If the unknown mortgage losses were priced into the stock market you would see significant losses. You would also see money standing on the sidelines, money in gold and commodities, and from overseas, return to the stock market post-adjustment. You would see enthusiastic trading and a rapid recovery based on trust. And you would not see the inflation coming from an extra $700 billion in debt propping up values. So my 401K goes down in value, but my contributions buy more and my buying power is preserved.

shuzilla on September 25, 2008 at 1:27 PM

My argument on MTM (and many analysts agree with this) is that the valuation has been driven down much lower than is accurate, not that the valuation is too high. You would be correct that MTM is a useful tool when historical pricing is too liberal, but once the pendulum swings the other way MTM, especially on leveraged portfolios, overstates the devaluation.

Devaluing a portfolio by 30% or more because 4-5% of the underlying properties are in default is foolish.

Maybe not. The riskiest, highest yielding tranches are toast. The lowest tranches a) yield significantly less, maybe zero if they can’t keep pace with inflation, and b) no longer qualify for their lofty ratings, if they ever really did.

The money to be made was weighted towards the higher yielding but mostly wiped-out tranch. None of the tranches effectively priced their risk.

Then watch the entire market crash. Devaluing a portfolio by 30% or more because 4-5% of the underlying properties are in default is foolish. Mark-to-market is, like most government intervention, full of good thoughts and little sense.

Vashta.Nerada on September 25, 2008 at 12:36 PM

OK, then. A crash would not be on the order of 1929 that was based on an over-leveraged bubble. Today’s RE bubble is more like 1929 stock market, being overpriced and overleveraged. The losses remain hidden away, and to the extent they are hidden investors are avoiding the market, even pulling money out for lack of trust.

If the unknown mortgage losses were priced into the stock market you would see significant losses. You would also see money standing on the sidelines, money in gold and commodities, and from overseas, return to the stock market post-adjustment. You would see enthusiastic trading and a rapid recovery based on trust. And you would not see the inflation coming from an extra $700 billion in debt propping up values. So my 401K goes down in value, but my contributions buy more and my buying power is preserved.

Maybe if our markets are the first to “crash” to supportable levels then they will be the refuge for money worldwide when their markets tank or their trading is halted.

On this we agree 100%. Sarbox and FASB157 were disasters of epic proportions. Mark-to-market played a major role in causing this crisis. It should be changed ASAP. But I think too much damage has been done at this point for that alone to prevent the failure of the credit market.

phronesis on September 25, 2008 at 1:00 PM

Agreed. At this point, we need to bring capital back into the market. Getting rid of MTM would only keep the damage from getting worse. I surprized some folks think it is a good idea – we got along without it until around December 2006, and investors were still able to value their investments.

Vashta.Nerada on September 25, 2008 at 12:36 PM

On this we agree 100%. Sarbox and FASB157 were disasters of epic proportions. Mark-to-market played a major role in causing this crisis. It should be changed ASAP. But I think too much damage has been done at this point for that alone to prevent the failure of the credit market.

angelat0763 on September 25, 2008 at 12:48 PM

The Fed did cause the great depression. That is absolutely true. How did it happen? Bank failures were already contracting the money supply and the Fed shrunk it even further. When the money supply contracts so severely, you get economic depressions. The failure of the credit markets last week, the evidence for which is legion, has precisely the same effect, i.e. a massive contraction in the money supply. That is what Bernanke and Paulson are moving to prevent. That is why it is not hyperbole to say the price of inaction is another great depression.

Right4life, in 1929 the government FAILED to act, and the actions it took were totally opposite of what they were supposed to do.

That makes no sense.

But I think I know what you’re saying. But the thing is, the reason the depression happened is because the Federal Reserve caused it. And that’s a quote from Bernacke: http://www.kickthemallout.com/article.php/Story-Bernake_Fed_Caused_Depression

The government did act in the early 1900’s, and those actions delayed and intensified the problem. So, what should have been a 1 year business correction was “fixed” by the government and turned into a 10 year tragedy 20 years later.

Bernanke’s an expert on the Depression…it was his focus while he was an academic. If he understands what the gov’t did WRONG in ‘29, and supports Paulson’s plan, then I think he’s probably got a better handle on this than either of us.

Sorry, as a devout believer in free markets, I think he’s behaving more like a gambling addict than anything. “Just give me one more hand – I’ll win this time!”

Heheheheh…I’m just too stunned at the lack of careful analysis here. This EXACTLY points out the difference between conservatives supposedly thinking versus liberals just “feeling” and gut-reacting.

Shirotayama on September 25, 2008 at 11:01 AM

It’s ironic that you’ve been arguing for the rescue and are so certain of it’s necessity yet weren’t even aware of the actual underlying causes of this problem in the first place.

Mark-to-market must exist and that should be non-negotiable. It’s up to the financial industry to provide the transparency needed to make MBS marketable, but instead they hide behind opaque debt instruments to cover their nakedness.

shuzilla on September 25, 2008 at 12:27 PM

Then watch the entire market crash. Devaluing a portfolio by 30% or more because 4-5% of the underlying properties are in default is foolish. Mark-to-market is, like most government intervention, full of good thoughts and little sense.

I heard a good example here the other day – if you have to sell your house in the next 30 minutes, what price will it sell at? This is what SOX and FASB157 are doing to the banks. Once all their capital is dryed up by trying to maintain their ratios to stay in business, where do they come up with capital to loan car dealerships and others seeking loans?

Vashta.Nerada on September 25, 2008 at 11:09 AM

The problem with that analogy is that you can actually sell a house today. And, because homes in most areas are dropping in value, if you could get for it what the market would offer in the next 30 minutes you would happily sell, versus waiting a few months to fix it up and another six months to a year selling it, chasing the falling market along the way.

The problem with the financial market is that the toxic debt is not relly MTM. It’s whatever the institutions holding them say’s they’re worth, which is usually the value necessary to keep them solvent. That scares off investors.

As much as has already been lost, mortgages are still going bad. There will continue to be losses once folks exhaust their 401k’s and sell anything they can on ebay. Second mortgages that covered downpayments are lost unless and until the firsts recover everything.

Here’s my analogy: suppose you and some friends want to invest in real estate, and you are looking at buying into an entire subdivision of brand-new homes that the developer needs to unload to remain solvent. However, there is a sink hole problem and homes and infrastructure are falling into them, which is why they’re not selling in the first place. As weeks pass, more homes and more infrastructure are consumed, with no end in sight. As the developer pleads for your investment so he can feed his children, on what do you base your offer, knowing with each passing day your investment is worth less?

My answer is that you don’t buy at all until you know the risks, meaning the extent of the geological problems and thus make a reasonable guess as to the extent of the loss. So, even though there is apparent value, without an ability to assess risk the subdivision is effectively worthless. As are MBS’s until enough transparency for buyers of those securities can assess the risks involved in purchasing them.

Mark-to-market must exist and that should be non-negotiable. It’s up to the financial industry to provide the transparency needed to make MBS marketable, but instead they hide behind opaque debt instruments to cover their nakedness.

Vashta.Nerada on September 25, 2008 at 11:23 AM

unfortunately we both know that actually fixing what went wrong would be RACIST and will never happen. I think they’ll just paper over the problem, while not fixing what actually is wrong, setting up a larger problem later.

http://conservativepolitics.today.com/2008/09/25/i-am-not-rich-i-cannot-afford-this-socialism/

…although the scarecrow could just be a metaphor for a “straw man,” the lion for fake courage; I don’t know nearly enough history to work it out. Anybody out there want to take a crack?

smellthecoffee on September 24, 2008 at 11:02 PM

I think the straw man was Agriculture, the tin man Industry, and the cowardly lion was Wall Street.

I’m afraid it will cause more problems than it solves, just like SOX, and the CRA, and all these other regulations for our own good

right4life on September 25, 2008 at 11:16 AM

Yes, I think any acceptable plan must include killing the CRA and at least the mark-to-market rule. If they can reach a plan that buys up subprimes at say .50 on the dollar, and run it like the RTC, without adding other socialist crap, and can get rid of MTM and CRA rules, I can live with it. Not happily, but it would be better than the alternative (kind of like my tepid support for McCain).

Vashta.Nerada on September 25, 2008 at 11:09 AM

good point. and this is what I am worried about with this new scheme to ’save us’. I’m afraid it will cause more problems than it solves, just like SOX, and the CRA, and all these other regulations for our own good

I thought it was in response to enron…to safeguard investors from corporate meltdowns like this…

right4life on September 25, 2008 at 11:03 AM

It was a response to Enron, just a poorly designed by government response. They were trying to prevent the ladder sales that Enron mastered, and ended up using an hand grenade to kill a fly. Their rule as now applied means that banks must write down loans as if a fire sale were taking place. I heard a good example here the other day – if you have to sell your house in the next 30 minutes, what price will it sell at? This is what SOX and FASB157 are doing to the banks. Once all their capital is dryed up by trying to maintain their ratios to stay in business, where do they come up with capital to loan car dealerships and others seeking loans?

Shirotayama on September 25, 2008 at 11:01 AM

oh please go F yourself moron.

Right4life, Sarbanes-Oxley is about ACCOUNTING and INTERNAL CONTROLS over FINANCIAL REPORTING…not about regulation of business behavior.

Why didn’t Sarbanes-Oxley prevent the subprime mortgage crisis? That is the unspoken question asked in a piece titled “Criminalizing Capitalism” written by a Manhattan Institute scholar, Nicole Gelinas. She reminds us that the legislation passed in the wake of the Enron scandal was meant to reform corporate governance and head off punishing meltdowns of investor wealth. It hasn’t.

link

I thought it was in response to enron…to safeguard investors from corporate meltdowns like this…

SOX and FASB157 require that illiquid assets be marked to market, even where there is no ready market, so that if you own a mortgage backed security based on a tranche that has some defaults, you have to mark down the entire tranche, and the leveraged securities attached to them. This is why a 5% default in actual mortgages results in appx 25% mark down. A bank rating is based on the ratio of outstanding loans to deposits, so they must either raise capital or sell some loans at a fire sale. This drying up of capital is effecting commercial paper and money markets now, which is why the other markets are cramping up.

Vashta.Nerada on September 25, 2008 at 11:01 AM

Vashta,

Thanks. That’s helpful to me understanding this…will go around the corner and talk to my financial economist colleague and bounce this off him before I comment further on that.

At least SOMEBODY threw some data at me with a logic and data-based argument. Thank you, Vashta.

Logging off now.

yes they are. whenever the government wants more power, a ‘crisis’ is manufactured…with cries of doomsday unless the beneficent all powerful government saves us….hallelujah…I see the same psychology at work with this ‘crisis’, as with the environmental ‘crisis’

right4life on September 25, 2008 at 10:56 AM

OH, BULLSH*T!!

“whenever the government wants more power, they “manufacture” a crisis.”

Heheheheh…I’m just too stunned at the lack of careful analysis here. This EXACTLY points out the difference between conservatives supposedly thinking versus liberals just “feeling” and gut-reacting.

I can’t take this anymore…you’re not willing to understand.

I’m done…logging out. Too damned much for me.

1. What on EARTH does Sarbanes-Oxley have to do with this?
I keep seeing people refer to SOX as having something to do with this and am NOT seeing the connection.

SOX and FASB157 require that illiquid assets be marked to market, even where there is no ready market, so that if you own a mortgage backed security based on a tranche that has some defaults, you have to mark down the entire tranche, and the leveraged securities attached to them. This is why a 5% default in actual mortgages results in appx 25% mark down. A bank rating is based on the ratio of outstanding loans to deposits, so they must either raise capital or sell some loans at a fire sale. This drying up of capital is effecting commercial paper and money markets now, which is why the other markets are cramping up.

Right4life, in 1929 the government FAILED to act, and the actions it took were totally opposite of what they were supposed to do.

no the Fed caused the depression by tightening the money supply. Friedman long argued that and bernanke agrees

even when government ‘acted’ with the new deal, it didn’t help. will this new action help? does anyone really know??

I thought SOX was supposed to save us from this? we have all this regulation, but of course its NEVER enough…we need more government, more control, more oversight…why? what got us into this mess is government…why do you think they can fix it?

and lets not forget the illegal alien angle that the government encouraged.

right4life on September 25, 2008 at 10:49 AM

Right4life, Sarbanes-Oxley is about ACCOUNTING and INTERNAL CONTROLS over FINANCIAL REPORTING…not about regulation of business behavior.

Again, another Apple and big ‘ol hunk o’ stinky cheese you’re assuming was supposed to save us.

Sarbanes-Oxley is like fetching a monkeywrench when what you need is a power saw. They’re not meant to address the same thing.