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Rest in Pieces, Mark-to-Market
From the better-late-than-never department:
[T]he Financial Accounting Standards Board on Thursday voted unanimously to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value.
The new guidance, which is expected to boost bank operating profits when they report first quarter results later this month, alters so called mark-to-market rules, which have required banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset.
Banks have complained that they have viable assets with strong cash flows that can't be sold because there is no market for them.
Seeking to resolve this situation, FASB's new guidance allows banks and their auditors to use "significant judgment" when valuing the illiquid assets such as mortgage securities.
Given that the toxicity of mortgage-backed securities have been front page news for two years now, and U.S. taxpayers are on the hook for $13 trillion and counting in the ensuing bailouts, this loosening of a Bush-era Wall Street regulation seems rather on the slow side. But, still.
Reason on mark-to-market here.
lunchstealer|4.2.09 @ 1:40PM|#
Although in fairness, I suppose it does provide some balance to the whole "Reason Lobster Girl" thing.
threeofclubs|4.2.09 @ 1:43PM|#
personally I think they should be allowed to value them at whatever made up value they want it worked for Enron, worldcom etc.
Dello|4.2.09 @ 1:46PM|#
You fools!! The "gay porn" "twink" represents the Funky Bunch of
folks in charge of this nightmare.
Where's my Kindle?
|4.2.09 @ 1:47PM|#
"Given that the toxicity of mortgage-backed securities have been
front page news for two years now... this loosening of a Bush-era
Wall Street regulation seems rather on the slow side."
This isn't really a response to financial institutions having
shitty assets. It is a response to those asset values (often
unrealistic if you have the ability to hold them) impacting the
capitalization of said institutions. It helps the firms work
through the period of depressed valuation without blowing through
debt covenants.
Sure it offers more flexibility for creative accounting (which can
hurt [dumb] investors and lenders) but it isn't as if the debt
holders are saints either. There are a lot of examples of banks
executing low bid-side sales to manipulate the prices of specific
assets so that they can foreclose on and BWIC entire portfolios.
FASB decision is in part in response to this action and evens the
playing field imensly, taking power out of the hands of some
brokerages who need to deleverage, while also easing their
deleveraging process by making it easier to stay well capitalized
and not breach regulatory statutes or debt covenants.
|4.2.09 @ 1:47PM|#
Er.... what does the gay porn have to do with
this?
Mark Wahlberg--AKA Marky Mark
ed|4.2.09 @ 1:48PM|#
I don't get the picture either. Is it some sort of test? Oh my god, am I gay? Mommy!
Shannon Love|4.2.09 @ 1:49PM|#
From the linked article:
Seeking to resolve this situation, FASB's new guidance allows
banks and their auditors to use "significant judgment" when valuing
the illiquid assets such as mortgage securities
This will not end well.
We are replacing the only objective measure of an assets value, the
price the market will pay right now, with the self-interested
estimation of those who hold the assets. This is pretty much like a
fully socialist state establishing prices by fiat without regard to
actual price mechanisms.
The problem here is a belief in what Giether called "intrinsic
value" i.e. the idea that assets have some kind of built-in,
persistent worth that a properly functioning financial system will
correctly price. Unfortunately, intrinsic value does not exist. The
value of anything at any given moment is the amount of some other
good other will trade of it at a particular moment in time. Any
other valuation is just guesswork.
Over priced residential mortgages that back the toxic residential
mortgage-backed securities from Fannie Mae, Freddie Mac and other
issuers are what wrecked the system. Even institutions that had no
major mortgage related business became insolvent if they used the
FM's securities for their legal collateral. Many if not most of the
worst mortgages came from California and with that state on the
track to become the next Michigan it is unlikely those houses will
ever fully recover their value.
Basing our accounting on the idea that the mere
hope that currently worthless assets will
reacquire significant value in the indefinite future is a fools
gamble. We should bite the bullet and stay with objective pricing.
We got into this mess by trying to get something for nothing. We
shouldn't repeat the mistake.
|4.2.09 @ 1:51PM|#
I'm not reading this blog anymore until it returns to its heterosexual male/lesbian roots.
Craig|4.2.09 @ 1:52PM|#
Banks have complained that they have viable assets with
strong cash flows that can't be sold because there is no market for
them.
Banks are lying. There is always a market for viable assets with
strong cash flows, as long as there is some expectation that those
cash flows will continue. If there is a strong expectation that
those cash flows won't continue, the asset could hardly be termed
"viable."
|4.2.09 @ 1:55PM|#
"Er.... what does the gay porn have to do with this?"
WHAT doesn't it have to do with this? Gay Porn is our only way out
of this. The UAW will be cranking out gay porn by shipload.
Our future is hard and sweaty.
|4.2.09 @ 1:55PM|#
Mark Wahlberg--AKA Marky Mark
Ugh. Is there some punishment for the photo equivalent of a bad
pun?
T|4.2.09 @ 1:58PM|#
The problem here is a belief in what Giether called
"intrinsic value" i.e. the idea that assets have some kind of
built-in, persistent worth that a properly functioning financial
system will correctly price. Unfortunately, intrinsic value does
not exist. The value of anything at any given moment is the amount
of some other good other will trade of it at a particular moment in
time. Any other valuation is just guesswork.
The problem here is we're trying to value stuff without actually
selling it. This works in some case but not in others. Commodity
goods? Yeah, tell me what it is and I'll give you a pretty good
estimate of how much it's worth. Real estate? Not so much. It's a
known problem. No matter how similar you claim house A is to house
B, I can find you a laundry list of reasons why one is worth more
or less than the other. Until you actually go out and find someone
who's willing to give you cold hard cash for it, you just don't
know.
|4.2.09 @ 1:58PM|#
The UAW will be cranking out gay porn by shipload.
Our future is hard and sweaty.
Can it be socialist propaganda style?
Can we hire Shepard Fairey to do it?
NeonCat|4.2.09 @ 2:08PM|#
UAW socialist gay porn: a white collar manager has his wrists tied with his expensive silk tie and is held down on the assembly line. One burly line worker has his way with him while three others sit around and watch. At first the manager protests but as the mighty union cock pumps away at him he moans in ecstasy and comes while screaming "You have nothing to lose but your chains, you have nothing to lose but your chains!"
|4.2.09 @ 2:09PM|#
Seriously now...
The mark-to-market rule hasn't been around that long, and the
carnage it's indirectly contributed to is pretty plain, so I don't
think it's unreasonable to change this rule.
However, using "significant judgement" doesn't seem like the right
idea. In his pieces on the financial crisis Michael Flynn suggested
a rolling average. Alternatively, rules for how capital ratios
should be computed or when bank's lending regulations kick in in
response could be modified.
The problem with the current crisis has been that mark-to-market
causes these sudden jumps in the capital ratios if an asset's
market value changes suddenly - as it did when the MBS market
collapsed. One day the bank is fine, the next it's bumping up
against its capital ratio. As a result, the bank can't lend,
because any jolt could send it over the edge.
Basically, something has to smooth out the curves, so wild
gyrations in market values don't the effects of regulations to kick
in unexpectedly.
|4.2.09 @ 2:12PM|#
Shannon,
The meat and potatoes of the decision is it gives more flexibility
to move assets from level 2 (significant direct or inderect market
inputs) into level 3 (unobservable inputs). It basically gives more
flexibility for not using quotes from distressed sales or BWICs
(Bid Wanted In Competition [i.e. after
foreclosure/bankruptcy]).
You are also mistaken that this is a really really big deal for
RMBS portfolios (especially because the most toxic stuff won't be
written up i.e. ABX). It will impact MBS (although more so CMBS),
but where it will really have a large impact will be in illiquid
small and medium bussiness loans (or commercial) where you might
see a similar sale every couple of months and its often in an
auction from a distressed seller.
Financial institutions under the new interpretation of FAS157,
still have to fair value assets, and people still don't have to
believe them. But regardless it will help aleviate pressure cuased
by GAAP movements and not by realizable earnings and losses.
If i'm wrong on any of this I'd appreciate any accountants we have
to correct me.
-J
|4.2.09 @ 2:13PM|#
SugarFree'd my tag:
"Dad, why'd you take me to a gay steel mill?"
"We work hard, we play hard."
|4.2.09 @ 2:18PM|#
Er.... what does the gay porn have to do with
this?
Let's go watch some gay porn to get our hate back!
|4.2.09 @ 2:21PM|#
Mark Wahlberg Talks to Animals
Mark Wahlberg is kinda badass though: 1) he's from Beantown 2) He
stole a car 3) he did time 4) he didn't follow his brother into a
boy band
Naga Sadow|4.2.09 @ 2:21PM|#
Mac: [to Sweet Dee and Charlie] Are you two seeing this?
[all look over at Dennis]
Dennis: [gayly] ...boys are out tonight, huh?
Shannon Love|4.2.09 @ 2:23PM|#
A statistical projection of proven market prices using a
standard algorithm would be a better alternative than any current
method since clearly we can't rely on the concept that an entire
class of assets can not collapse suddenly.
It is disconcerting to see how much of this crisis resulted not
from actual loss of income flowing in the door institutions but
rather from institutions becoming legally insolvent due to sudden
changes in the valuation of their collateral assets.
Maybe we shouldn't have passed laws that let institutions hold
residential mortgage-backed securities from government sponsored
enterprises as their legal collateral on par with T-bills. Bit of a
blooper in hindsight.
|4.2.09 @ 2:30PM|#
Banks have complained that they have viable assets with
strong cash flows that can't be sold because there is no market for
them.
If the assets are so great, why isn't there a market for them?
Could it be that potential buyers are worried about
RISK? Could it be that this entire crisis is borne
out of a sudden realization that prices and investment ratings did
not adequately reflect risk, that the happy assumption wherin some
assets are viable with strong cash flow is a myth?
However, the battle over mark-to-market may not yet be over.
Bankers are pressing [to be allowed] to retroactively recoup
losses...
Barney Frank, D-Mass., told the American Bankers
Association..."They [bankers] ought to be able to go back and say
they took that loss on an asset that is being held to maturity and
recoup that loss."
Sop for the banks, that's all this is. What next? Will people be
allowed to qualify for mortgages based on the purchase value of
their plush animal collections? Will we all have access to
Pollyannas-cum-auditors for the purposes of solvency
evaluation?
If the assets do not recover in value, this policy change will only
accomplish making bank failures in the future a
surprise.
Kolohe|4.2.09 @ 2:37PM|#
While the mark to market rule may be fairly recent, so reversion
might not be the worst thing, it irks me that people were using it
to get rich on the way up (because they could increase their
leverage), but now when things are going down, trying to get rid of
it. Consistnent rules are important.
Also, mark to market is really the only 'true' test of value.
Things are only worth what people are willing to pay for them. As
the best explanation of mark to market illustrates:
Pawnbroker: Burnt my fingers, man.
Louis Winthorpe III: I beg your pardon?
Pawnbroker: Man, that watch is so hot, it's smokin'.
Louis Winthorpe III: Hot? Do you mean to imply stolen?
Pawnbroker: I'll give you 50 bucks for it.
Louis Winthorpe III: Fifty bucks? No, no, no. This is a Rouchefoucauld. The thinnest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland, and water resistant to three atmospheres. This is *the* sports watch of the '80s. Six thousand, nine hundred and fifty five dollars retail!
Pawnbroker: You got a receipt?
Louis Winthorpe III: Look, it tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad.
Pawnbroker: In Philadelphia, it's worth 50 bucks.
Louis Winthorpe III: Just give me the money.
Louis Winthorpe III: [looking in display case] How much for the gun?
|4.2.09 @ 2:48PM|#
Some F-ed,
"why isn't there a market for them?"
-You are right to an extent and in some asset classes it is that
risk was (or is) misspriced, but that doesn't hold for a lot of
assets. It takes time for markets to correct themselves, and
meanwhile people are getting fucked over, hard. It is no secret in
finance that the markets swing too far in both dirrections. The
difference between distressed and orderly sales in this environmetn
is huge. Arguing that 'fair value' is forcing someone to take a
mark on an asset that was sold in a distressed sale two months ago
is obsurd. It's also pretty naive to pretend like all of the
repricing is due to an accurate realization of what the actual risk
attached to these securities are.
With regard to your second point, this isn't revolutionary and it
isn't a taxable or realizable profit (unless you release reserves).
If you write an asset down, and then it appreciates in value you
have a GAAP gain. You don't actually realize the profit until you
sell the asset or it matures. This impacts balance sheets and
capitalization. And didn't the gov't waive appraisals for recent
mortgages that are refinancing? So what's next already
happened.
creech|4.2.09 @ 2:58PM|#
Didn't everything go along o.k. from when FDR repealed
mark-to-market in 1938 and Bush re-regulated it in 2007? Several
bankers of my acquaintance claim the whole financial meltdown could
have been easily contained without mark-to-market. If so, then
Bush's regulation, not de-regulation, caused the bulk of this
crisis.
The accounting profession has always gone by the principle of
"lower of cost or market."
My company has a building on the books at cost, $1,000,000. Recent
appraisal $4,000,000.
We can't recognize the $3,000,000 gain unless we actually sell the
property. However, if the EPA discovered toxins on the property and
the property could not be sold, then the CPAs would require it be
written down to zero.
Or take a peanut butter re-seller. If his whole inventory had to be
thrown out, due to discovery of salmonella, he still might recover
by demonstrating to his customers that his new supplier's peanut
butter was fine. A short term hit can frequently be borne.
Fractional reserve banks are different. They have to maintain
certain ratios of assets to liabilities. Even rumors of insolvency
will cause them to lose all their customers, no matter how much
they claim the assets are only temporarily impaired. Accountants
have ways of determining an Allowance for Bad Debts based on the
history of receivables collections and other economic factors. The
profession needs to develop a formula that fairly values assets
which are temporarily impaired.
|4.2.09 @ 3:14PM|#
If the assets are so great, why isn't there a market for
them? Could it be that potential buyers are worried about RISK?
Could it be that this entire crisis is borne out of a sudden
realization that prices and investment ratings did not adequately
reflect risk, that the happy assumption wherin some assets are
viable with strong cash flow is a myth?
Of course that is the reason, but the point of marking to market is
that the firm could liquidate at those levels if they wanted to.
Where there is no market, or an insufficiently liquid market (for
whatever or any reason) the rational behind M2M doesn't really hold
water. The old approach was mark them at cost. Marking them to a
fancy (probably wrong) model is an improvement to that, and
probably to trying to infer a "market" price where none exists.
|4.2.09 @ 3:15PM|#
If so, then Bush's regulation, not de-regulation, caused the
bulk of this crisis.
Like most massive financial panics there is never one single thing
- but an interaction of many factors. This is undoubtedly one of
the big ones.
lunchstealer|4.2.09 @ 3:20PM|#
Ugh. Is there some punishment for the photo equivalent of a
bad pun?
Yes, but the punishment is reading Hit & Run. DAMN YOU
WELCH!
|4.2.09 @ 3:42PM|#
Several bankers of my acquaintance claim the whole financial
meltdown could have been easily contained without mark-to-market.
If so, then Bush's regulation, not de-regulation, caused the bulk
of this crisis.
That's pretty much what Michael Flynn says here:
We should pause here to note that two simple regulatory tweaks
could have prevented much of the carnage. Suspending mark-to-market
accounting rules (you could use a 5-year rolling average instead,
for example) would have shored up the balance sheets. And a
temporary easing of capital requirements would have provided banks
breathing room to sort out the MBS mess.
AIG was CRIMINAL|4.2.09 @ 3:44PM|#
If only the Dutch had thought of abandoning "mark to market" when tulip prices went all skizzy back in the day...
|4.2.09 @ 4:05PM|#
If only the Dutch had thought of abandoning "mark to market"
when tulip prices went all skizzy back in the day...
very different. Dutch tulip dealers had contracts that forced them
to pay enormous sums of cash for the immediate delivery of bulbs
whose value had fallen precipitously and they could not resell.
They had a cash crunch. No regulator was saying they needed to hold
ex amount of reserves against a 5 year contract. The banks had
plenty of cash, but then they were required to raise more because
of regulatory requirements. The only way to do this was to sell the
assets that are causing the problem in the first place. It's a
catch-22.
|4.2.09 @ 4:11PM|#
Isn't the government establishing a value by buying up the assets with the 700B? If there are 700B items, the value is $1, right? Then if someone buys them from the government at $1.25 doesn't that become the market value and up and up? I know I'm out of my league in this discussion, but that's how it looks. Serious question about how the value gets established.
|4.2.09 @ 4:16PM|#
Some reserves, if the reserves are permitted to change in
value.
Unless I misunderstand matters, the ultimate nonsense is that
reserve requirements apparently permit the holding of some
proportion of investments instead of just cash. If I were the
guarantor and designer of a fractional reserve banking system, I
wouldn't have the first line of defense against bank runs (banks'
own reserves) rest on assets subject to cyclical changes of value.
The whole point is too avoid business cycles leading to bank
runs!
|4.2.09 @ 4:25PM|#
This may be good news for stockholders in financials, but count
me on the side of those who think this is bad news for the real
economy.
Doesn't this make it even less likely that institutions holding
these things will dump them? If they can't get what they're holding
them on the books for, why would they put them back in play in the
market?
And isn't that what we're trying to get them to do?
Pardon me if I'm stating the obvious, but it seems to me that the
"problem" was the easy money policy and just like the Austrians
say, that led to misinvestment, in this case, in things like
mortgage backed securities. The credit crunch, then, is part of the
solution to the problem--it cuts off more money for bad investments
which would make the problem worse.
The other half of the solution is unwinding those bad investments,
and it seems to me that ending mark to market makes unwinding those
investments, AKA getting rid of them at market prices, less likely,
more cumbersome, means that it'll take more time... I don't see why
these companies would dump them at market prices now, and I
certainly don't see why anyone would buy them at artificially
inflated prices.
This is one of the reasons why bankruptcy, rather than bailouts, is
better, by the way, because it returns these instruments back into
the market rather than having them locked onto some otherwise
defunct institution's books.
And God forbid stressed institutions actually lend against these
marked up instruments! Wasn't that what got everyone all excited in
the first place? Wasn't that what got Bear Stearns, Washington
Mutual and Lehman in trouble?
And I just don't see how ending mark to market is consistent with
free markets and the good things they do. Maybe I'm missing
something, and if I am I'd love to know. So somebody set me
straight, okay? Why is the market so right about so much but so
wrong about this?
Rice Bingham|4.2.09 @ 4:36PM|#
Ken,
I'd love to explain to you where you're wrong, but as far as I can
tell, you're dead on.
Geotpf|4.2.09 @ 4:41PM|#
Mark to market is the only way to value assets. Assets are only worth what people are willing to purchase them for, not some random made up bullshit numbers pulled from some accountant's rectum. Just because you say a 1986 Hyundai Excel is worth fifty thousand dollars doesn't make it worth fifty thousand dollars.
|4.2.09 @ 4:45PM|#
That's where you misunderstand their aims, Ken Shultz. The goal
is to keep the banks from having to sell anything.
If banks are selling assets because of mark-to-market, it's to
procure cash to meet reserve requirements. If they're procuring
cash so as to sit on it to meet reserve requirements, they aren't
lending it. This, in the words of the Administration and Bernanke,
is the root of the crisis.
Reserve requirements are the veil holding the banking system
together. They are the official backstop against getting taken over
by the FDIC for being insolvent (which is what is supposed to
happen before depositors get spooked and make a run on the
bank).
Pretty mind-blowing stuff, isn't it? The goal right now is to
accomplish the exact opposite of what you think should be
happening. I was just trying to argue from their perspective, where
the goal is to keep both the economy and the fractional reserve
banking system intact.
Geotpf|4.2.09 @ 4:59PM|#
domoarrigato | April 2, 2009, 3:14pm | #
Of course that is the reason, but the point of marking to market is
that the firm could liquidate at those levels if they wanted to.
Where there is no market, or an insufficiently liquid market (for
whatever or any reason) the rational behind M2M doesn't really hold
water. The old approach was mark them at cost. Marking them to a
fancy (probably wrong) model is an improvement to that, and
probably to trying to infer a "market" price where none
exists.
If nobody is willing to buy something, than the value of that
something (from a financial aspect, at least) is zero. Period, end
of story. It doesn't matter what you paid for it. Items can, and
do, go down in value.
Let me give you an easy example: Before each major sports event
(World Series, Superbowl, etc.), T-shirts with the names of both
teams are printed saying they are the world champions. The T-shirts
of the actual winner are sold for twenty bucks each. The T-shirts
of the loser are turned into rags or donated to third world
nations-that is, they become basically worthless overnight-less
than their cost to make. But both cost the same amount to
make.
Under mark-to-market, the second batch is recoginzed as being
worthless. Under the old/new rules, the second batch would be
valued at at least the cost of production.
Sometimes things really are worthless, or nearly so. Sometimes
things are worth less than the cost to produce or purchase
them.
|4.2.09 @ 5:36PM|#
Yeah, whenever I hear a bank guy talking about how mortgage
backed securities are "worthless", I just take it as a codeword
meaning "We're not willing to take what the market's offering right
now."
...which isn't exactly "worthless", is it.
|4.2.09 @ 5:57PM|#
I think Shannon Love hit it up thread:
It is disconcerting to see how much of this crisis resulted not
from actual loss of income flowing in the door institutions but
rather from institutions becoming legally insolvent due to sudden
changes in the valuation of their collateral assets.
Maybe we shouldn't have passed laws that let institutions hold
residential mortgage-backed securities from government sponsored
enterprises as their legal collateral on par with T-bills. Bit of a
blooper in hindsight.
That strikes me as right. The banks were holding MBSes in reserve
instead of T-bills because the MBSes were giving higher returns -
as a result of the artificially low interest rates set by the
fed.
The MBSes were being treated as if they were bonds because of the
myth that housing prices would always rise.
If I'm getting this right ... If the MBSes had held their value,
the banks would not have been overleveraged. But when the value of
the MBSes collapsed, their capital ratios shot up and forced the
banks to stop lending. Ergo, credit crunch.
Basically, it again comes back to a huge miscalculation of the risk
in the mortgage market. Which goes back to the ratings
agencies.
How is it that the MBSes got AAA ratings on subprime loans
again?
|4.2.09 @ 6:10PM|#
"How is it that the MBSes got AAA ratings on subprime loans
again?"
Part of it was the insurance. The ratings agencies gave an issue an
investment grade rating if it was insured. So what happens if the
companies that insured all those issues all go bust?
We're pretty much lookin' at it.
The part that's almost funny? The ratings agencies had to give them
an investment grade rating because a lot of the institutions and
funds that were buying the stuff are specifically prohibited in
their formation docs from buying anything under an investment grade
rating.
Institution: "We'd love to buy some of your subprime stuff, be we
can't buy anything under a AA."
Security Issuer: "We can take care of that, we'll just buy some
insurance!"
What could go wrong?
|4.2.09 @ 7:05PM|#
That doesn't seem right ... if the MBSes were getting AA ratings because they were insured, how did the insurance company decide how to price the insurance?
|4.2.09 @ 8:01PM|#
"That doesn't seem right ... if the MBSes were getting AA
ratings because they were insured, how did the insurance company
decide how to price the insurance?"
I believe there are essentially two ratings. There's the base
rating or underlying rating and then what I see referred to as a
shadow rating or the insured rating.
See these links:
http://en.wikipedia.org/wiki/Monoline#Bond_insurance_problems_in_2007
On the next link they wrote:
"Providing a shadow rating on bonds that carry a monoline
guaranty. Obligations being considered for insurance are not only
reviewed by AFGI member firms, but also by one or more rating
agencies. Generally, the triple-A insurers will not insure an
obligation if it falls below investment- grade credit quality
independent of the financial guaranty."
http://www.afgi.org/ratingsagency.htm
I guess they're saying that if you aren't higher than BB+ they
won't give you anything above BB+ even if you have bond
insurance.
...I don't know exactly how recent an innovation that is, but I
don't believe it was that way until recently.
|4.2.09 @ 8:03PM|#
I would throw out too that credit default swaps are essentially
insurance too, and that was more or less making the same
error.
Hey, AIG has the other side of this, so there's nothing to worry
about!
|4.2.09 @ 8:45PM|#
I'm beginning to think that the justice department should
seriously look into fraud charges against the ratings
agencies.
Heck, they should have done it back in 2000 after the dot-com
bubble burst. We all know how everything had a 'Buy' or 'Strong
Buy' rating on it.
Maybe the fact that they got away with ridiculous Buy
recommendations encoraged them to put AA ratings on subprime
mortgage securities.
|4.2.09 @ 9:23PM|#
I think there were a lot of contributing factors. People should
have been doing their own due diligence, you never take the
seller's word for it or his consultant's word for it--that's
whether you're buying a used car, a piece of real estate or an
investment tranche.
I think the ratings agencies too had to work with the information
that was given on the loan applications, a lot of which was
baloney. Sometimes it was inflated by mortgage brokers, sometimes,
I think, there was outright credit fraud--individuals just
lied.
There's no doubt there were lax lending standards. I remember New
Century telling us that it hadn't lowered its lending standards. My
memory's not 100%, but I think I remember them saying that they
required either a down payment or proof of employment, but that you
had to have one or the other. I think that turned out to
be...um...inaccurate.
What it all boils down to though is cheap credit. When there's that
much cheap credit sloshing around, all looking for the same
investments, the investments will materialize out of the woodwork
to absorb all that money.
But yeah, we should throw all the crooks in jail, even if it is a
natural part of the business cycle. Freedom allows a certain amount
of crime, but it's worth it in the long run.
hmm|4.2.09 @ 10:17PM|#
I can't believe people didn't get the Marky Mark
reference.
Six months later the government figures out how fucked up mark to
market is. (Is that a new speed record?) The whole this is the only
objective measure is BS. Land that backs MBS has intrinsic value.
It will only go to zero when the last human dies and Xorbb from
Glacknar declares Earth his. Why does land have have intrinsic
value? It is finite, there is only so much, you ain't makin more,
and humans are increasing in population (although not a
requirement). If you start seeing homes going for $0 let me know.
(this does not apply to eminent domain) People are talking about
MBS as if they are equities and can go to zero.
It's a business cycle. With a giant bubble that more than one
person had a hand in. The government pushed for housing overtly and
through omission while the private sector discovered MBS and went
bat shit nuts leveraging them. The government forced the risk free
rate to damn near negative against inflation while at the same time
saying MBS are virtually risk free (backed by land that was
skyrocketing
http://www.investmenttools.com/images/re/re_median.gif) without
actually saying so through fannie and freddie. So where do you park
your cash to protect against inflation? In MBS. What if you are out
of prime borrowers? You move down the scale. Why can you move down
the scale and not significantly increase the risk? Because Black
Scholes is a complete piece of shit model.So we mix sub prime with
prime slice it up sell it off and then insure with nothing more
than a gamble to feel safer. The loan originators go hog wild to
provide for the demand, Congress claps like a retarded monkey on
the side as constituents get fat and happy in homes they can't
afford, Wall Street goes on a leverage binge to turn this mole hill
of profit into an intergalactic bubble. When one of the small
bubbles holding the big bubble goes (MBS due to sub-prime
concerns)the shit hits the fan with the force of a 7AM hung over
taco bell crap.
At the end of the day there are some firms that survived just fine.
Our hockey playing cousins are up north with their banks rocking
along. People like to scream it's their regulation, and in part may
well be. But oddly enough they avoid risk like it's herpes and most
hold capital adequacy ratios well over the required and lend well
below the limit. Along with some US banks.
The culture as a whole got greedy. Greedy for $350K homes on $40K
salaries. Greedy to maintain Congressional seats and power. Greedy
for increased returns with leverage. Greedy to buy more shit with
someone else's money. And it has all come back to bite us in the
ass.
Mark to market was a bad idea and a knee jerk reaction. It should
have been gone six months ago or never started.
The rating agencies are a scam. They manipulate and pencil fuck
models to get what they want or what serves them. They are damn
near as big a scam as the market makers on the exchange
floors.
I feel better. (sorry for the rant)
why is name mandatory?|4.2.09 @ 10:33PM|#
I for one completely approve of government handing hundreds of
billions of dollars to jews.
Israel deserves our support while they kill our soldiers, commit
false flag ops on our soil, Control our government and generally
incite the world to hate us.
|4.2.09 @ 10:36PM|#
Going back to Reason's article on the ratigns agencies from last
fall, I think this is a really crucial bit of information:
The key additional fact is that experts were selling advice about
mortgage-backed assets as if those assets were independent when, in
reality, they weren't at all independent assets. Only once
investors realized that the housing market is a national market-not
a local one-did it become clear that these securities were
extraordinarily risky. Hence the collapse.
What this is really saying is that the people doing the statistical
analysis were making the assumption that mortgage markets were IID
or independent identically distributed.
This is a common enough assumption if you're trying to do something
like statistical signal processing. I.e. Assume noise is not
correlated from sample to sample - that noise is "white", so you
can average it out.
Or another way of putting this is that the assumption was that
fluctuations in the mortgage markets would average out to zero if
you included a basket of mortages from all over the country in the
security. Florida might go bust, but Colorado would be booming, so
you're losses and gains would average out, reducing your
risk.
Of course, the housing bubble caused local markets to become
statistically correlated - everything was booming at the same time,
which meant that a simultaneous bust would raise your losses
dramatically. The risk rating should have shot up because you
couldn't average it out anymore. But the computer models they were
using to calculate risk still included that IID assumption.
My guess is that nobody noticed that the assumptions were wrong
until these securities started going bust and someone had to
investigate why. They were asleep at the switch, and by that point,
it was too late.
hmm|4.2.09 @ 10:54PM|#
The assumptions could have been correct and the mess still would have happened. The model used in the manner it was used is flawed.
|4.2.09 @ 10:57PM|#
The rating agencies are a scam. They manipulate and pencil
fuck models to get what they want or what serves them. They are
damn near as big a scam as the market makers on the exchange
floors.
You're probably right. Whether they deliberately ignored the
warning signs, or weren't paying attention, they should be
liable.
It's either negligence or deliberate malfeasance. Prosecutable
either way.
if you can sue Exxon for putting a drunk at the helm of the Valdez,
you can sue Moody's for using a fucked up statistical model to
calculate risk.
|4.2.09 @ 10:58PM|#
Anyway, even if they don't have the money, they'll be out of business and we can get some new agencies that will be a tad more careful about the accuracy of their recommendations.
|4.3.09 @ 8:08PM|#
Taking my cue from FASB (which, frankly, has rarely if ever led
me astray), I've determined that my diet will work so much faster
and more efficiently if I simply sand all the numbers off of my
scale.
Then, I can get up in the morning, stand on the scale, and decide
what my intrinsic weight will be for that day.
This is gonna be great.
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