Comments on: Goal of Paulson Plan: Restore Mark-to-Myth Accounting

By: Edith Orenstein

Edith Orenstein — Sun, 28 Sep 2008 03:06:00 +0000

I’m not sure I’d call Treasury’s program Mark-to-Myth accounting as Yves does, I think a lot of people maintain FAS 157 drives mark-to-myth in the current environment which is illiquid and subject to extrapolating vulture pricing. Rather than the tail (accounting) wagging the dog (the auction process, or more broadly, the economy) I think it may be worth considering if the tail needs adjusting, since it was created on an explicit theoretical presumption of active markets with willing buyers and sellers and non-distressed sales, rather than forcing the dog to chase its tail.

By: foesskewered

foesskewered — Thu, 25 Sep 2008 23:40:00 +0000

Good luck to them; no investor in their right mind wuold totally trust the valuation of a seller (whatever item they may be selling), more so when they are so far off the line of rationality. By marking to myth, they are only encouraging more fear, scepticism and ultimately speculation of the savage kind.If no one enters the market for those assets, they’ll be forced to continually mark down till some sort of consensus is reached and it won’t be pretty, the -ve volatility will be the penalty exacted upon them- would anyone enter a store and buy items that they know are going to be sold in the Not-FireSale-sale next day /week /month?

By: William

William — Thu, 25 Sep 2008 22:21:00 +0000

Hi Lewis,

I'm in sympathy with everything you say.

On one point: the instruments that comprise, eg, a CDO -- a dozen or so contracts -- are as clear as any other finance paper, I should think.

What has proven less than clear is the modelling (spreadsheets) that both the bankers and rating agencies use to predict the performance of the tranches under various stresses.

By: Anonymous

Anonymous — Thu, 25 Sep 2008 22:19:00 +0000

allegedly banks are still hiding 1 trillion of losses in their balance sheets under category 2 and 3.They have recognized till now 0,5 trillions. I guess assets under category 2 and 3 are near par value, fair value, price to maturity or whatever you call it so there will be no big gain. So banks are mainly selling those loans already written off the balance sheet to the treasury generating a big profit and capitalizing and at the same time those assets under categories 2 and 3 magically have a certain and fair value near par!!

By: Lewis B. Sckolnick

Lewis B. Sckolnick — Thu, 25 Sep 2008 21:50:00 +0000

William here in Massachusetts we have two rules for the Registrar of Deeds that must be followed:

1. All instruments must be clear and readable.

2. The provenance is beyond dispute.

The first is enforced but the second never is.

Now we wake up in September 2008 and Freddie and Fannie are gone, Lehman closes the doors, Merrill Lynch takes a hike, GS MS are now banking away and its all Bush's fault.

I am slightly against the PP if you have not notice.

There never would have been wounded MBS's if there were proper instrument inspection and as for bank's they have to do their own in house research and not rely on some lawyer or title searcher.

It is not impossible to go back on all of that junk paper and track it back to those who committed the fraud and hang it on them. Let them pay not us. That is the bottom line which no one wants to get because being irreponsible paid so well.

By: William

William — Thu, 25 Sep 2008 21:10:00 +0000

But Lewis,

The alternative is a $700 billion governmental bond trading operation -- one of the largest on the planet. Extremely risky business.

No "rule" or legal changes are required, broad strokes.

Rather: the quarantine of the wounded MBS currently on the institutions' books -- with price controls that keep the gov't out of the MBS trading business, while stabilizing the wounded banks.

By: Lewis B. Sckolnick

Lewis B. Sckolnick — Thu, 25 Sep 2008 20:55:00 +0000

There is absolutely nothing wrong with the current MBS rules so long as everyone is honest.

How much government do some people need?

By: Lewis B. Sckolnick

Lewis B. Sckolnick — Thu, 25 Sep 2008 20:38:00 +0000

It is both simplistic and easy to blame the current situation on President Bush. The problem remains that junk paper can be written today just as easily as it was written in the past. Right now there remains no effective oversight and the oversight that is in place is not being used and enforced because it is seen as just too much work and the product mistakes become perpetuated.

By: William

William — Thu, 25 Sep 2008 20:30:00 +0000

Matthew,

1. When I spoke of mkt mythology, I did not intend to imply FASB and similar should be lifted. They should not.

2. But for the FASB violators out there, the Tsy plan WILL make them whole -- by trading cash for non-compliant marks.

Ie, the plan is to execute a one-time backdoor voiding of FASB for those institutions currently non-compliant.

These non-compliant banks won't have their balance sheet juiced (since their MBS are already marked near guesstimate "Hold to Maturity" levels).

But they will get cash in exchange for those elevated marks. That's the covert rescue of bad players no one is talking about.

So I'm against the Tsy plan for that reason and, more importantly, because it puts Tsy on the hook for future performance of the wounded bonds.

I'm for, rather, recognizing that no market has existed for 14 months for these bonds. And that in such a world Mark-to-Market has nothing to work on.

Ie, the MBS market is broken. Humpty Dumpty.

Thus the need for price controls (as outlined in comment 9 above) on the MBS currently on the books.

By: donna

donna — Thu, 25 Sep 2008 20:20:00 +0000

If McCain gets in, this leads to a replay of the depression. We had all better hope it’s Obama. We MIGHT have a chance, then.

If not, I guess at least the Republicans will avoid the blame and their party might survive to screw us another day. I see this entire action as the last, biggest theft by the Bush administration.