We would think most people would apply healthy doses of skepticism to any measure that reduces information, limits disclosure, or (worse) injects falsehoods into a market system. So it continues to puzzle us when normally rational and at least moderately intelligent looking people blithely gaze in another direction when told they are going to be repeatedly lied to about the fundamental financial condition of publicly held firms. Worse, there are a select few (a population primarily filled out with elected officials) who seem to have cause and effect chains so mangled that they believe accounting rule changes fundamentally make companies worth more (or less).
I suppose decades of watching financial segments on MSNBC or (gulp) Fox Business so dulls the financial intellect that it seems entirely plausible that delaying the recognition of losses on a bunch of CDO sludge actually makes a firm more solvent. How else do we explain it when the likes of Congressman John Boehner support the suspension of Mark-to-Market accounting by explaining that disclosing numbers that actually some connection to the financial reality of a firm's balance sheet might be too "onerous" for financial firms to bear. This nearly sends us screaming into the darkness. Have we really sunk to the point where the fiction of earnings is so deeply embedded in the Wall Street psyche that no one so much as blinks hard when something like this is uttered in front of a live mic? Worse actually, as simply inventing an argument of dubious plausibility for asset valuation seems to be enough to justify almost any figure you would like to use in your financial disclosures now. The least you people can do is authorize the use of the [totalbullshit] tag in xBML, then, right?
Investors Battle Fair Value Accounting Suspension [New York Times]
Posted by guest , Oct 02, 2008 10:09AM
Wouldn't suspending mark-to-market accounting fly in the face of the entire point of SOX? How are we going to sit here tell companies they have to spend millions of dollars implementing SOX and then once they are done with that turn around and make up numbers for their assets?
I would call our government a bunch of retards but that would be offensive to those who are mentally handicapped.
Posted by guest , Oct 02, 2008 10:13AM
Moronic and assinine. No other way to describe it. If m2m is truly suspended - it will mask the problems temporarily but the companies balance sheets will still be for shit - as well as their P&L - just no one will know or see it because they have these bullshit valuations and faulty accounting.
Analogy - It's like spraying air freshner to cover the smell of shitting your pants but not cleaning up the shit - the smell [and the shit] will always be there and when the air freshner runs out you the smell will be even more horrendous.
But I digress...
Posted by guest , Oct 02, 2008 10:17AM
This is putrid...
Good analogy 2
Posted by guest , Oct 02, 2008 10:20AM
Won't the shit eventually fall out? What then? Who will it fall on?
Posted by guest , Oct 02, 2008 10:21AM
@ 2 good analogy but cleaning up the shit requires a major 3-4 year recession and failure of a lot of banks.
i dont think suspending m2m is the be all, end all but it will buy time until we can make this market transparent and put these MBS on CME
Posted by guest , Oct 02, 2008 10:21AM
the sheeple?
Posted by guest , Oct 02, 2008 10:25AM
Why don't they assign every firm a secret number that only a few people know. Then they can go online to a special website and put in their secret number and have their interns (only the ones who work for free are still there)put up all the toxic stuff and whatever else they want to get out there.
In the end, everyone can go to the website and see all the toxic assets and maybe some will actually want to buy them?
Posted by guest , Oct 02, 2008 10:25AM
To a political type this makes perfect sense, because they think you can fix any problem by passing a law. That's why he wasn't embarrassed to say it. He wouldn't understand why you think he should be no matter how hard you tried to explain it.
Well, like the old guy said, "Laws not make people nice," and laws not turn shit into gold, either.
Posted by guest , Oct 02, 2008 10:30AM
EP: if you me and every last American default on our mortgages, and each house we owned is sold for zero dollars, then all these MBS are worth nothing. Otherwise, they are backed by assets and have a value. What that value is, no one knows. Will 20% of America default, 30%, 40% ... no one knows with certainty now. So, it's virtually impossible to trade them in the market. Lack of demand is pushing the prices down, perhaps lower than their intrinsic values. Saying Mark to Market gives a true value is akin to saying market is able to value these properly, which we know isn't true. it might in fact be better to recognize losses as they come in.
Posted by Dan Daoust , Oct 02, 2008 10:31AM
If I have no intention of selling an asset today, why should I be forced to value it at what it would get me if I sold it today? Why shouldn't I value it at what I may realistically get for it down the road?
Obviously there needs to be reasonableness, I can't just make up a number, I should recognize that the future may not be as rosy as I wish for it be, etc. But all this "magic number" talk is just a strawman.
Posted by guest , Oct 02, 2008 10:31AM
ep- great post
Posted by guest , Oct 02, 2008 10:32AM
ep- great post
Posted by guest , Oct 02, 2008 10:32AM
dan-- how's the team?
Posted by guest , Oct 02, 2008 10:34AM
@5...who's to say it will get better in less time by doing this?
But your suggestion misses that in 5-7 years this companies are still fucked because they never properly cleansed their balance sheets with accurate numbers. The trouble and bad values will still lurk in those balance sheets.
And what assets get this special treatment? What about Alt-A's and prime mortgages being underwritten now -should those get this suspension as well? The market will be even LESS transparent with suspending M2M and buying time to do what?
Posted by guest , Oct 02, 2008 10:34AM
We obvioulsy learned nothing from the S&L debacle. Liberalizing regulatory accounting principles during a time of stress defeats the whole purpose of having regulations.
Posted by guest , Oct 02, 2008 10:35AM
EP: isn't the problem not the fact that MTM exists, but that its used to calcualte capital adequacy. Essentially forcing financials to treat unrealized losses as if they were realized, thereby jeapordizing their existence.
Posted by guest , Oct 02, 2008 10:36AM
@9, @10 -
If I don't plan on selling my 14 shares of stock in Lehman Brothers (or WaMu, or AIG, or WB, or...) right now then why shouldn't I be able to use it as collateral for my new $400m mortgage? It'll come back! I'm sure of it!
Posted by hedgehog , Oct 02, 2008 10:36AM
"The least you people can do is authorize the use of the [totalbullshit] tag in xBML, then, right?"
HAH!! Awesome.
Posted by guest , Oct 02, 2008 10:37AM
@14 and you know exactly how much to cleanse? Please read my post -9
Posted by Dan Daoust , Oct 02, 2008 10:39AM
@13, exactly where they've always been for as long as I can remember.
Posted by cheesedog , Oct 02, 2008 10:40AM
If you put your house on the market and nobody bids for 3 months, but some ass is in your driveway bidding $10, is your house really only worth $10? Obviously not. It aint worth what you paid for it. But it aint worth $10. MTM means you have to mark it at $10, and count the difference as a loss. The truth lies somewhere in between the $10 bid and the absurd amount you paid for it.
Posted by guest , Oct 02, 2008 10:41AM
@ 10 - And how are you going to prove that the value of your assets is "reasonable"?
Posted by Debter , Oct 02, 2008 10:44AM
LIE-bor
3mo libor 4.20
NYFR at 4.6141
Posted by guest , Oct 02, 2008 10:44AM
@17 here's a suggestion, lehman is in bankruptcy already, if it wasn't, you could look at the bookvalue of the company, look at earnings, and make a fair estimate of the share price. Also, Lehman share is an equity, an MBS is backed by a number of houses, one of them might be your, or your parent's house even. Now I hope I don't need to tell you that we have not reached a situation where even 30% of all American are in default of their mortgages and houses are all being sold for one share of LEH.
Posted by guest , Oct 02, 2008 10:46AM
@21 but if for some reason you absolutely had to sell right now then the value of your house would be $10. The "truth" value you describe is not the current value it is the value at some point in the future since you can't get that price right now. Therefore the price is $10.
Posted by diablo , Oct 02, 2008 10:50AM
Look at Sec. 132 of the Senate bailout bill (p. 88) and there you see it:
SEC (Cox) is granted the authority to suspend FASB 157 if he feels like it.
Posted by guest , Oct 02, 2008 10:51AM
@25 ... have you ever heard of Discounting Future Cash Flows, look it up, it's the basis of the financial system and all investments. You make an investment of $100 now, and you expect future returns - the present value of your investment is not in fact, like you suggested -$100, because that's the balance right this now. You have to account for future returns when valuing any asset specially when you don't mind holding it to maturity.
Posted by guest , Oct 02, 2008 10:53AM
25 Not so fast. Lets assume your original asking price was $1 million. I'll bet if just before you were ready to sell for $10 you asked the guy next door if he would buy it for $100, he would. Then the guy next to him would come over and say, hey heard youre selling for $100, I'll give you $1000, and so on. You wouldn't get to the $1 million but could very quickly get to somewhere significantly higher than the $10 and much closer to the intrinsic value of what you're selling. Thats what going on here. The "bailout" seeks to create a system where market prices are closer to intrinsic value.
Posted by guest , Oct 02, 2008 10:55AM
@27....What if there are no future returns? How are the future returns on homes in Detroit looking right now?
Posted by guest , Oct 02, 2008 10:58AM
29 Good point, but the MBS's on financial firms' balance sheets are not homes in Detroit - they do in fact have an intrinsic value.
Posted by guest , Oct 02, 2008 10:59AM
@28 wouldn't that make the mark-to-market value the "$1000, and so on" value and not the $10?
Posted by guest , Oct 02, 2008 11:03AM
@29 ... MBS are not just homes in detroit, it also include, say, homes in New York. Also, just because all detroit homes are valued less now, don't mean every single homeowner in detroit will default on their mortgages. The market for MBS doesn't exist because no one knows exactly how much of say, Detroit, will default - and how much the foreclosed homes will fetch.
Posted by guest , Oct 02, 2008 11:05AM
THOUGHT EXPERIMENT-
I am a hedge fund manager. I manage x amount. My only investment is in google. I bought it at $600 a share thinking it was worth easily $800. It is now trading around $400. However, my internal model now says its worth $700. The only reason I think its so low is because other hedge funds are having problems and are "temporarily" selling it in a panic. That said, I'm unwilling to buy any more here, because who knows what's going to happen.
It is time for me to release my yearly results. According to m2m I'm down 33%. However, I report that I'm actually up 15%. Since many hedge funds are having problems, I'm flooded with people who want to invest in my fund. I happily accept their money.
QUESTION- Despite the obvious liquidity difference between MBS and GOOG, (although the manager here thinks the price is lower on account of panic selling, so the situation is very similar) why is this situation any different than a bank with bad loans on its book that it wants to "mark to model?"
Posted by guest , Oct 02, 2008 11:06AM
31 Exactly my point. 25 says its worth only $10. I'm saying that that's the result of the market being extremely inefficient at the moment, which is causing the market value to diverge significantly from intrinsic value. But if you facilitate some type of auction mechanism the market value will be the "so on", which will approximate intrinsic value.
Posted by guest , Oct 02, 2008 11:08AM
@33 for the win.
Posted by guest , Oct 02, 2008 11:12AM
R-Kelly accounting rules.
As long as you really do believe the figure is high enough based on no evidence then everything is fine.
Posted by guest , Oct 02, 2008 11:13AM
@33 - that's because of two things:
1. GOOG - equity, MBS-bonds backed by asset - the valuation is not the same. Where equity is valued by anything from health of CEO (example Apple) to how the competitors are doing, bonds are valued by discounting cashflow.
2. Equity market is functional and trading and assigning a value to GOOG. MBS market has stopped pinning, if we can restart it, we can find a market value that'll be closer to true value.
Posted by guest , Oct 02, 2008 11:17AM
@33, you answered your own question. It is "the obvious liquidity difference between MBS and GOOG" that makes the situation different. Like asking Sarah Palin, "Besides the one really big thing that McCain tried to do to shore up the oversight of FNMA, what was a really big thing that McCain did to shore up the oversight of FNMA".
Posted by guest , Oct 02, 2008 11:18AM
@37 how will assigning magic numbers as the asset values restart the trading?
Posted by guest , Oct 02, 2008 11:20AM
@30/32...just using that as one example. Yes there is intrinsic value behind them but..........what nobody seems to understand is that the vast majority (70% is my estimate)of homes purchased during the boom were investments intended to be flipped or second homes that would not lose their value. Now the values have tanked. The owners look at them as a bad investment and walk away.
The government wants to save the peoples homes. HAHAHAHAHAH!!! They want to save homes nobody is living in!
Yes I know there are some people that really need help but the above is the vast majority of the problem and with values continuing to decline the problem will grow.
Posted by guest , Oct 02, 2008 11:21AM
39 Its not assigning magic numbers, its putting in place a system that will provide enough liquidity to allow market and intrinsic value to converge.
Posted by guest , Oct 02, 2008 11:23AM
40 Thats a whole nother issue. What we're talking about here is a MBS, with cash flows that need to be valued. And the value of those cash flows is skewed because of a lack of liquidity in the market and a resulting inefficient auction system. Make the market efficient and it will take into account the issues you are sighting when valuing the underlying mortgages.
Posted by guest , Oct 02, 2008 11:23AM
37-
Is not a stock "a claim on future discounted cash flows?" Also, since this "discounted cashflow" is completely uncertain (to anyone), how does one properly value it? Looking at the past?
38-
I'd argue that the reason this market is locked up right now is that those who should be selling would be out of business if they did. Therefore, they might as well hold and hope for better times (or for Hank to come in with a Hoover.) There are definately bids out there. Where are the offers?
Posted by guest , Oct 02, 2008 11:24AM
@41 yes, but how does suspending mark to market achieve liquidity?
Posted by guest , Oct 02, 2008 11:25AM
@39 treasury comes in, makes predictions on losses, says we will buy shit for 70cents on the dollar - somebody will be willing to sell at that price, after a few bid-ask going ons with treasury and then other market participants, we will get to a functioning market. Difference -no one will sell at 0, and everyone is scared to offer to buy at 70, if the true value turns out to be 65. If that's too complicated for you, come back after you have at least finished reading Markets for Dummies.
Posted by guest , Oct 02, 2008 11:28AM
let me just pause here and congratulate all who are contributing to a very smart thread.
Posted by guest , Oct 02, 2008 11:31AM
@45 thanks for being a dick, but what you described is the treasury forcing liquidity through purchasing these assets. You haven't described how ignoring mark-to-market will solve this (which is an independent action from the treasury buying these assets). But once again, being a dick to the guy playing devil's advocate really helped to further this intelligent discourse.
Posted by guest , Oct 02, 2008 11:33AM
SECOND THOUGHT EXPERIMENT-
I own a bank. I take deposits and make loans. I only have one loan out right now, and its to a pizza maker named Mario. When the loan was made, pizza was the hot commodity of the day. It seemed like opening a pizzaria was a no brainer. Unfortunately, the cover of the NYT just read, "Study: Pizza Undoubtably Makes You Fat." Pizza is no longer as popular as it once was. Pizza makers are going out of business left and right. Fortunately, Mario is a good, hard-working guy and has not missed any payments. (yet) However, his future business prospects are undeniably grim. Other pizza loans have been sold for 22 cents. The pizza loan market has frozen. Mario might be able to satisfy the terms of the loan, but its pretty clear he might not.
Q- Where should I mark the loan? Should I continue to take deposits knowing I may be insolvent?
Posted by guest , Oct 02, 2008 11:34AM
47 Not 45 here, but strike the last sentence and he's not a dick. Treasury is in fact forcing liquidity to get things moving. That's the point. And Treasury may in fact incur a loss. But hopefully that loss will be manageable and will not be realized for a few years and in the mean time and in the end we'll all be better off.
Posted by guest , Oct 02, 2008 11:36AM
@43, yes stock is a claim to DCF (theoretically), but it's much less structured than in fixed income and has generally always been priced by market mechanisms. Where as value of a fixed income bonds like MBS is purely a discounting of it's cash flow. Unfortunately no one knows with certainty after the losses what those cash flows will be. And there is too much panic in the market for anyone to take a bold step and try to value anything closely. Bids out there are too low, because no one wants to guess whether it's worth say 80 or 75 - so if they think it's worth 75, they would offer 40 to build a huge margin of safety - but that doesn't mean holding it to maturity will yield 40 (but 75, if 75 turns out to be really the true value)
Posted by guest , Oct 02, 2008 11:38AM
48 Flaw in the thought experiment is that you have only one loan outstanding. If pizza is no longer in vogue, you have no choice but to close the door. Banks do not have one MBS in their portfolio.
Posted by guest , Oct 02, 2008 11:39AM
@49 I agree that treasury buying securities at their own magic number will inject liquidity into the market. What I am questioning is how suspending mark-to-market has anything will do the same? They seem, to me, to be two independent actions; the first one has reasoning and logic behind it (and a likelihood to succeed), the second one doesn't (at least to me it doesn't, and I have yet to be convinced otherwise).
Posted by guest , Oct 02, 2008 11:40AM
50 Plus, you might add that the market for any individual bond is not as efficient as that for a listed security like GOOG.
Posted by guest , Oct 02, 2008 11:42AM
52 Gold star to you. The people advocating the suspension of MTM are the ones that oppose the rescue plan and advocate the suspension as an alternative.
Posted by guest , Oct 02, 2008 11:44AM
@48, did Mario mortgage his pizza parlor for the loan? Then that has an intrinsic value, businesses can vanish, but a building has a value. Should the bank in panic selling sell the Mario loan for 22, or wait to find a buyer for the building, if say the building can fetch 60-70? Also, going back to MBS, remember diversification, not 100% os US homeowmers all over the country will default and home prices won't keep going down forver - if those happen, we have much bigger things to worry about.
Posted by guest , Oct 02, 2008 11:47AM
42...If the treasury comes in and attempts to set a market price for the mbs aren't they risking an attempt to put a floor under these assets that may be artificial while the underlying asset (the homes) are continuing to lose value?
Posted by Anal_yst , Oct 02, 2008 11:47AM
the problem here is with FAS 157 (among other rules), the language in it is ambigious at best, and the conceptual framework underlying the rule similarly dubious for the reason(s) many above have pointed out.
Posted by guest , Oct 02, 2008 11:51AM
42...If the treasury comes in and attempts to set a market price for the mbs aren't they risking an attempt to put a floor under these assets that may be artificial while the underlying asset (the homes) are continuing to lose value?
Posted by guest , Oct 02, 2008 11:51AM
42...If the treasury comes in and attempts to set a market price for the mbs aren't they risking an attempt to put a floor under these assets that may be artificial while the underlying asset (the homes) are continuing to lose value?
Posted by guest , Oct 02, 2008 11:51AM
42...If the treasury comes in and attempts to set a market price for the mbs aren't they risking an attempt to put a floor under these assets that may be artificial while the underlying asset (the homes) are continuing to lose value?
Posted by guest , Oct 02, 2008 11:51AM
56 Maybe. But the mechanism for determining the offer price has yet to be established. We're supposed to trust Paulson on that one. And remember - a lot of these MBS's are generating cash flow and if bought at say 65% of par will be yielding around 10%, giving Treasury a big positive carry for the duration of the program and a lot of room to realize losses in a few years.
Posted by guest , Oct 02, 2008 11:52AM
@57...IFRS should solve that - judgement based vs. rule based (i.e. GAAP)
Posted by guest , Oct 02, 2008 11:58AM
@56 putting a floor (artificial or real) is absolutely the point. When say you go make a bid for a google stock, that sets a bar for that stock. With MBS, everyone is too paniced to make a realistic bid. Once there is a floor, and other participants are in the market, the floor can then be adjusted by market mechanism. Think of this as giving electric shock to the dying patient. Apply shock, heart beats again all's good. Doing nothing means patient will definitely die.
Posted by guest , Oct 02, 2008 12:02PM
55-
Yes, he did mortgage the parlor. Unfortunately, its located in the pizza making district which is currently being infested with crime and squatters as other pizza makers board up (similar to places in california, arizona, and nevada.) The land has some value, but its unlikely that it will be worth very much any time soon.
51-
Banks may have more than one loan, but when you lever up 30 to 1, it doesn't take very many bad loans to completely wipe out your capital (and certainly bring it below regulation thresholds).
50-
I sort of agree with what you're saying, but we're off on a few things. When you say, "but that doesn't mean holding it to maturity will yield 40 " I think you're trying to say that puking into lowball bids right now is probably not a good idea. I agree with that. Unfortunately, there is absoltuely no way correctly value what the "right" price will turn out to be. In human experience, it appears that markets do a much better job of figuring that out than a solitary bank executive. Who knows? Home prices could fall another 75% from here. (Unlikely, but so was the prospect of home prices ever going down) If you don't have the capital reserves to sit it out and find out how much these mbs will yield, you do not deserve to be in business any longer. Let someone who is more prudent with their capital buy the loans (in your bankrupcy) and find out. That is the way capitalism is supposed to work.
Posted by guest , Oct 02, 2008 12:05PM
@all (esp. those in favor of suspending MTM, and arguing for it)
I still do not feel as if anyone has put forth a concrete argument for how suspending MTM will increase liquidity.
I contend that it will actually decrease liquidity in that if I've got this asset on my books at 90 I'm never going to sell it at anything less because I don't want to realize the loss (and maybe I'll keep increasing it's mark-to-myth value to continue to gain value on the asset), which means less people will be willing to participate in trading. Without MTM having these assets priced artificially low may force people to sell (for capital calls, bankruptcies, etc) which will contribute to price discovery and market efficiency.
(hope that made sense, it's been a long week)
Posted by guest , Oct 02, 2008 12:07PM
64 I think the whole point though is why not try some intervention which, though not as pure in the short term as relying totally on the market, will result in better long term outcomes.
Posted by guest , Oct 02, 2008 12:09PM
63-
Can you please name one real world example of a price floor (or ceiling) has been beneficial for society at large?
(If you can come up with one, I'd genuinely be curious to know what it is. I can probably name 8-10 off the top of my head that have been terrible for society)
A better way to establish a "floor" would be for everyone to pull back the curtain so we can determine who is insolvent. In the bankrupcies, their MBS will be sold to someone at some price. This will probably be the lowest these assets will ever trade, but it is really the only way.
Posted by guest , Oct 02, 2008 12:12PM
@64 - 50 here.
I agree with a lot of what you said, including the capitalism approach of letting a failing institution fail. However, how do we decide that. My position is the market is broken - the true value is say somewhere between 65-75 and it's bidding 25-35 (just an example). So when we look at leverage and apply losses do we let it fail based on incorrect 25-35 when it might live at 65-75? There is another cost to keep in mind, say if all the major american banks fail, we are set back 10-20 years and our govt has an interest in preventing that. That is part of capitalism, we have govt and central bank to smooth things out and keep the machine going. Anyways, that's just my opinion.
Posted by guest , Oct 02, 2008 12:21PM
@67 - it's not a real price floor in the sense you are taking. Like I said earlier, it's akin to making a bid for say Google. If everyone stopped trading google, and it's stock went to 0, it won't mean that value of the company Google became 0. As a company it has assets, it generates cashflow. So if someone comes in and say, I bid 75 dollar, and that got rest of the market interested again and they came with various bids of their own leading to a price discovery - all's good right?
Posted by guest , Oct 02, 2008 12:25PM
Hi 50, 68...
I do not know the specifics of the market in question. If the market is something like .25 bid .85 offered, I will agree is that there is some leeway. Perhaps a bank should stay in business if that's the case. However, if there is someone out there willing to sell size at .35, then valuing the security at .80 is a crime. Much better to let the banks fail.
For the record, I don't think JPM or BOA would fail if we enforced tough marks. Similarly, there's plenty of community banks that are not exposed to mortgage securitization that would also be fine. (Commerce Bank comes to mind bc Veron Hill was on CNBC this morning.) There would be some failures with tough marks, but we would absolutely not go back 20 years in time. We would still have email, electronic markets, reliable automobiles, DealBreaker, etc etc. Credit markets are freezing because banks don't know if they're lending to banks with timebombs on their balance sheets or not. The quicker we can clear out those timebombs, the quicker we can move forward. Suspending m2m will certainly not help us clean out the balance sheets any quicker.
Posted by guest , Oct 02, 2008 12:28PM
Commerce Bank was bought by Toronto Dominion, its no community bank. They just havent changed the signs yet, or integrated it with BankNorth.
Posted by guest , Oct 02, 2008 12:30PM
70 I think however no one is currently willing to sell size at .35, becuase that would cause them to fail. Yes? So we're back to being stuck, being without liquidity in the system which is hurting.
Posted by guest , Oct 02, 2008 12:32PM
72 again. And I'll bet that distressed funds are all too willing to BUY at .35, and ride that up to intrinsic value of .65.
Posted by guest , Oct 02, 2008 12:40PM
69-
I am 1000% cool with that .75 bid, so long as its coming from a private party risking their own capital. Its a much different story when a self-interest government comes in to make that bid with the money of its citizens. If, for some reason, the market on Google was $100 bid $600 offered, I would not want the government to say, "well, most americans have GOOG in their porfolio, so we're going come in and bid $400, but don't worry, we'll prob be able to sell it for $500 somewhere down the line." The government, believe it or not, is not a private equity firm. Its mandate is not to try to make profitable investments for the benefit of the population. If it wanted to start that up, it'd have to pass an amendment, probably called Amendment 28- The Stupidest Fucking Amendment of All Time. (knocking the proposed gay marriage amendment to a close second).
One last thought experiment- If everytime you didn't like the market price of something, you simply refused to sell (and everyone else did this at the same) thinking that the government will step in at some point, all of a sudden we'd always get markets that go .15-.85 whenever an asset price falls. This bailout is setting a terrible precedent, and I have no problem guarenteeing it will happen again if it goes through.
Posted by guest , Oct 02, 2008 12:48PM
73- Well, if distressed funds we're all dying to buy at .35, thinking it'd go to .65, they'd probably be willing to bid .40 and then .45 and so on.
Similary, everyone is willing to sell this shit at .85. However, if they began offering it down they'd be out of business. As a consequence of the asymetries in running a public company, the rest of us are suffering so that bank executives can keep their jobs.
71- OK. How about Hudson City?
Posted by guest , Oct 02, 2008 1:01PM
@75
No. Not necessarily true. These things depend very much on liquidity and volatility, which are both at terribly negative extremes for actually purchasing.
Posted by guest , Oct 02, 2008 1:07PM
76-
I'm basing my conclusions on the premise from 73 (which i don't know if you wrote or not). Namely, "I'll bet that distressed funds are all too willing to BUY at .35" I doubt they're absolutely dying to buy .35's but would walk away from .40's.
Posted by guest , Oct 02, 2008 1:15PM
77 Agreed. The point is that while they're dying to buy at .35, that appetite falls off steadily as the price increases. Sellers are dying to sell at .85 and their appetite also falls off steadily as the price falls. Problem is that we can't get the two to meet. The Paulson plan solves that, avoiding insolvency among the holders.
Posted by guest , Oct 02, 2008 1:26PM
Why avoid insolvency among the holders?
If some dickhead crashed his 50' yacht, would you tell him not to worry, and throw him the keys to your cruise ship?
Posted by Anal_yst , Oct 02, 2008 1:35PM
Gents, let me clarify something here (because FASB has a hard time saying it in plain language):
Firesale or Distressed transactions shouldn't affect marks.
Unfortunately in their infinite wisdom, those who drafted this genius piece of quasi-requlation that is FAS 157 then deigned that as long as it is a 'willing transaction between two parties' (uh, it wouldn't be a 'transaction' if it wasn't, that'd be called robbery or something), its all cool
Thats what we call contradiction.
Posted by guest , Oct 02, 2008 1:38PM
79 Its not crashing the yacht. Its gashing the side as you try to dock it. Its no longer a virginal yacht, worth $100 million, but its certainly worth more than $35 million.
Posted by guest , Oct 02, 2008 1:43PM
79 The analogy is flawed though, cause junking the yacht will cost the owner, while junking MBS will cost all of us a lot more than the costs we would have to bear under the Paulson plan. Or at least thats the theory. You may have doubts about that, but that's not what you're questioning. You're just single mindedly arguing, I assume based on principle, for letting the market do its thing and letting the chips fall where they may.
Posted by guest , Oct 02, 2008 1:46PM
81-
But if you bought that Yacht with only 1/30 down, and you're using that yacht as a money-making enterprise (to pay off the rest of the yacht), I no longer want to loan you any more money, and you should be forced to sell the yacht to someone less careless and better capitalized.
Anal-
Yeah, the language certainly isn't doing anyone any favors. MBS sold in a liquidation bankrupcy prob shouldn't be used as a mark. Someone selling to deleverage probably should.
Posted by guest , Oct 02, 2008 1:59PM
82-
Yah. I think everyone here as fleshed out their positions.
I'm definately of the camp-
No bailout.
I don't know what will happen.
Probably won't be that bad.
Will be helpful, however, in avoiding similar sitations in the future.
Other camp seems to be-
Yes bailout.
I don't know what will happen (I hope that is acknowleged).
Could be very bad.
Better to try to intervene here.
No one is going to do this again because we all just lived through it.
I think wiping out the capital of the guy who bought the boat at 1/30 (securitization firms), and that of the guy who let the other guy buy the boat at 1/30 (the bond holders of the securization firms) is better for our society in the long run than trying to ease the short term pain by "bailing out" these two parties.
That is, I think, the arguement in a nutshell.
Posted by guest , Oct 02, 2008 2:21PM
84 Very good summary, except I would interject that the yes bailout camp (me included) believes that at the end of the day the plan will wind up costing nothing. Treasury will be buying securities at .65 to yield around 10%. Positive carry for the duration and the discount leaves a lot of room at the end to cover eventual losses. And for the duration, more prosperity and therefore more tax receipts.
As for your "probably not that bad": currently CAT is having problems rolling over commercial paper; banks are straining from corporations drawing down their credit lines; LIBOR is flying; small businesses cant make payroll. We may never make it to the point where the pain is managable.
Posted by Anal_yst , Oct 02, 2008 2:23PM
@ 84
Your interpretation leave much to be desired. Unfortunately I'm too busy to go through it point by point at the moment, i'm sure someone else will shortly (or I'll come back later when i'm not so busy, knock on wood)
Posted by guest , Oct 02, 2008 3:02PM
85-
So what's the next step? Is everyone just going to kill themselves? What is the absolute worst case scenario? 10% unemployment? Things will not be as bad as the great depression, and we seemed to have made it through that ok. People who know how to do (or make) things of value are going to continue to do so. (People who don't will be in some trouble, but that's part of the deal.)
If the price the gov't pays for the MBS is an acceptable deal for the banks its almost certainly a bad deal for treasury. If it were an acceptable deal, why wouldn't the private sector step up? I realize the gov't can borrow at a lower cost, but so could fannie and freddy. Why doesn't the government just prop up any asset that declines in price? What people fail to grasp is that the treasury does not have some magical checkbook that just goes on forever. We (you and I) are liable for the debts the treasury incurs (via future taxation). Fortunately for us, there is no other place in the world with the legal infrastructre, entrepenuerial spirit, and free market idealism, so they almost have to park their money here. This may not always be the case.
I just heard some clown on CNBC asking for the FDIC to insure all deposits, regardless of size, and to insure the banks creditors (the bond holders) for the FULL AMOUNT OF PRINCIPAL PLUS INTEREST. Is there no such thing as financial risk anymore? Heads I win, tails the gov't loses?
Posted by guest , Oct 02, 2008 3:04PM
Anal-
I await your analysis.
Posted by guest , Oct 02, 2008 3:10PM
87 Wondering about you: do you have a real job? any capital? Any stake in America being prosperous?
Posted by guest , Oct 02, 2008 3:20PM
89-
I trade energy futures for myself. Was on the floor of the NYMEX for a couple years. Now I rent space in the world financial center. The trading is all electronic.
My capital is on the line everyday. I suppose I can be idealistic because I don't rely on a paycheck from a corporation. I want America to proper, because I don't believe there is anywhere else better to live. However, if you look through history, the societies that have embraced capitalism have fared the best.
Posted by shalimar , Oct 02, 2008 6:10PM
1) The point of the bailout seems to be liquidity. Yet none of the CEOs have come out saying that they'll lend more to each other if this bailout takes place. BB&T's CEO made a statement underscoring this point.
Bailout campers - do you have any data points supporting your argument? Just a couple of statements from executives at lending agencies would do.
2) Why the hell isn't anyone pointing this out in public? The arguments are all about moral hazard and eventual winners - not about inconsistency in the plan itself.
3) Credit availability is lower. That's a given. Yet isn't this similar to the housing price phenomena --- where credit was too easily available in the first place? Maybe companies that depend on liquidity should reconsider their business models.
Look at the arguments:
Paulson: (A) Buy these illiquid assets, otherwise (B) banks will stop lending and businesses dependent on revolvers will die.
Liberals: (C) We don't want to pay Wall Street for their being ijits.
People talk about A leading to C, which ignores the fact that A will not prevent B. The switch in focal points means that Paulson's postulate is accepted.