first

Nemo strikes again.

Smashing the barometer on the side of the boat isn't going to make the weather any better.

For these companies it sounds like a good solid SELL to me.

As a former MBS derivative trader...... all I can say is that not requiring traders to to MTM is essentially a license to print your own bonus...to say the least, this is not what an already opaque asset class needs at this time!

Comrade Kaboom,

Speaking of short selling, if I'm reading between the lines of this correctly "specialists" have had to step up to fill the gap left by the short sellers.

"Specialists' Moves Monday May Have Staved Off Bigger Market Fall", by Geoffrey Rogow, Dow Jones / CNN Money, September 30, 2008.

Another idea brought to you by the Department of Let's Do The Worst Thing We Can Possibly Think Up!

IrvineRenter writes:
"If the credit markets have seized up because nobody knows who holds the toxic waste on their balance sheets, how is hiding it and pretending it isn't there going to help? If this becomes part of [any proposed] bailout bill, it will make the problem worse."

You type the words before I could.

Daft as a hairbrush, the Ravenous Bugblatter Beast of Traal is arguably the most insanely idiotically dense creature in existence. It believes that if you can't see it, it can't see you. Therefore, if you are faced by the horrid (yes, horrid, in spite of its intelleigence, or lack of) Beast you should wrap your towel around your head (you do have one, don't you!?) to TEMPORARILY ward off the Beast's voracious apetite and furious... fury... sorry.

this totally makes me want to move to CT and start the craziest hedge fund ever. beanie babies are a neglected asset class.

Every thing I read tonight has another country saying the US screwed up and needs to pay for a bailout. With all the international pressure, how long do you think your Congress can hold out?? I think the gig is about up. Got lube?

"As a former MBS derivative trader...... all I can say is that not requiring traders to to MTM is essentially a license to print your own bonus...to say the least, this is not what an already opaque asset class needs at this time!"

How's rehab coming along. Detoxified yet?

We have had 14 months now for these valuable assets to "recover" in price, while the cashflow from the underlying pools of mortgages becomes even more compromised. After 14 months, shouldn't these securities be valued on the amount of cashflow they are receiving now, not on the amount that the traders are hoping that they will receive in the future based on their models? Noone wants to buy a bunch of bananas that are a week beyond the expiration date, why would anyone buy assets with declining cash flows and possible capital impairments? I was never good at accounting anyway, thank goodness.

As an actuary (retired), suspending MTM makes for fascinating math equations. OK I'm all for it!!!

This is how you get around that pesky issue of solvency. Redefine solvency.

I've been thinking lately that I understand how George Orwell must have felt. I don't to know how George Orwell felt; I suspect he wasn't a happy guy.

2+2=5, or with leverage: 150

"Hedge funds don't really gang up on bonds."

i think at least one has captured the widening spread between AAA and treasuries this week.

"By the way, if anybody cares about a competing view, Bob McTeer does a pretty good job. He's the former President of the Dallas Fed. Which may or may not give him more credibility."

William Isaac is another - but what would he now - he was only head of FDIC during the RTC erra and guided the huige and suiccessful bailout of Continental Ill Bank & Trust

An Old Hand Counsels Lawmakers - WSJ.com

and

How to Save the Financial System - WSJ.com

(you may have to search for William Isaacs and WSJ - the stories lineked above are " How to Save the Financial System By William M. Isaac 09/19/2008" and "An Old Hand Counsels Lawmakers" both at WSJ - if Halo hoses the links)

Anybody read Paul Kedrosky's piece on AIG and European Banks gaming their regulatory capital requirements? Any thoughts if you have read it?

Does the ban on short selling expire tomorrow? What effect will this have on the market?

If you haven't read Kedrosky's AIG article today. Go read it! The banking system in Europe is farked!

We're not Zimbabwe. At 0% reserves, mark to whatever, we can print the sideways 8 bill. Saves on the zeros. Google can't even keep up.

homedad43
I have about had it myself. I try to think about what I will do and I blank out. No place to hide. Mad Max looks to be my only option.

Crap.

"If the credit markets have seized up because nobody knows who holds the toxic waste on their balance sheets"

Then why the HELL don't we simply require complete reporting.

Disclose it all -- and after a deadline, anything not disclosed ceases to exist.

Put it all into a model.

If we can model the damned climate, guessing about the details, we sure as hell ought to be able to model the economy with precise, accurately reported disclosure of all the financial instruments and accounts
-- and their terms.

The whole problem is with what Warren Buffet claims is an expectation of 15 percent profit on the toxic waste.

It's an illusion.

People will pay for illusions.

But -- disclosure is supposed to be the cure.

Freeze the system for a week or a month.

Report every component of it.

Honestly.

Because anything not reported ceases to exist in the One Big Book.

Sum it up.

Assign real money to real people.

Assign the vapormoney to the corporations.

It will even out, if -- and only if -- the real money ends up with the real individual people at the bottom of the pile.

Then -- hell, let the stupid three-cup guess-where-profit-is game start over again, if we must.

Mark to market only works when you have an orderly functioning market with willing buyers and sellers - in that situation it is a good idea

FASB 157 says distressed sales should NOT be used for mark to mnarket - yet when the ONLY sales iut there are distressed sales this model braks down ...

and every one of these distressed sales - which have zero bearing in reality as to value based on cash flow and performance of the asset - then becomes the new mark to market for the entire industry

as one pundit wrote mark to market forces the panic sale value of one asset to be imposed on every asset in the marketplace

As it stands today you can have an asset performing exactly as expected, that was purchased for long term hold, and that has little or no likelihood of perfomance declining significantly - forced to be written down to pennies on the dollar

A good analogy is if your bank called you and said:

"there was a foreclosure sale in your neighborhoood of a similar home to yours - it sold for 30% less than your mortgage amount with us - now we know you've been paying your payment on time for years and are not likely to stop doing that but the rules require that we mark your value down to the foreclosure sale of your neighbor ... oh, and by the way since your home is no loner worth what we lent on - please send us a check for the 30% loss in value ... we realize this is a hardship so we'll gladly give you a week to come up with the cash..."

I also belive - someone feel free to correct me - that FASB 157's mark to market (aka: mark to paniced fire sale liquidation) pricing only applies to investment banks and similar financial entities and NOT to regular banks

Regular banks are allowed to keep their assets bought for long term hold under the present value of the cash flow method - which accurately fully, and correctly reflects the value of that type assets

WHich makes it all the more ridiculous - if it is safe for a bank to use - why woudl the same asset be held to a different standard based on who owns it ... if it is bought as a long term hold and not "for sale" and is performing as expected why should anyone be forced to value the asset at less than the present value of its cash flow ?

Those who trust corporate accounting departments, please raise your hand.

Brilliant. If we all stick our heads in the sand and pretend, the balance sheets will get better. Too bad we don't have any fairy dust to sprinkle on them too, and then we can all think "happy thoughts" over them.

Better yet, why not get Palin's pastor to pray over the balance sheets, so they will be protected from WITCHCRAFT?? That ought to make them look much better.

I can't believe we elect and PAY these people...

Watch Paulson!

§ 502(5)(E)(E) In estimating net present values, the discount rate shall be the average interest rate on marketable Treasury securities of similar maturity to the cash flows of the direct loan or loan guarantee for which the estimate is being made.


Mark to market has casued hundreds of billions in assets to be unfairly valued at pennies on the dollar desopite the majority being fully performing not impaired oin any way assets

AIG said last week that the actual expected real world losses on their portfolio would be appx 10% of the forced mark to market write downs ... and I had this confirmed to me by the head of a multi-billion $ REIT who reviewed their assets ...

he said that 80% of AIG's assets are true AAA quality and fully performing

but he also said NO ONE is interested in AAA paper today because it is TOO SAFE - there are plenty of buyers for the true risky stuff, the lower tranches - becasue they pay very high returns and trade at a substantial dscount

the AAA paper that is the majority of the illiquid assets - is extremely safe - but it pays a tiny return as a result - and after discounts - even factoring a 30% or higher foreclosure rate - the lower tier toxic garbage pays a much higher rate

Kids, kids, kids,

The point is here, that discretionary judgments with intangible valuations with Level 3 assets, which are unobservable is something that does need to be suspended! These gurus may think this accounting magic plays a role in something other than fraud, but whatever that is, they should explain what that it is, cause we didn't get to this point with honesty!

I appreciate the CPA sentiments.... are they going to make GMAC mark down the auto loans to Blue Book value?...... day 2 -20%????

Anyone with index exchange traded derivatives is screwed anyway, so why not just tell all the mice in those traps that they have poison cheese balls?

I think some people are confused (congress)...banks use FAS 115, which is much different than FAS 157. Oh well, never let the facts get in the way...

It wouldn't be a problem.

Ahh... until you have CDS exposures that are tied to stock price or the MTM book value...

where is cannabis tonight?

Nemo

I agree with just about everything you have said in this thread, with one exception and one caveat.

1) The exception is when you wrote, just now, that "Starting next week, the value of any financial asset will become whatever Hank Paulson says it is."

My reading of the Treasury conference call with analysts Sunday night was that it would be some time, weeks if I recall right, before the Treasury would start buying MBS. As I recall, one or more parties on the call said, roughly, you know that a lot banks will fail before then. The treasury response was to say, yes, we know, we're aiming to save banks, we're aiming to save the market.

According to that conference, it seemed Treasury intended to let the market continue to weed out banks for a little while, based on mark to market pricing . . . albeit with some psychological boost from the knowledge that Treasury buying of MBS would commence in several weeks.

2) My caveat to your remakrs concern the near impossibility of working around the Bush Admn. I agree that the 200 economists' letter did not help much because it had no alternative plan. It didn't and couldn't. Try to get 200 academics to agree to the color of the sky. Generically, that is one half of the reason why emergency acts of this sort originate from the executive branch, were the President can assert leadership. The half of the reason is that the executive branch has to enforce or implement the act once passed.

So the bottomline on doing anything is the fact that the Bush Admn is a leadership vacuum, a dead end, a dead duck. Sadly, tragically, stupidly, hopelessly, it all hinges on Paulson.

Max writes:
As long as the transparency is there, you can figure out what you're getting into.

I'm getting the feeling there's no easy answer. These securities are so complicated, their value is unknowable.

How do you make money on them again?
Max | Homepage | 10.01.08 - 12:29 am | #

i'm getting hte feeling we are being screwed big time. tomorrow the bill will pass in teh senate.

what's next?

"The bailout plan is unnatural and everyone knows it. "

First - it is not a "bail out" - as anyone who has actually reviewed and tried to understand the bill can see

Even the Wicked Witch of the Left Ms Pelosi (Pelosi and Murtha and Reeeeiiid ... oh MY! ... skip, skip ...) acknowledges this

I was initially opposed - a lot - to it ... then I took time to udnertsand it and in many ways iot is brilliant

It accomplshes all kinds of goals - first and foremost - even more important than buying the assets - it does what Paulson and Brnanke haven't been able to do other wise - it does an end run around the current FASB 157 mark to market problem

It does this by establishing a real market and real market values based on the cash flow projections of the assets and not on panic fire sale liquidation values to vultures

This flows through the whole system rising all tides

by establishing real values - even though they are likely to still be at substantial (estimated 30% to 50%) discounts - every asset can be marked to this value - which means the huge paper wriotedowns unrealted to real asset values can be written back up - in one swoop we provide solvency back to the entire market

That solvency in turn provides liquidity in itslef - which greatly leverages the $700 billion in rewally money to purchase assets

With solvency and liquidity these organizations are no longer under pressure from lenders under collateral covenants in their loan agreements - and the capital calls which were triggering panic fire sales can largely end

And US givt - the taxpayers - end up owning a valuable protfolio of assets they have bought at 50 to 70 cnts on the dollar ... which the Fed, with noine of teh constraints of the private markets - and with tehir extrememly low borrowing rate - can easily afford to hold and/or modify .... making signficant profit for the taxpayers in the process

The plan also provides considerable support directly to efforts to prevent foreclsoures - earmarking 20% of any profits to this casue ... not to mention giving a much greater ability to modify these laons to help homeowners - which is also addressed in the bill

The latest version of the bill adds the oversite (6 layers if I recall), review and a myroiad of other protections .... it also allocatse only $250 billion up fronty and another $100 billion on Presuidents request - the remainder is subject to challneg by the politicians

This is a win, win - especially if they add meaningful FASB 157 controls and it sounds like some tax credits

If people actually took time to udnerstand this bill and its REAL facts they would have a far different opinion of its value and benefits

Even the conservative Congressional Budget Office says this bill will very likely make taxpayers a significant profit

It will break the death spiral caused by the self feeding mark to marketloop and has a great chance restoriung coinfidence in the markets

And the worst case if it doesn't work? The US givt and taxpayers own $1 trillion or more in assets that they will have paid something between $500 and $700 billion for - which will very liekly make a hundred billion or more profit for the taxpayers

It is interesting that phone calls a few days ago were overwehlmingly against this plan - but yetsrday afternoon and today have done a complete, huge about face .... legislators that were beein lamabsted - told if they voted for the bill tehy would be voted out of office - are today being beseeched to vote for the bill

oops

I meant the treasury people said "we are NOT aiming to save banks, but aiming to save the market." i.e, they mean to let the market eat banks for a while, allowing mark to market to sink them, and then Treasury would step in to recapitalize some survivors by buying MBS at higher than market value.

... he also said NO ONE is interested in AAA paper today because it is TOO SAFE - there are plenty of buyers for the true risky stuff, the lower tranches - becasue they pay very high returns and trade at a substantial dscount...

you're gonna have to walk me through this one slowly. the AAA stuff was originated at much higher rates than the current risk-free rate of nearly 0%. is he suggesting there is little intereste in Risk-Free plus say 3%?

that's almost believable, especially for anybody projecting higher interest rates over the life of the asset.

FAS 115 (for financial institutions, has been around for a while) here are the details:

The accounting treatment for the securities depends on their categorization. It is important that companies seriously consider their intent when initially classifying securities, as the later transfer from one category to another has significant accounting consequences.

2.3.1 Held to Maturity

Investments may be classified as held to maturity (HTM) if the enterprise has a positive intent and ability to hold those securities until maturity. SFAS No. 115 provides examples of changes in circumstances that may cause a company which originally classified a security as HTM to change its intent, without "tainting" the remainder of its HTM portfolio. These circumstances are described below:

Evidence of a significant deterioration in the issuer's creditworthiness

A change in tax law that eliminates or reduces the tax-exempt status of interest on the debt security (but not a change in tax law that revises the marginal tax rate applicable to interest income)

A major business combination or major disposition that necessitates the sale or transfer of held-to-maturity securities to maintain the enterprise's existing interest rate position or credit risk policy

A change in state or regulatory requirements significantly modifying either what constitutes a permissible investment or the maximum investments in certain kind of securities, thereby causing an enterprise to dispose of HTM securities

A significant increase by the regulator in the industry's capital requirements that causes the enterprise to downsize by selling HTM securities

A significant increase in the risk weights of debt securities used for regulatory risk-based capital purposes

The above list makes it clear that simply changing a portfolio structure or deciding that there is a need to liquidate a portion of the portfolio is not an acceptable reason to change the classification from HTM to available for sale (or trading). Only events that are isolated, nonrecurring and unusual for the reporting enterprise that could not have been reasonably anticipated.

There are two circumstances in which a HTM security may be sold prior to maturity, with that settlement being considered a maturity:

The sale of a security occurs near enough to its maturity date (or call date) that changes in market interest rates would not have a significant effect on the security fair value (generally, within three months of maturity or call date);

The sale of a security occurs after the enterprise has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due to either scheduled payments or prepayments.

HTM securities are to be accounted for at amortized cost. Dividend and interest income, including amortization of premium and accretion of discount arising at acquisition, should be reported as components of interest income. Gains and losses are recognized when they are realized (usually from the sale of the security, although losses may be also recognized due to impairment concerns). These realized gains and losses should be reported in "other income" as securities gains and losses.

2.3.2 Trading Securities
Securities that are bought and held principally for the purpose of selling them in the near term will be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in prices. Dividends and interest income are reported in the same manner as those for held-to-maturity securities. Changes in the fair value (i.e., unrealized gains and losses) are reported in income.

2.3.3 Available for Sale

Investments not classified as trading securities or HTM securities will be classified as available for sale (AFS). Classification as AFS does not mean that management has a positive intent to sell the securities prior to maturity, but rather that it does not have the positive intent and ability to hold them to maturity. As the category name indicates, these securities are available for sale to meet portfolio requirements, including interest rate risk management, liquidity needs, or for any other reason.

Dividends and interest income are reported in the same manner as those for held-to-maturity securities. The securities are reported at fair value, with changes in the unrealized gains and losses reported as a component of equity (in other comprehensive income), net of tax. These unrealized gains and losses will remain in equity until they are realized through the sale of the security or the recognition of other-than-temporary impairment. Upon sale, the realized gain or loss is recognized as a securities gain or loss in other income.

220mph: "blah blah blah...
The latest version of the bill adds the oversite...
blah blah blah..."

220mph you are full of shiite. Oh, and learn how to spell, too.

None of your claims of buying these MBSs for less than they are worth have any substance at all to them. None. It's just a wild unsupported claim.

Then to add on top of that, that they'll make so much profit that they'll even pay for mortgage reworks makes it even more insane.

In short, you lie. Now go do your astroturfing somewhere else.

"You know, ever since becoming addicted to reading and learning at economic/financial blogs and websites (CR is the best!) I feel like I am in the midst of some horror movie."

So do I, but where is the part where the nubile bimbo starts seducing me before the ax murderer with the goalie mask arrives ? - Oh, that's why those floozies on CNBC are there!

Doesn't the bailout plan essentially suspend "Mark to Market" by creating this artificial buyer (the Treasury) that will willingly pay higher prices than what the securities are worth today? What kind of a market is that.

Seems simpler to suspend the rule and save our money.

SDM...interesting

Give me your tired, your poor, your sick...we must feed them to the wolves.

Both. Just like Hank and Ben.

Err, capitol -> capital.

Hank buy them yourself. Give us back that bazooka. Use your scattergun.

good night

I haven't read the posts yet, but this is the most intelligent comment I have read on the financial crisis. Fair Value accounting is the only thing that saved us from a complete fraud. The banks tried their best to hide the problems as it is. God only knows what they would have stooped to if we didn't have market-to-market accounting.

Best

Fair Economist: "If the models are chosen by an independent disinterested party you get rid of the moral hazard problem."

Securities Appraisers?

220 said "There is no logical reason to me that the same assets should be treated differently iif its a bank or an other financial institution ..."

Banks are not in the business of trading stocks (ala GS) that is why the classification is different...remember GS and MS are now banks and they will now use these three categories of classification for their investments,

I don't believe I ever heard the banksters say during the runup:

"Hey there's no effing way this CDO is worth as much as my client is willing to pay me for it. I'm going to have to notify him that I won't accept his bid until he lowers it substantially."

"The bank was saved, but the people were ruined."
- Henry M. Gouge, circa 1830

"Your comments that the current market price for safe AAA assets based on real estate is too low is subjective. Maybe it's true, maybe not. "

Sale prices of the real estate underlying mortgage assets has no direct bearing on the value of the asset - the value is the cash flow (the interest stream) adjusted for the likelihood repayment is impaired

So only to the extent home values affect the likelihood of repayment do the effect value of the assets ...

As to whether buying $700 billion of assets at a discopunt and holding them to maturity or until market turnms is a good idea or not you have to look at the expected performance of those assets and the discount to face value bought at

If we say the Fed buy at an avg 70 cents on the dollar ... (probably higher than they eventually will buy for - but better to be high for this comaprison as inflated costs reduce potential gains) ... then the Fed will get appx $1 trillion in face value assets for $700 billion

Now - what is the liekly performance?

Lets assume they are ALL subprime ...
(which they are not but again this will infalte losses and decrease profit potential to be conservative) ... current lifetime rates on subprime are something like 9% foreclsoure rates and overall default rates are in I think the 35% range

Lets again be conservative - even thoug home prices are moderating and bottoming in many markets acriss teh country and the pressure is diminishing on foreclsoures - lets assume foreclosures are going to more than triple - increase 300+% - from current rates ... to 30% ... and lets use a 50% loss severity of sale of these foreclosures

So - some bail out math:

1 trillion in total govt assets
x 30% foreclsoure rate
= $300 billion in foreclosures
x 50% loss on each property
= $150 billion doirect loss

So we only get $850 billion for our $1 trillion in assets ... but we only paid $700 billion ... so even with 30% foreclsoure rate and 50% loss severity the taxpayers make $150 million

Except we still have inetrest income to account for ...

Lets say we modify every mortgage down to 6.5% - and now lets blend in the low risk AAA tranches that are only returning say 5% ... heck - lets just use 5% return on ALL assets ... and lets plug in a default rate of 500% - that only half of the mortgages actually pay theoir payment - which is inline woth the default vs foreclsore stats

So - more bailout math:

$1 trillion in assets
x 50% paying interest
x 5% interest annually
= $25 billion in annual interest

Lets just go out 5 years (ignoring most of this is 30 year income streams)

So $25 billion a year x 5 years is $125 billion in interest

So the Grand Totals ...

With a 30% foreclsoure rate, a 50% loss on each one, a 50% default rate and a 5% inetrest rate on each loan ... all of which are reallistically overinflated by cinsiderable factor

...the government - the taxpayers - will receive $850 billion after foreclosures and $125 billion in interest - total $975 billion in returns over 5 years ...

Which they paid $700 billion for

A profit to taxpayers of $275 billion

Yep ... a terrible deal ....

Heh, why don't these financial companies just reduce their liabilities by discounting them against the chance they may go under and never pay them.

Now that's an accounting change that could free up some capital.

Crispy&Cole:
Banks are not in the business of trading stocks (ala GS)

as a former fixed income analyst covering top 100 banks in the late '80s there were some banks that generated a substantial amount of their income from trading operations (e.g., Bankers Trust)

Fair Value summary with some accounting prononcements (seek the advice of your OWN CPA...don't rely on some anonymous loser on the net like me):

The following summarizes items which are accounted for at fair value in at least some circumstances

Investments classified as trading or available for sale (SFAS No. 115)

Loans

Loans held for sale

Certain impaired loans (SFAS Nos. 114 and 118)

Certain purchased loans (SOP 03-3)

Foreclosed assets

Derivative instruments (SFAS No. 133 and related pronouncements)

Mortgage and other servicing assets (SFAS Nos. 140 and 156)

Assets and liabilities acquired in business combinations (SFAS No. 141)

Certain intangible assets (SFAS No. 142)

Goodwill

Core deposit intangibles

Trust intangibles

Financial Guarantees (FIN 45)

Stock-based compensation (SFAS No. 123(R))

Impaired long-lived assets (SFAS No. 144)

Accounting question:

If 3=4 and 5=11

what does 3+11 equal?

This is surreal. Oh yeah, I'm really gonna invest in this market.

"as a former fixed income analyst covering top 100 banks in the late '80s there were some banks that generated a substantial amount of their income from trading operations (e.g., Bankers Trust)"

I am talking about your local banker...yes if you look at a 10K from Wells Fargo they have a substantial portion of their balance sheet investments classified as Trading securites and available for sale.

"BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday."

Believe this was soundly and quickly refuted as false when it came out

"A profit to taxpayers of $275 billion"

I thought that many of what the Fed wanted to take of the financial institutions' books were also highly levered...so the losses would be multiplied. Is that not the case?

Another point...if there is that much "profit", shouldn't we just market this to the sovereign wealth funds, Bill Gross, Bill Gates, Warren Buffet, Microsoft, etc.? They have massive amounts of cash and treasuries; are they chomping at the bit to do this? If so, why do we have the taxpayer investing in this "sure thing"? Why not let the private wealth take the upside and the downside?

Are the sovereign wealth funds fighting to step ahead of the taxpayer on such juicy, almost guaranteed returns? If so....well let them. If not...well, maybe there's something missing in your analysis?

"If the market was so confident in the future cash flow, wouldn't it be priced in? And if the market is not pricing it in, who are you to say what the true value really is?"

There is NO market - with the siezed market, the huge uncertainties, the crisis oif confidencse and lack of trust waiting for next shoe to drop, where perfectly good isntitutions with long histories and good assets are disappearing due to bank runs etc evey day ...

no one is pretty much buying anything - regardless of value - everyone is in business of hoarding cash ... and THAT is the problem

All the recent name calling and nyah-nyahs like the one below are wrecking this site.

What do you get from trying to convince us that this bailout is all rosy?

EvilHenryPaulson

As I understand it FASB 157 was an issue in the up market as well .... asset values were marked to current values based on sale prices of comparable assets sold

The difference is then tehre was an orderly free market - willing buyers and selling making arms lenth - non-forced sales

Today you have unwilling sellers foced to sell - and often udner duress - with dasy or weeks to unload the asset to meet a capital call

A Huge difference

Cloudy Day

I agree with you 100%. No ad hominem attacks against posters. Attack their ideas, not them.

Cursing out major public figures who don't post here (at least not under their own names) is different.

911 call - Squirrel
YouTube -

joe shmoe writes:
"is Hank Paulson's mom named Heisenberg?"

Marianna Gallaeur, but I see the parallel with the uncertainty principle...

I also have a cat named "Schrödinger"...

Hank Paulson's Mom ... an excellent simple commentary

It seems pretty simple - if an asset was bought for long term hold (regardless of the type entity buying it)and is performing generally within its oginal expected parameters - it should be marked to maturity with an adjustment for any impairment (expected or actual changes in foreclosure/repayment rates etc)

If it is an asset bought and held for sale it should be market to market

As I understand it that is how FASB 115 pplying to Banks does it ...

"I also have a cat named "Schrödinger"...
Hank Paulson's Mom "

Anyone with a cat can't be all bad, even if they are Hank Paulson's mom and have something to answer for in that department.

sm_landlord writes:
"where perfectly good isntitutions with long histories and good assets are disappearing due to bank runs etc evey day"

Do you mean perfectly good institutions like Lehman? Or Bear Or Fan/Fred?

....

or Countrywide?

or, uh, the Bush Administration?

is there an open letter we could sign and show our disgust to our SENATORS asking them to do something about it?
Because we as investors will suffer from not knowing what is the value of the assets of the firms we invest into.

Enough is f. enough!!!

You know how you can tell when a government estimator is lying? He's moving his lips.

As Judge Judy says about teenagers.

"Wow, 220mph, your foreclosure rates are incredibly optimistic. Homes in California were typically selling for 5 times their value 10 years ago, and for 10-12 times income, in the greatest up cycle in RE history. RE is cyclical. Losses will be huge as the cycle inevitably moves down to historical averages, and even bigger as it goes below."

A 30% foreclosure rate and 50% default rate assumption is "optimistic"???

California is a small part of the country - an important and influential part but a small part none the less

And even in California the foreclosure rate - even with a 30% drop in home prices in many areas - is a fraction of 30%

The answer is mark-to-model with the models chosen by the regulators or auditors, not the company. If the security is so complex they don't have models to handle it, then the company has to pay them to develop the models (a good incentive against excessively complicated garbage). If the models are chosen by an independent disinterested party you get rid of the moral hazard problem.
Fair Economist

That is the most sensible idea I've heard out of this whole mess! Thank you.

"dr strangemoney writes:
then publish two books: one, the liquidation value (mark-to-market) and the other the fantasy land books for those that prefer to trust and not verify."

those who point out problemns with FASB 157 - like me and a lot of other very smart folks like William Isaacs
Chairman of FDIC during the RTC era - do not in any way say that there should be no verification or transparency

And no matter how many times some say it - that is not waht happens .... there are clear accepted account practices that govern pricing an asset based on discounted cash flows and performance ... it is done every day on assets all over the world

All these shenanigans! Banning short selling, bailing out the reckless and corrupt, banning sensible accounting practices, marking to wishful thinking ... I tell you, Watson this is a bear market and that's that. No matter what foolishness these clowns get up to, the market is going down, and only when all the rubbish has been purged from the global system will the market make a bottom and after a time- yes, it will once more begin to rise.

"if you think investors are buying AAA bonds (as mentioned in another post) at values that they believe is fair with respect to losses,..think again. i recently talked to one of the largest money managers in the world about their purchase of over a billion in AAA bonds off a prime bor deal at less that 0.60 on the dollar. no where in the conversation did they ever consider losing any money on the deal, and quite the opposite, expressed amazement at how messed up the markets are and stunned they were able to make that purchase. all they could talk about was how the deal would need to have 80% of the loans go bad and 80% loss severity before they breakeven, and how impossible they felt that was. "

ES .... another great point - which I;ve tried to show as well ...

Because the AAA tarnches were in such preferred position usually - even those on subprime protfolios would have to see astronomical foreclosure and loss severity rates to lose a diume of principle

At 60 cents on the dollar especially so ...

With realitic loss ratios on the underlying assest there is zero effect or risk to most AAA tranches as near as I can tell

The buyers don't like them because that lack of risk means very low returns - but even if you have a 4% or 5% return and buy at a 15% or 20% discount it becomes a pretty good return for a safe investment

That there are not many more pruchases of these assets is a testament to how siezed teh amrket is ... everyone is scared of their shadows - in full lcokdown mode - and hoarding every penny they can

I believe its likely that once we get some confidence and a little solvency/liquidity that private buyers will step up - and start bidding against the Fed for these assets ... and the govt may not have to do much more than a few sales to seed the pool

"Being able to say "I told you so" is soooooo very satisfying. "

Interesting ... I assume that would also apply to all of the people who said last November that FASB 157 would tip the market over and casue massive writedowns and losses?