am finding it hard to even joke about what is going on now. 157 billion of crap onto level 3? Count this to the mega bailout of Freddie and Fannie.
Sad days indeed.
"ZIRP-USA writes:
My attitude as a former California housing developer "
Oh, I see, now that you've raped our country you're leave us to clean up your mess. Good Riddance. Hope you move and get fired.
i guess this will continue until the last bit of trust is squeezed out of the regular person
but when that last bit of trust is gone, it may be harder to recapture that trust than is currently believed
CR,
Are not level three assets those that are hard to value and end up getting written off? I thought level three was bad.
tim
yuck - the chart on p23 says a lot, imo, 27% of $92B in subprime paper's rolling 60+del, and overall 1/5th of Freddie's ABS portfolio is rolling 60+. that's $30B - estimate maybe 2-30% of that keeps rolling downhill (?) ... so on the low end that pushes Freddie just below OFHEO's surplus target. nice
It's easy to envision the monolines blowing up looking at the wrapped numbers. It's easy to see that they will need more capital based on their own estimates as well. I suppose the good news is they don't have to blow up today and that as long as they can take losses over time the situation is under control. I still don't see why anyone would buy the stock in the face of ongoing dilution but hey there's a lot about this situation I don't understand...
Crazy statistics: the CPI rose less than expected "because higher food prices (and I presume gas prices too) were offset by lower furniture prices." So as many people buy furniture as buy food. Figures; furniture is a daily necessity of life, without it where would you sit? LOL.
Lovely to see all the money flowing to Dubai which hopes to be the final playground for the fabulously wealthy.
At least we will know where they all are...
tim, level 3 refers to the level of liquidity for the asset, it is not a measurement of value.
So we essentially moved the entire abs portfolio into level three.
Crooks.
Chris writes:
Crazy statistics: the CPI rose less than expected "because higher food prices (and I presume gas prices too) were offset by lower furniture prices." So as many people buy furniture as buy food. Figures; furniture is a daily necessity of life, without it where would you sit? LOL.
Chris,
You forgot about lodging costs! How could you forget about lodging costs?!? Without lodging, where would we stay when we go on vacation?
"May 14 (Bloomberg) -- U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs that offset the biggest jump in food expenses in 18 years."
Is Level three not the most illiquid of the asset level?
tim, level 3 refers to the level of liquidity for the asset, it is not a measurement of value.
Hogwash. Level 3 = low or no bid = low or no market value. Period. And since we're talking about interest paying debt/paper, it's pretty clear what this says vis-a-vis the market's appraisal of it.
eh, that is what I though, they are not able to place a value on 150 billion? WTF! WTF! Freddie gets fingered.
You forgot about lodging costs! How could you forget about lodging costs?!? Without lodging, where would we stay when we go on vacation?
Oh, wait a minute. I just thought of something. Maybe lodging costs have gone down because nobody can f#@^ing afford to go on vacation and there is an excess of lodging. Maybe that's not so good.
I'd be cautious about describing as "successful" the Bank of Japan's measures to deal with the collapse of the bubble economy in the 1990s. Interest rates at zero caused a decade of excruciating pain for a graying nation of savers.
Hmmm lets see, 600,000 house declines by 120,000 and occupant's food costs goes up 10,000 in a year, inflation is negative by 110,000.
superdave,
People do have a point when they say that a devaluation of the Yen did boost their export driven economy whereas the US depends mostly on domestic consumption of foreign made goods. It was a positive consequence of bad policy overall. Also Japanese were not overly leveraged as Americans are. US savings rate is 1% whereas Japans was 25%
Tim
Think of it this way
Level 3 is an original Picasso, valued at $1,000,000
Level 2 is a corporate art collection, 200 various items, together valued at $1,000,000.
Level 1 is a bunch of crates (200,000 in all) framed Thomas Kincaid prints, valued at $1,000,000.
OT, to Kevin R, will let you know how things go with the Dubai interviews. Typically they will move your family as well and if married depending on the company can find work for your wife also. I already received an offer from one of the big fishes over there, and I found the company culture problematic, but things with this second group are going significantly better and they seem to have a very thoughtful and considerate corporate culture.
To Anonymous, thanks for your kind, well-informed words. I'm willing to bet as a housing developer me or one of my competitors has probably build the roof over your head. Anyways, I've been working in the development business now since 1998, and the only time I've seen real estate built is during periods of massive bubble inflation and credit expension. Last time I checked developers can't control credit supply. As for trashing California, I spent most of my time there building environmentally friendly urban infill projects near public transportation locations so people can live near where they work an minimize their use of cars. Would be doing the same thing in Dubai doing projects on the new metro line there. In California, considering all of the ridiculous misallocation of financial resources present in the housing bubble, I found that to be a better than average use of resources.
shnaps-
look again at your post....backwards
Ciao
MS
We should all learn from Freddie Mac:
Hmmmm, I shorted a couple of brokers, banks and investment banks and don't like the market price. So I'm moving my entire trading portfolio in level three and assiging my own values to them. (Hehe)
Looks to me like California is going to revert back to a desert waste land in a year or so.
Alaska prices -1.8%. This despite an 'oil boom,' limited inventory, 'it's different here' and yadda yadda yadda. Interesting times ahead.
MS writes:
shnaps-
look again at your post....backwards
Ciao
MS
Totally agree...ask any CFO if his level 3 assets are equivalent to an original Picasso and you may have to pick him up off the floor form laughter.
Sorry, your worldwide income is taxable by the U.S. govt.
Zirp,
Good luck over there! The internet sure has a way of letting small clueless people think thier big and extremely brilliant. Kind of like OZ..
Seems you were doing some good for Cali..I used to love it when Irvine was full of strawberry fields and orange trees..The water sure was cleaner at Newport too..
"What the heck is going on in South Dakota to cause a 3% rise in home values."
Ethanol, Ray. It is good times in corn country at the moment. Having no state income tax doesn't hurt, either.
In California, considering all of the ridiculous misallocation of financial resources present in the housing bubble, I found that to be a better than average use of resources.
Doesn't change the fact you were here to smoke a fatty with the gang, but you ducked out the kitchen door when the keg tapped. After all, gotta look after you and yours & etc. There to make the baby, not there to change the diaper, everyone knows the type.
tim, how about this: level three is what someone's business acumen suggests the asset is worth. Now if CR says his shower curtain is worth two hundred dollars, you might believe it, if I say mine is worth one hundred dollars, you might wonder who would buy it at that price.
Inflation under control (of the BLS models that cap any increases)
[Rising global grain prices helped spark the largest increase in monthly food costs in nearly 20 years, as consumers paid more in April for cereals, baked goods, and the dairy, meat and other animal products that rely on feedstocks, the government reported today...
The Federal Reserve and other economic policymakers watch inflation closely]
That is what I figure when I pass on to the other side the United States in 30 or so years maybe less, will be one big Ethanol field.
Rich-
Your worldwide income is taxable by the US gov't over $82,000 with additional exemptions for other items last I checked. It's a total shelter of about $100,000 to $110,000, so yes, I will be paying a good amount of taxes when all is said and done, but at least I'll be doing something to mitigate my loss. The catch is that you can't be in the US more than 5 weeks that year. The way our country is behaving, that is fine by me.
When you stop and think about it, every major REAL EVENT in the U.S. economy over the last year or so has been negative.
All the positive news has been of four types, all man-made and manipulated:
1) Fiscal policy, rate cuts and liquidity injections
2) Dubious govt. statistics
3) Investment market bubble-up
4) Strange accounting tricks and ratings agency games
It's a little like building an Opera house in the middle of the Brazilian rain forest.
You can call it culture. But it's still just a rain forest full of hostile critters.
It's funny how many supposedly smart people believe in the hubris.
I'm puzzled.
Slide 8 says the National quarterly change in prices is -4.2 %
Slide 9 appears to say that it is -8.2%.
Why the difference ?
Level 3 is an original Picasso, valued at $1,000,000.
Sorta. Level three is a Picasso that may or may not be a forgery. The owner values it at $1,000,000 but refuses to allow anyone to inspect it in case it turns out that you could buy the same thing at a starving artist sale down at the airport Holiday Inn.
Rich,
If you are a rubber baron with tons of money and little else to do, why not build an opera house? Gives you something to do. At least, some people might argue that it is better than licking hallucinagenic mushrooms all day. Although, I suspect licking those mushrooms and then going to the opera would have its own beneficial effects.
Zirp, you don't pay US income tax on earnings from abroad, just so you know.
And yes, a Picasso would be a level 1 asset. The Thomas Kincaid prints, the subprime mortgages of the art world that would be hard to value or sell, would thus be level 3.
Level 3 is associated w/ liquidity, meaning the ability to turn something into cash, which is the essence of value. You place an asset in level 3 saying it is hard to value but in fact what you mean is that it won't fetch the value that you wish at that moment in time. It is "illiquid" and that's a very bad thing for companies that need cash, but level 3 designation makes it seem it's just hard to value, instead of impossible to sell.
"Level 1 is a bunch of crates (200,000 in all) framed Thomas Kincaid prints, valued at $1,000,000."
ROFL! That may be the funniest thing I've heard all year. Just need to move that decimal point over to .05 or maybe gesso over the print and sell the frames for .50 on the craft market.
In California, considering all of the ridiculous misallocation of financial resources
Zirp, I'm glad Dubai isn't misallocating financial resources.
F*ck this crooked country
Probably unintentially, seems like you're saying Dubai is (morally? financial-allocation wise? IQ-wise?) better than the USA. But does the Dubai build-up really make more sense than, say, the Inland Emipire build-up?
Why is "dick" lower-case?
Is dick being used here as a noun or a verb?
adjective
Sorry, your worldwide income is taxable by the U.S. govt
not when ex-pat, as i understand it
I can't imagine why anyone wants to live in Dubai. It is HOT there. Probably hotter than in Las Vegas. Plus there's nothing scenic about a flat desert with nothing but sand for miles and miles. The water temp. at the beach there is over 80 degrees F. Yuck.
Think of it this way:
Level 3 are dirty diapers that need to dropped off at the back window of the Fed for laundering.
I don't know about you but I wouldn't want to be an equity shareholder in this company. A negative $16.9 billion common shareholder equity at fair value. A minus $5.2 billion when combined with the preferred. Year over year net interest income growth of 3.5%. How do you earn your way out of that and why on earth would anyone want to give them fresh capital.
"That is all that is."
That says a lot.
deTocqueville had it right. Americans are a bunch of buck-chasers: no past, no future
"Level 3 is an original Picasso, valued at $1,000,000"
Take your pick
YouTube - picasso
On the home price front, it's most interesting that analysts at neither Freddie Mac nor Fannie Mae use the national or regional OFHEO home price indexes to model mortgage credit performance or project losses -- mainly because they know that the dataset is just too small, especially in some regions (you need "paired transactions" for homes with mortgages purchased or securitized by Fannie and Freddie, and in many parts of the country that's a small sample of total home transactions). Rather, Freddie/Fannie analysts supplement the OFHEO dataset with data from third party vendors and/or state/local info.
"When you stop and think about it, every major REAL EVENT in the U.S. economy over the last year or so has been negative."
All economic 'events' are negative. The constant drip of knowledge accumulation which is the real driver of economic well being is rarely seen as an 'event' even in the cases where it will lead to the most dramatic positive changes for the economic well being of the planet.
Remember the page one headlines when the transistor was invented? How about the laser? High temp superconductors? Internet?
The huge life changing discoveries that are happening at this very moment are unknown to virtually everyone on the planet.
My guess is that the next big thing is going to be advances in electrical energy storage either in chemical batteries or ultracapacitors which will pave the way for the electrification of ground transport and end the fossil fuel era. This will change the planet in many ways and will happen way way faster than anyone is currently anticipating.
Jus me-
Right. Like I said, every real estate project I've been involved in the last 10 years has been the indirect result of some crack-up asset bubble. Must be because the economy since I got out of grad school has been almost in its entirety a result of a crack-up asset bubble. I'm really not sure if any of the growth created in the US since 1998 is real or is just the result of financial engineering. If so, then as a little real estate developer in a big pond of fraudulent financial engineering who cares where the money comes from? What are my options....are you saying I should have invested that money not into real estate into something more "worthwhile"....you mean like Pets.com.....what's "worthwhile" if you acknowledge that none of the economic growth in 1998 was real anyway? What I'm saying is that those bubbles have created some great projects of "moral", as you it, value at least for me; projects near public transportation, projects that are environmentally friendly. And these projects included hundreds of units of affordable housing. The higher thinking, you could say, of the urban planning community.
So your reference to "morality", and another post's reference to "sneaking out the bank door" must have to with where my money is coming from for the deals. I've long learned not to think too hard about where the money comes from this; the Wall Street crowd I've met in the absence of Wall Street seem to be the type of people that could make a perfectly fine living running cocaine up from Colombia. Don't think you're ever going to find too much morality on the Street....the next bubble in commodities seems to be forming up nicely and is anyone standing in the way of that freight train? What frustrates me is that this time, different from previous bubbles, you've really never had such a coordinated effort from the public and private sector to create fraud on such a massive scale. Maybe I'm naive but I always saw the US as holding a sort of moral high ground in world leadership growing up; didn't even Machiavelli argue that holding the moral high ground up until the very last necessary moment was a important component of leadership? It's like the US doesn't even try any more. I'm not arguing Dubai is more moral than the US, I'm just arguing that the US, my native country, seemingly used to care about moral leadership and in my adult life really doesn't even appear to want to try to care anymore.
The other fact is that the global economy is too large to manage and too large to regulate, and deals of all kinds will be increasingly complex to underwrite. And, like we did in California, people are going to take whatever aggressive capital they can get, extract upfront fees, and do the deals that they know how to do in order to make a living. That is going to create more risk in the marketplace, increasing interest rates and cap rates, and in my mind that is the risk that you see the market pricing in now. If you believe in market forces like many on this blog do, it is difficult to argue that the fact of the matter is fact global growth is an increasingly powerful force that is occurring faster than any entity's ability to regulate it. And that means greater risk premiums in deals. The market is solving this mess, but no one said it wasn't going to be painful.
Kee-riste has this thread a chance?
We can do better, but it's bedtime here, so until tomorrow...
ps good luck anyway Zirp
I think it should be more like:
Level 3 is a crate that someone says has a Picasso painting in it, but you're not allowed to peek in though...
david_in_ct, we already have the biggest electrical storage container in the world right above our heads, the ionosphere. Now will any government allow us to get to the energy of that great solar collector is another story.
Forget it, Shnaps, you're never going to convince this crowd that Level 3 is anything other than "junk you lie about."
Nobody is paying any attention to what got said here: basically, they had that stuff in Level 2. They were getting huge variation in the (observable) pricing they were getting from the dealers. How come? Because all the dealers have it in Level 3.
If the dealers have it in Level 3, and that's where the dealer prices are coming from, then at what point is it so weird for Freddie to just stick in Level 3? They say they're still using the mean dealer price.
As far as I can see, if all the dealer prices are coming out of some crazy model, then everyone has to put ABS in Level 3.
Thanks for the clarification Tanta.
Zirp -
When I bowed down to Betty & Phil in '78 I got spit out without ceremony. Now I believe it's nearly impossible to unbecome an American. By the look of this chart, the amero is coming (loonie nailed at par since October), so it's a good thing I still know the Pledge
Canadian dollar vis-a-vis selected currencies-
Exchange Rates-
Rates and Statistics- Bank of Canada
Since early '03 I've been transfixed by the spectacle of these trillions of dollars of mortgage paper stabilized by a few tens of billions of capitalization in the GSEs. What were these people thinking? So far today, FNM & FRE are up about 8 percent, but presumably in three days the gains will have been given back (again) and someone will have to pull yet another rabbit out of the hat. Some wise person once said that things that can't go on forever don't. But it takes a long time for something this big to fall over.
cd writes:
Zirp,
Good luck over there! The internet sure has a way of letting small clueless people think thier big and extremely brilliant. Kind of like OZ..
Hey, cd, if you're so smart, trying writing more than two sentences and getting all of the spelling correct.
Everyone please read Tanta's clarification and pay no attention to me. I'm just a poet.
we will soon be in the "non-observable input" economy where everything is valued infinitely......
Tanta-
If all of the ABS assets are put at L3 does that qualify as an observable input even though none of them want to admit it??
Ciao
MS
and by "all" I mean.....ALL not just FRE
Ciao
MS
Level 1: liquid assets that are marked to market
Level 2: Assets that are available for sale but sell infrequently(say, muni bonds) are marked to model. Works great until the ARS fail.
Level 3: Assets held for long term investment marked to what you bought em for/think they're worth.
Freddie Mac can now only have to write of the notes that fail/get reworked. Everything else that stays current stays at its original mark.
Obviously it's a bit of a dodge, but it's also realistic considering they have to tighten up going forward.
YouTube - Animals - Pigs [Three Different Ones] (Part 2)
... Pig Man, charade you are
This is how Freddie defines the levels (page 86 of the financials):
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; inputs other than quoted market prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets; and
Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair values.
Freddie owns almost nothing in Level 1. All MBS are "similar" instead of "identical" (they aren't Treasuries) to other MBS; you always have to adjust for something. Per Freddie (page 88):
Our Level 1 financial instruments consist of exchange-traded derivatives where quoted prices exist for the exact instrument in an active market. Our Level 2 instruments generally consist of high credit quality agency and non-agency mortgage-related securities, non-mortgage-related asset-backed securities, interest-rate swaps, option-based derivatives and foreign-currency denominated debt. These instruments are generally valued through one of the following methods: (a) dealer or pricing service inputs with the value derived by comparison to recent transactions or similar securities and adjusting for differences in prepayment or liquidity characteristics; or (b) modeled through an industry standard modeling technique that relies upon observable inputs such as discount rates and prepayment assumptions.
Our Level 3 assets primarily consist of non-agency mortgage-related securities backed by subprime and Alt-A mortgage loans and our guarantee asset. While the non-agency mortgage-related securities are supported by little or no market activity in the first quarter of 2008, we value our non-agency mortgage-related securities based primarily on prices received from third party pricing services and prices received from dealers. The techniques used to value these instruments generally are either (a) a comparison to transactions of instruments with similar collateral and risk profiles; or (b) industry standard modeling such as the discounted cash flow model.
Zirp:
If you play golf, remember to take a couple of rolls of Astroturf. You can roll them out and use them when teeing off in the desert. It worked for the geologists and roughnecks I knew who were working in Oman.
HAHAHAHAHAAHAHAHAHAA
Realistic??..that's why they are in that bucket marked "Hold and Hope"
Ciao
MS
If all of the ABS assets are put at L3 does that qualify as an observable input even though none of them want to admit it??
Not if nothing trades.
The thing is, while everybody might be makin' up the quotes, they aren't all makin' up the same quotes. It is that very wide variation in the quoted dealer prices (for stuff that doesn't end up trading) that gets you to Level 3.
Now, maybe if everyone made it up consistently, we could all take it back to Level 2.
Of course I live in New York -.9%.
Wow, what a correction off 200%+ increase in values over the past 5 years.
Zirp,
I am afraid they might want to listen to all of your "free speech" rants and raves over there.
Here's something that negative equity affects: estate planning. According to my will, my debts get paid first. Two years ago my kids would have actually inherited a little something after selling the house. And the life insurance goes to my estate - I plan to change that ASAP and make sure it goes directly to the beneficiaries.
Sorry, forgot to say: Way OT
Sorry, your worldwide income is taxable by the U.S. govt
not when ex-pat, as i understand it
I believe they consider you a taxable "citizen" for 10 years after you leave.
Tanta,
Your comment that Freddie owns almost no Level 1 assets makes sense and is reasonable. Unless one owns "on-the-run" Treasuries, most fixed income portfolios price bonds and fixed income securities using some sort of "matrix" where Treasuries and active trades provide reference yields and prices.
Thanks to all for the clarification on Level 1-2-3 assets. Even I had (mistakenly) assumed that the designations were based purely on credit quality. Serves me right, and now I'm absolutely convinced the Fed did the right thing and am even more up-beat and bullish than before. (Imagine.)
I was particularly taken with Tanta's reference to Freddie's stance: "While the non-agency mortgage-related securities are supported by little or no market activity in the first quarter of 2008, we value our non-agency mortgage-related securities based primarily on prices received from third party pricing services and prices received from dealers."
What this suggests to me is that if "some" market activity occurs, even if it's only modest, conditions can suddenly get a lot better.
Sebastia
I'm calling BS.
If they are pricing at the mean of price s they get from the dealers then that is market pricing and should be level 1 or at worst 2. No need for level 3. So why did they do it unless the answer is bs.
I'm calling BS.
Perhaps you could do us all the favor of explaining what benefit you think Freddie Mac gets from treating these securities as Level 3 instead of Level 2.
I'm a bit confused about the "mark to model" aspect. Do they value these Level 3 assets at what they bought them for, what their model said the future value would be, or something else?
Slides 23 details the ABS portfolio:
link.
"I'm not convinced Japan is out of the woods with regard to the Yen. If the carry trade blows up and Yen had to be repatriated, I think they could see (hyper)inflation."
Japan is already on the verge of hyperinflation, thanks to near 0% interest rates. They need to make a tough decision to raise them, or risk committing hari kari. When that happens, the carry trade unwinds big time, and look out below for US stocks.
I'm a bit confused about the "mark to model" aspect
Mark to model is Level 2
Level 3 is what you believe they are worth.
Most everyone here don't trust the evaluator and so they think the assets must be lied about, but what Tanta and Shnaps are saying is that in this case it's the "correct" category to place these assets in and not a scheme to hide problems.
Let's say you have something that was sold for 5 dollars three days ago, 1000 dollars two days ago, one hundred dollars this morning, and 1,050 an hour ago,...but you're not allowed to sell for a year,...what do you value it at?
oops sorry, wrong room
Two of the external pricing services used by mutual funds are Reuters and FT-IDC.
A link to a Reuters discussion of FAS 157 is:
http://about.reuters.com/productinfo/datascope/material/FASB_Statement.pdf
A link to FT-IDC's methodology is:
http://www.ftid.com/pdfs/FAS157PositionPaper-20070522v3.pdf
The Reuters link is particularly useful because it provides a table listing type of financial asset and the corresponding FAS 157 level.
Finally. A graph that is easy to differentiate colors on.
The Ponzi goes on and so does the countries net worth. Down the tubes from these corrupt pandering politicians.
The friggen congress is the most corrupt organization selling out to the highest bidding special interest group.
Not that suprising. The underlying prices are so volatile, and so many mortgage operations have shut down, that it must be getting hard to get reliable quotes.
Some people on the board get mad and think it is a conspiracy that things become level two or three. If it isn't on an exchange, it is very hard for something to be level one (most derivatives and all mortgages are off-exhange). While if you call dealers and can't get a quote on something, it is automatically level 3. What should they do, just burn the mortgages and call them worthless because they couldn't get three traders at three different firms to give a consistent price to them? It is much less of the firms saying, "We don't like the price we are getting, lets make it level three" and more "we can't get pricing, so level three is the only way we can acknowledge that we have these assets on our balance sheet.
Another thing that I say earlier in this thread is someone said you had to hold level three to maturity. This isn't true. The asset levels (I, II, III) are for Basel II accounting, the asset held-to-maturity is for GAAP accounting. Financial firm usually do three forms of accounting: Basel II for the regulators (Fed, OCC, OTS), Tax accounting for the IRS, and GAAP accounting for financial reporting for the SEC.
I am so sorry I couldn't have returned earlier. Thanks Tanta for elaborating, I thought my art analogy would help, but that just confused people, apparently.
Either that, or they just have convinced themsleves that L3 must mean something sinister.
Garçon à la pipe sold for $104 Million in 2004. Only one d00d has it, and he isn't selling at the moment.
In contrast, a print of one of Thomas Kincaid's masterworks, "Gingerbread Cottage", can be got for $898 + shipping from a seller with excellent feedback.
From an accounting perscpective, 115,812 of the latter has the same book value as 1 of the former, the only difference being the "level" at which they'd be classified.
Even if the high-end art market was 'disconnected' at the moment, I'd rather be holding the L3 if I were looking at the long term. But that's just me.
Does anyone here honestly believe that if they wanted, really wanted, to get a market value on the level 3 stuff that they couldn't?
ARW,
Yes, I truly believe that.
As much as you think banks are hiding crap, there aren't a whole lot of people siting on piles of money who want to buy whole Alt-A mortgage loans right now. Freddie can't just send a dealer the loan sizes, DTI and weighted average FICO and have him give a firm quote, a higher level of due diligence goes into any mortgage or MBS deal now.
Without as many observable market deals it is harder to justify the soundness of a level two model.
ARW - you really don't get this concept, huh?
Apparently, you've got company. Before this comment thread, I confess I wouldn't have thought you had that much company.
What does the word 'liquidity' mean to you, in the financial sense?
barkingtribe writes:
Circle the wagons... there's always level 4,... right?
Spinal Tap: We go to eleven.
Got Popcorn?
Neil
Paint Lipstick on this Pig
Winter (Economic and Market) Watch » Paint Lipstick on this Pig
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