Comments on: Extreme Measures V and VI; Drop Mark-to-Market; Beg Oil Producers to Rescue Banks http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html Mon, 23 Nov 2009 11:57:17 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5594 Anonymous Sat, 22 Mar 2008 04:06:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5594 At the end of the day all these bail outs leave something very important off the table-the American Consumer cannot service their debt, they do not get it for some reason. All this FED mojo and still the basic underlying issue remains-American SFH and soon commerical RE is overvalued, leveraged beyond its fundamental value and the folks holding the mortgage paper are basically insolvent. At the end of the day all these bail outs leave something very important off the table-the American Consumer cannot service their debt, they do not get it for some reason. All this FED mojo and still the basic underlying issue remains-American SFH and soon commerical RE is overvalued, leveraged beyond its fundamental value and the folks holding the mortgage paper are basically insolvent.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5593 Anonymous Sat, 22 Mar 2008 03:49:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5593 Yves,<br/><br/>It seems that many people are saying that part of the problem here is lack of transparency. Somehow the published financial statements of major financial institutions that are prepared in accordance with GAAP are not giving the markets enough information to allay concerns about counter-party risk. Since you have opened the door for "extreme solutions," what would happen if the government required all the major regulated financial institutions to disclose in complete and excruciating detail all of their portfolios and trading positions, leverage etc. - all of the information available to their internal risk committees or the federal regulators - as of a certain day, say the last day of March? A national "open kimono day," if you will. I guess this is really a thought experiment, not a serious suggestion. But I wonder, would this kind of "extreme disclosure" help alleviate unfounded concerns about counter-party risk? Or would it be insanely risky? If there are major insolvent institutions out there, do we even want to know? Yves,

It seems that many people are saying that part of the problem here is lack of transparency. Somehow the published financial statements of major financial institutions that are prepared in accordance with GAAP are not giving the markets enough information to allay concerns about counter-party risk. Since you have opened the door for “extreme solutions,” what would happen if the government required all the major regulated financial institutions to disclose in complete and excruciating detail all of their portfolios and trading positions, leverage etc. – all of the information available to their internal risk committees or the federal regulators – as of a certain day, say the last day of March? A national “open kimono day,” if you will. I guess this is really a thought experiment, not a serious suggestion. But I wonder, would this kind of “extreme disclosure” help alleviate unfounded concerns about counter-party risk? Or would it be insanely risky? If there are major insolvent institutions out there, do we even want to know?

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5580 Anonymous Fri, 21 Mar 2008 23:37:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5580 fair value has always been disclosed for all financial assets and liabilities. check the 10-K, "fair value balance sheet" usually near the end of the footnotes.<br/><br/>has always been there. fair value has always been disclosed for all financial assets and liabilities. check the 10-K, “fair value balance sheet” usually near the end of the footnotes.

has always been there.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5579 Anonymous Fri, 21 Mar 2008 23:34:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5579 Insight into MTM requirements: the wallstreet firms are suffering due to their own actions. it used to be that a firm would buy a security, put it on at cost (held to maturity) and then once it appreciated, mark it to market to recognize the "trading" gain. This manipulation is tiresome to all regulators... and here we are with MTM accounting for their entire portfolios.<br/><br/>additionally, there are models out there for this stuff and there is information about underlying assumptions imbedded in indices like iTraxx and ABX. Frankly, CDOs and the like were never really "traded" to begin with after they were issued. The only indicative bid was the newest issuance... so if you want to get a good "bid" for a CDO, issue a new one and see what spread a trader will take for it. While there may have been some seasoned trading in the structured finance market, the most volume was in new issuances. Why would I buy something that has started to show wear and tear when I can get a fresh new one.. now you can't get a new one, so you are wondering what the old one is worth... oops!<br/><br/>The fundamental problem is that there is too much leverage and too much borrowing short and going long (didn't we learn from that in the S&L crisis?!?!? SIV what!??)<br/><br/>And if you look at why people did that, it all flows back to compensation. When compensation is not in sync with risk management, you will have a biased view of potential profit and you will take on more risk than you expected. Additionally, without real skin in the game (mortgage originators) you won't care what happens down the line. It happened at Enron as well (30 year power projects = big bonus today = retire early -> watch the project fail because you underestimated cost).<br/><br/>The extreme measure that needs to be taken is to let all of this wash out of the system. Mortgages typically run 5-7years. About a year more of this and we'll be back on solid fundamental footing. Absent an economic disaster like a war in Iran... that is. Insight into MTM requirements: the wallstreet firms are suffering due to their own actions. it used to be that a firm would buy a security, put it on at cost (held to maturity) and then once it appreciated, mark it to market to recognize the “trading” gain. This manipulation is tiresome to all regulators… and here we are with MTM accounting for their entire portfolios.

additionally, there are models out there for this stuff and there is information about underlying assumptions imbedded in indices like iTraxx and ABX. Frankly, CDOs and the like were never really “traded” to begin with after they were issued. The only indicative bid was the newest issuance… so if you want to get a good “bid” for a CDO, issue a new one and see what spread a trader will take for it. While there may have been some seasoned trading in the structured finance market, the most volume was in new issuances. Why would I buy something that has started to show wear and tear when I can get a fresh new one.. now you can’t get a new one, so you are wondering what the old one is worth… oops!

The fundamental problem is that there is too much leverage and too much borrowing short and going long (didn’t we learn from that in the S&L crisis?!?!? SIV what!??)

And if you look at why people did that, it all flows back to compensation. When compensation is not in sync with risk management, you will have a biased view of potential profit and you will take on more risk than you expected. Additionally, without real skin in the game (mortgage originators) you won’t care what happens down the line. It happened at Enron as well (30 year power projects = big bonus today = retire early -> watch the project fail because you underestimated cost).

The extreme measure that needs to be taken is to let all of this wash out of the system. Mortgages typically run 5-7years. About a year more of this and we’ll be back on solid fundamental footing. Absent an economic disaster like a war in Iran… that is.

]]> By: Anonymous http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5570 Anonymous Fri, 21 Mar 2008 17:05:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5570 There have been bids for this bad paper. Wall Street simply doesn't want to accept the valuations.<br/><br/>JPM put a bid on Bear's Alt-A paper. The E-trade buyout late last year put a bid on their paper.<br/><br/>Of course, if Wall Street accepted those valuations, they're all insolvent today. I think they all should be in receivership this afternoon... but that's just me. There have been bids for this bad paper. Wall Street simply doesn’t want to accept the valuations.

JPM put a bid on Bear’s Alt-A paper. The E-trade buyout late last year put a bid on their paper.

Of course, if Wall Street accepted those valuations, they’re all insolvent today. I think they all should be in receivership this afternoon… but that’s just me.

]]> By: st http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5569 st Fri, 21 Mar 2008 16:53:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5569 re: 12:06 idea<br/>To avoid being taken for a ride, the government would have to limit the contracts it would buy to those that were created by a certain date in the past. re: 12:06 idea
To avoid being taken for a ride, the government would have to limit the contracts it would buy to those that were created by a certain date in the past.

]]> By: st http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5568 st Fri, 21 Mar 2008 16:29:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5568 By the way, I think the Economist counts as having proposed an extreme measure, too. They argue that governments should put a floor on asset prices. My concern with such a policy would be that, if the situation continues to deteriorate, governments may find themselves in a position comparable to trying to defend a pegged exchange rate when the fundamentals are against you.<br/><br/>Whatever the governments decide to do, it is essential that they address the fear of contagious failure. By the way, I think the Economist counts as having proposed an extreme measure, too. They argue that governments should put a floor on asset prices. My concern with such a policy would be that, if the situation continues to deteriorate, governments may find themselves in a position comparable to trying to defend a pegged exchange rate when the fundamentals are against you.

Whatever the governments decide to do, it is essential that they address the fear of contagious failure.

]]> By: st http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5567 st Fri, 21 Mar 2008 16:06:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5567 Here's another extreme idea to avoid contagious bankruptcies. Set up a government body that "buys" contracts in default (i.e. CDS with counterparty failures). The government pays as much as the full (without failure) value of the contract and receives in return from the seller a claim to hybrid capital. This hybrid capital does not need to be paid if the firm is facing financial difficulty, but must be paid before shareholders receive a penny.<br/><br/>This would achieve capitalization of the firms that need capitalization while carefully targeting the problem of counterparty failure. It may also reduce the panic by making it clear that the financial sector will not be caught in a chain of failures. Here’s another extreme idea to avoid contagious bankruptcies. Set up a government body that “buys” contracts in default (i.e. CDS with counterparty failures). The government pays as much as the full (without failure) value of the contract and receives in return from the seller a claim to hybrid capital. This hybrid capital does not need to be paid if the firm is facing financial difficulty, but must be paid before shareholders receive a penny.

This would achieve capitalization of the firms that need capitalization while carefully targeting the problem of counterparty failure. It may also reduce the panic by making it clear that the financial sector will not be caught in a chain of failures.

]]> By: fmo http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5565 fmo Fri, 21 Mar 2008 15:48:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5565 pardon the stupidity.<br/><br/>if there's no bid for X, or the bid is way low, so X doesn't sell, and the guy who owns X dk's on his mortgage or loan which he's using to carry it, so the value of his loan should be marked down cause there's no bid for X, etc<br/><br/>(think all for the want of a horseshoe nail)<br/><br/>exactly what is the GAAP or OCBOA value of X please?<br/><br/>im just a plain folks tax lawyer and quant, but i thought the definition of market value was what a willing seller would pay a willing buyer.<br/><br/>if thats some fraction of X, gee, isn't that what it is?<br/><br/>and if you lower the capital ratio requirements, in a time of stress, gee, isnt that, what's the word...<br/><br/>oh yeah<br/><br/>PROCYCLICAL ie the guy operating with lower capital is even riskier now than otherwise with lower capital so we have to mark down his paper and...<br/><br/>how come no one understands there's no solution?<br/><br/>if the problem is there's no bid then unless there IS a bid what am i missing ie no way out... pardon the stupidity.

if there’s no bid for X, or the bid is way low, so X doesn’t sell, and the guy who owns X dk’s on his mortgage or loan which he’s using to carry it, so the value of his loan should be marked down cause there’s no bid for X, etc

(think all for the want of a horseshoe nail)

exactly what is the GAAP or OCBOA value of X please?

im just a plain folks tax lawyer and quant, but i thought the definition of market value was what a willing seller would pay a willing buyer.

if thats some fraction of X, gee, isn’t that what it is?

and if you lower the capital ratio requirements, in a time of stress, gee, isnt that, what’s the word…

oh yeah

PROCYCLICAL ie the guy operating with lower capital is even riskier now than otherwise with lower capital so we have to mark down his paper and…

how come no one understands there’s no solution?

if the problem is there’s no bid then unless there IS a bid what am i missing ie no way out…

]]> By: sk http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to.html#comment-5561 sk Fri, 21 Mar 2008 14:57:00 +0000 http://www.nakedcapitalism.com/2008/03/extreme-measures-v-and-vi-drop-mark-to-market-beg-oil-producers-to-rescue-banks/#comment-5561 <i><br/>I doubt any foreigners will stump up much cash until they see who the new occupant of the Oval Office will be and have a sense of his or her posture towards housing and the financial services industry.<br/></i><br/><br/>That is so accurate in its result, IMO - but I think each particular foreigner class will be more interested in the political/military(will they bomb/protect us ( or our enemies))/trade posture towards each individual THEM then in the posture towards domestics concerns of housing and financial services.<br/><br/>-K
I doubt any foreigners will stump up much cash until they see who the new occupant of the Oval Office will be and have a sense of his or her posture towards housing and the financial services industry.

That is so accurate in its result, IMO – but I think each particular foreigner class will be more interested in the political/military(will they bomb/protect us ( or our enemies))/trade posture towards each individual THEM then in the posture towards domestics concerns of housing and financial services.

-K

]]>