By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
In 2007, as the credit crisis commenced, paradoxically, nobody actually defaulted. Outside of sub-prime delinquencies, corporate defaults were at a record low. Instead, investors in high quality (AAA or AA) rated securities, that are unlikely to suffer real losses if held to maturity, faced paper – mark-to-market (“MtM”) – losses.
In modern financial markets, market values drive asset values, profits and losses, risk calculations and the value of collateral supporting loans. Accounting standards, both in the U.S.A. and internationally, are now based on theoretically sound market values that are problematic in practice. The standards emerged from the past financial crisis where the use of “historic cost” accounting meant that losses on loans remained undisclosed because they continued to be carried at face value. The standards also reflect the fact that many modern financial instruments (such as derivatives) can only be accounted for in MtM framework.
MtM accounting itself is flawed. There are difficulties in establishing real values of many instruments. It creates volatility in earnings attributable to inefficiencies in markets rather than real changes in financial position.
Alan Greenspan once noted that: “It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person’s ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making.” He may be the only one qualified to understand modern financial statements.
MtM accounting falls well short of its objective – the provision of accurate, reasonably objective and meaningful information about financial position. In the present crisis, it has heightened uncertainty and confusion about the position of banks and investors.
MtM accounting requires financial instruments to be valued at current market prices. This assumes a market and a price. As Michael Milken (the progenitor of “junk bonds” at Drexel Burnham Lambert) once noted: “Liquidity is an illusion. It is always there when you don’t need it and rarely there when you do.”
In volatile times, liquidity becomes concentrated in government bonds, large well known stocks and listed derivatives. For anything that is not liquid, MtM means mark-to-model. This assumes universally accepted pricing methodologies with verifiable inputs. Valuation for all but the simplest instruments today requires a higher degree in a quantitative discipline, a super computer and a vivid imagination. For complex structured securities and exotic derivatives, the only available price is from the bank that originally sold the security to the investor. Prices available from the purveyor of the instrument (a concept known as mark-to-myself) strain reasonable concepts of independence and objectivity.
A current market price of 85% for a AAA security does not actually mean that you will lose 15% of the face value. It is only an estimate of likely losses. It may reflect the opportunity loss of being able to invest in the same or similar security at the time of valuation. In volatile markets, excessive uncertainty or risk aversion means that values deviate significantly from actually cash values.
MtM prices may be prone to manipulation. An often neglected element of the Enron scandal was the company’s ability to convince its auditors and the U.S. Securities and Exchange Commission (“SEC’) to allow MtM accounting to be used in the natural gas industry allowing the company to record current earnings based on the future value of long term contracts.
In dealings with hedge funds and structured investment vehicles (“SIVs”), banks have an incentive to mark positions at high prices thereby preventing complex and illiquid securities being sold at a discount and pushing down prices in the market. If these securities actually traded then the lower market price would have to be used to value positions increasing losses and margin calls on already cash strapped investors.
A lower price can be used to force margin calls and selling that may allow a dealer to buy the assets cheaply. Long Term Capital Management (“LTCM”) believed that the dealers brought about their downfall by moving the market values against their positions. In the current credit crisis, at one time markets resorted to barter – you exchange what you want to sell for something else – to avoid recording low prices for securities.
MtM prices, no matter how dubious, drive real investment and credit decisions. Holders of AAA rated securities may be forced to sell securities showing losses because MtM losses reach “stop loss” levels. Where investors have borrowed against these securities, the falling MtM value supporting the borrowing means finding money to top up the collateral or selling the securities thus realizing the loss. In the case of SIVs, the MtM losses trigger breaches of tests that require selling securities to liquidate the structure.
MtM values are used to establish current portfolio values and allow investors to invest or withdraw funds. Errors in pricing lead to transfers in wealth between incoming and outgoing investors; for example, a low value punishes a redeeming investor but rewards the new investor. In 2007, difficulties in establishing MtM values caused some funds to suspend redemptions. Sound investments may be sold off to prevent further losses or realize earnings to cover other losses even where the market does not fairly value the asset penalizing investors.
In the global financial crisis, with the capital markets virtually frozen, the extent of losses on bank inventories of hard-to-value products and commitments (structured debt and leveraged loans) was difficult to establish.
Financial Accounting Standard Board (“FASB”) Standard 157 (“FAS157”), which became effective for fiscal years after November 2007, is designed to provide “clarity” to the issue of fair valuation of assets and liabilities.
The centerpiece of FAS157 is the three level hierarchy of valuation (better referred to as the “three levels of enlightenment”).
The Fair Value Hierarchy prioritizes the valuation inputs used to determine fair value into:
Level 1 – this requires observable inputs that reflect quoted prices for identical assets or liabilities in active markets and assumes that the entity can access the markets at the measurement date (known as Mark-To-Market). In practice, this means a liquid asset or instrument that is actively traded; for example, where two-way prices are readily available.
Level 2 – this requires inputs other than quoted market prices included within Level 1 that are observable either directly or indirectly (known as Mark-To-Model). In practice, this means instruments that cannot be priced based on trade prices but are valued using observable inputs; for example, comparable assets or instruments or using interest rates/ curves, volatility, correlation, credit spreads etc that can be put through an accepted model to establish values.
Level 3 – this relates to unobservable inputs reflecting the reporting entity’s own assumptions used in pricing an asset or liability (known as Mark-To-Make Believe or Mark-to-Myself). In practice, this means that the asset or liability cannot be priced using observable inputs and requires the use of modeling techniques and substantially subjective assumptions.
FAS157 valuations should be based on the exit price (the price at which it would be sold) regardless of whether the entity plans to hold or sell the asset. FAS157 emphasises that fair value is market-based rather than entity-specific.
FAS157’s fair value hierarchy ranks the quality and reliability of information used to determine fair values – market prices are regarded as reliable valuation inputs, whereas model values that include unobservable inputs are regarded less reliable. The lowest level of significant input drives placement in the hierarchy and the level within the hierarchy drives financial statement disclosures.
The objectives of FAS157 are laudable and unobjectionable. Unfortunately, the standard provides significant discretion to companies in determining the values of assets and liabilities, although detailed disclosure is required. It also may create significant uncertainty in the values of assets and liabilities and financial condition of the reporting entity. This is especially true of Level 3 assets. It is also relevant to the valuation of Level 2 assets.
The problem is compounded by the fact that many major global financial institutions have increased their holdings of Level 3 assets in recent years. Major areas of valuation concern include:
1. Structured finance securities such securitised mortgages including subprime mortgages, securitised credit card obligations, asset backed commercial paper and collateralised debt obligations (“CDOs”).
2. Leveraged and private equity loans.
3. Distressed debt.
4. Principal investments by financial institutions in private equity, unlisted securities or physical assets for which there are no true market.
5. Complex derivative contracts including exotic options.
Level 3 assets of the leading 20 U.S. banks as at 31 March 2009 were reported to be $657.5 billion (as reported by the Congressional Oversight Panel in its Oversight Report dated 11 August 2009 “The Continued Risk Of Troubled Assets”). This represented a 14.3 % increase in Level 3 assets compared to three months prior (December 31, 2008). Bank of America, PNC Financial, and Bank of New York Mellon had twice as many assets (in terms of dollars) classified as Level 3 in the first quarter of 2009 compared to year-end 2008. Morgan Stanley had more than ten percent of their total assets categorized as Level 3.
The panel noted that: “The risks troubled assets continue to pose for the banking system depend on how many troubled assets there are. But no one appears to know for certain….It is impossible to ever arrive at an exact dollar amount of troubled assets, but even the challenges of making a reliable estimate are formidable.”
The key issue is that a relatively small change in the values of these Level 3 assets has the potential to reduce the capital base of the entity significantly.
The valuation of Level 2 assets may be more problematic than generally assumed especially under condition of market stress. This reflects the impact of model risk and lack of disclosure of the instruments treated as Level 2. Importantly, if market conditions deteriorate then some of these assets classified as Level 2 may need to be reassessed and treated as Level 3 assets.
It is not clear where in the Fair Value Hierarchy specific instruments are currently being valued. The correlation between disclosed bank write-offs and Level 3 assets is imperfect. This may be because individual institutions are classifying assets within the three level hierarchy using different criteria. It may also mean that there is actually no correlation between the classification and “real” losses. The lack of correlation may also reflect behavior, such as new chief executives wishing to write-off assets to be able to “blame” previous management.
Level 3 securities and derivatives cannot be valued using observable prices in liquid public markets. Market values must be based on models and estimates. Where losses are reduced (substantially) by MtM “hedging” gains, the exact nature of the hedges is not disclosed. Some banks and hedge funds have indicated that some losses resulted from hedges that did not function as intended. The hedge counterparty is undisclosed. As the gains are unrealized, if the counterparty (a thinly capitalized hedge fund) is unable to perform, then the hedge gains would be illusory. The lack of disclosure around the value of the hedges, their nature and hedge counterparties makes it difficult to gauge whether they are truly effective in reducing losses.
There are other oddities in current MtM accounting, such as the fair valuation of an entity’s own liabilities. FAS157 and Statement 159 (“Fair Value Option for Financial Assets and Financial Liabilities” issued in February 2007 by the FASB) allows the entity’s own credit risk to be used in establishing the value of its liabilities.
Changes in the entity’s credit standing are therefore reflected as changes in fair value. This results in gains for credit downgrades and losses for credit upgrades. For example, if a bank has $100 million of bonds that are subject to mark-to-market accounting and the market price drops to $80 (80%) then, it records a “gain”. As credit spreads increased, U.S. banks have taken substantial profits to earnings from revaluing their own liabilities. These MtM profits on liabilities have helped banks offset recent write-downs. But the revaluation of a bank’s liabilities is problematic. The face value of the liability must still be repaid. The gain from a higher credit spread is unlikely to result in cash profits. It is only if the entity can re-purchase its debt that the “theoretical” gain can be realised.
The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision objected to Statement 159 prior to its passage. They argued that would the MtM of a bank’s liabilities in this way would “have the contrary effect” of increasing a bank’s net worth at the same time its “financial condition is deteriorating.”
The revaluation of a bank’s liabilities may also create volatility of earnings. Major financial institutions have recently been forced to issue substantial amounts of debt to finance “involuntary asset growth” as assets returned onto their balance sheets. This debt has been issued at relatively high credit spreads reflecting current debt market conditions. This means that if the market conditions improve, these institutions may record the mark-to-market losses on their liabilities even as their credit condition improves.
The International Accounting Standards Board (“IASB”) is understood to be considering the issue. Under proposals being considered, gains on falls in the value of an issuer’s own debt my no longer be allowed to be recognised. This would remove one of the most controversial elements of MtM accounting.
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WHEN YOU CANT SEE THE WOOD …DUE TO THE TREES :
OR…. when there SUDDENLY came some SENSE to it all :
FACTS :
1.
(quote from The PRIVATEER ) :
” For December 2009, there are various reports of the official size of the Treasury deficit for the month
ranging from $US 86 to 92 Billion. ”
” Over the month of December 2009, official US Treasury debt “to the penny” rose by a bit more than $US 177 Billion. As already reported, over that same month of December 2009, worldwide foreign holdings of Treasury debt paper FELL by $US 53 Billion, the biggest monthly
fall ever.
Clearly, “somebody” was buying a lot of Treasury debt in December, and it wasn’t overseas investors including foreign central banks. The Fed was supposed to have ended their “quantitative easing” (direct monetisation of US Treasury debt) in October.” ……
….. AND …..
2.
” The reason for the timing of the Greek ratings cut is shown clearly by the data above. The debt and
deficit situation in Greece did not suddenly sharply deteriorate in December 2009. What did sharply
deteriorate, and very suddenly, was the global appetite for the ever expanding debt of the US Treasury.”
3.
MOODY’s is an USA Institution …. RIGHT ?
…. AND ….
4.
re-READ the stories about GOLDMAN & SACHS as well as OTHER
US speculators ATTACK on the GREECE FINANCIAL SYSTEM ( and THE EURO )… in a DOUBLE-CROSS MANEUVER
PUTTING ALL ABOVE TOGETHER LEADS INEVITABLY TO ONLY
1 CONCLUSION NAMING 1 PERPETRATOR
AND I HEREBY INVITE THE INTELLIGENT READERS OF THIS BLOG
TO COME FORWARD WITH SOME SUGGESTIONS AS TO WHO THAT 1
MAY BE
I HAVE NO DOUBTS ! … DO YOU ?
For my part I will make sure this knowledge becomes KNOWN by as many EUROPEANS as i am able to reach ..
Otherwise to the editor of nakedcapitalism :
KEEP UP THE GOOD WORK !
I will wager one sawbuck that you are referring to The Great Cephalopod Goldman Sachs but even if they are thrown under the bus is not their hierarchical superior, the New York Fed, still alive and well and reconstituting another incarnation of this Financial Nightmare ?
This is great stuff and with a little creative thinking, there’s a silver lining in this cloud.
Consider, if you will, that this is just what the NINJA homebuyers did. They didn’t lie. They just marked their solvency to a model based on expectations of their eventual future income after they won the lottery, or struck it rich in the lawn-mowing business (it does happen) or sold their house for twice the purchase price.
Now, if the IRS could let them take a gain on the collapse in the value of their mortgage obligation attached to the house once it’s clear they havn’t won the lottery and likely won’t, or even gotten a job — then the borrower could transfer that gain to the CDO holders in lieu of payment and that would offset the losses at the CDOs and we could neutralize this entire financial crisis.
I wonder why nobody has thought of this. The transfer would have to be given tax free treatment, but all that takes is a good lobbyist.
I bet Goldman Sachs could find a way to make this work!
lawn mowing can make you rich, don’t kid youselves. I’ve seen the mowers, first hand, they’re mostly Hispanic, with long sleeved T shirts and stained khakis and round floppy hats and work boots, out in the big grass yards under the big trees, out in the air. they stop at lunchtime and they drink from plastic thermoses, laughing with their buddies, grinning and talking in Spanish in the shade of the trees — and when you drive by on the narrow street they sort of look at you hard and uncertain, but if you wave they smile — lanky and strong with hard clean faces and healthy torsos.
and then the owner comes home, a paunchy white dude with a big butt and a bald spot and a sour face. a work face, a tired fight face, a too many details face. there in the asphalt driveway of the big house, the big clean house with the big trees, where everything is marked to a model.
Maybe it’s just youth, maybe they drink hard and beat their wives, maybe they die young and hard, but it seems that the lawn mowers mark themselves to life, to the sun and the moon and the afternoon light through the trees and the wind. and their women don’t care either. they all ride the busses, with their 4 kids, all dressed in reds and greens and smiles. they don’t care. Deep thoughts. everybody should fuck the models, really, and go mow their lawns. :)
LOL… and frankly, a lot of truth to that.
Das’s point that m2m accounting is flawed is beside the point. The presence of considerable leverage makes is necessary. E.G. if I am a financial institution lending to a broker dealer or hedge fund, I can’t take the risk of using historical cost which implies allowing positions to unwind over time. The problem is inappropriate levels of leverage, especially associated (indirectly through an entity’s total financial picture or directly) with hard to value assets.
It certainly is necessary due to the massive amount of leverage still in the system. What I would be very interested to hear comments on is how can this be rectified in any meaningful way. The treasury AND fed can not want to seriously change this because the taxpayer is now on the hook for losses that would come about as a result. If these assets were forced to be liquidated (I think a good outcome so we don’t become Japan with zombie banks- and don’t end constraining economic growth merely to finance financial assets that are vastly overvalued), wouldn’t it entail failure of all the too-big-to fail banks. If at least Citi and BofA fail, the taxpayer has massive liablity due to treasury guaranteed bank issued debt, and the couple hundred of billion of assets either fed/treasury have guaranteed. Anyone know the extent of projected losses on these guarantees, and any opinions on way to minimize these losses and should we really force liquidation and dismantling of these organizations? Personally I think it is the right idea (for allowing eventual economic recovery), but I also am 22, so I have no fincial assets, and think Dow 5000 sounds great….
Das is great, and he was telling us what would happen long before it has. But talking about the inefficiencies of mark-to-market when it’s a corrupt game is worthless. Put these things on an exchange, maybe you’ll get a bid. If not, the bid is ZERO. That means nobody wants to pay a cent because the stuff is WORTHLESS. Right now, GS and JPM are determining the prices — that’s your problem.
There is an easy solution I’ve never heard anyone talk about. Why don’t we make it law that the formula used to value the private contract is part-and-parcel from the get go? The seller sets out their expectations, the buyer gets to decide if they agree. When GS and AIG get together to haggle CDS prices, each says that their formula is correct. Instead of arguing about it post, let’s solidify it prior.
What’s that you say — all the profit would be squeezed from the business if that were to occur? The games is so crooked, any adjustment renders it unprofitable.
For a topic like Fair Value Accounting, which is complex enough in itself, let alone trying to explain its relationship to the economy, I commend the author of this article, Satyajit Das, for writing one of the most well-balanced and plain English explanations of this topic that I have seen, and I commend Naked Capitalism for posting this article.
Although I don’t agree with every point or premise in the article, (and this comment represents my personal opinion only), among the most significant points raised in the article are:
1. Financial Accounting Standard Board (“FASB”) Standard 157 (“FAS157”), which became effective for fiscal years after November 2007, is designed to provide “clarity” to the issue of fair valuation of assets and liabilities.
2. FAS157 valuations should be based on the exit price (the price at which it would be sold) regardless of whether the entity plans to hold or sell the asset. FAS157 emphasises that fair value is market-based rather than entity-specific.
3. The objectives of FAS157 are laudable and unobjectionable. Unfortunately, the standard provides significant discretion to companies in determining the values of assets and liabilities, although detailed disclosure is required. It also may create significant uncertainty in the values of assets and liabilities and financial condition of the reporting entity. This is especially true of Level 3 assets. It is also relevant to the valuation of Level 2 assets. The problem is compounded by the fact that many major global financial institutions have increased their holdings of Level 3 assets in recent years.
4. MtM accounting requires financial instruments to be valued at current market prices. This assumes a market and a price.
5. For anything that is not liquid, MtM means mark-to-model. This assumes universally accepted pricing methodologies with verifiable inputs. Valuation for all but the simplest instruments today requires a higher degree in a quantitative discipline, a super computer and a vivid imagination
6. MtM accounting falls well short of its objective – the provision of accurate, reasonably objective and meaningful information about financial position. In the present crisis, it has heightened uncertainty and confusion about the position of banks and investors.
I think there are many points missed. The MtM promotes collusion amongst the banks owning the paper as well. Who are the ones determining the prices of assets being valued? Banks, since there are no longer any brokers worth a candle. Who wrote the loans/term borrowings? Banks. If this isn’t a conflict of interest and why the end of Glass, Steagall signalled the dawning of all our troubles I don’t know what did. Well aside from the free xfr of wealth from the tax payer to the banks that is! You know..banks write 500 billion of mortgages with a duration of 7 years at 1% over ten year Govies, Fraudy and Funny by the pools with AAA ratings at 0.5%, profit paid to banks since this system operated = 5,000 billion x 7 years at 0.5% spread compression. Fraudy and Funny then borrow off the market with an implicit guarantee back from the banks at 0.5% above govies for another 500 billion x 7 years x 0.5%. I know $350 billion isnt a lot of money these days, but just how much are the largest banks capitalised at now, based on share markets? We flatter to deceive ourselves that we should be concerned with valuations when the scam is still in play and sponsored by the Fed and the Govt who’s only role is to prevent us ever finding out the truth of how much of the brown stuff this current system puts us in. The system remains broken, it needs fixing, MtM is irrelevant.
Good post, agree entirely.
However, all you list is built on top of MtM, not part of it: eg all this stuff is not good faith accounting, it’s gaming the system.
So I think Das’ artile one of best I’ve seen on NC in a while… great article.
you say:
well, yah… that’s a problem. Kind’a like you know there’s roots in the sewer drain, whether/when it backs up kind’a depends on “stuff” you just don’t want to dig up and look at.
Yep.
And I assume you don’t mean “fixing” in the sense GS “fixes” things.
I would add as context that in a free banking system with no central bank dictating policy and no public liability should the bank fail, this entire argument becomes irrelevant. Pricing assets that cannot be easily priced is a requirement of regulators trying to keep solvent a system with only fractional reserves. MtM is only necessary because of reserve ratios, which themselves are only necessary because of federal insurance and, more recently, federal bailouts and the loss of incentives against risk and leverage.
Some would argue that a privatized (pre-1913) banking industry is prone to runs, irresponsibility, etc. But it is becoming increasingly clear, in my opinion, that the very process of tying banks to a central reserve – establishing reserve ratios, valuing assets – makes the system either fraudulent or broadly unstable, with the side benefit of massive public liabilities and “too big to fail”.
As it is, I would argue that the most stringent forms of MtM are necessary, because it is access to capital that dictates solvency. Fair value and the profitability of investment are issues for investors. If an asset cannot be sold (or only for low value), banks MUST be forced to raise capital to cover potential payouts, because the taxpayer must be protected at all costs. When you fuse banks to the government and the treasury, you CANNOT handle them with a velvet glove or allow them to degrade their balance sheet in the belief – implicit in “fair value” – that good times will rein.
Yes, its a great article, IF, you are into all of the intricacies and convolutions the corrupt fantasy world of usurious finance has spread all over the con man’s shell game table — a table that is now so obviously laden with so many shells of deception that the game has become; far too corrupt and complex, the odds of finding the pea under a shell are next to impossible, all trust in the game is gone, and, no one wants to play the fucking game any more!
The flaw in this article is here, where the author, with a head full of bullshit knowledge about, and acceptance of, the ‘too many shells on the table totally rigged bullshit deceptive game of finance’, says; “The objectives of FAS157 are laudable and unobjectionable.”
That’s bullshit! I object! And here is the bullshit presented earlier in the article that stands as a supporting preface to that above quoted bullshit remark …
“Financial Accounting Standard Board (“FASB”) Standard 157 (“FAS157”), which became effective for fiscal years after November 2007, is designed to provide “clarity” to the issue of fair valuation of assets and liabilities.
The centerpiece of FAS157 is the three level hierarchy of valuation (better referred to as the “three levels of enlightenment”).”
I claim bullshit and object because the problem is irreparable! You can not provide clarity to it! The problem is that there are too many shells on the table! Too many scams! Trying to fix all of those scams by adding three more shells (three more scams) to the table — which would be better called by their real names; “three levels of deception!” — only adds more complexity to the already existing tightly coupled interrelationships of complexity and further makes the game unplayable.
Sweep the fucking table clean, including the self serving, pretentious, useless as tits on a bull, butt head ‘economists’, that keep the now overly complex Pernicious Greed game alive. Jesus god you guys need to find some socially productive other pursuits to fill up your time with. The catch 22 irony here is that your complicity with the wealthy ruling elite has made things so bad that when they turn you out into the streets you won’t even be able to find a job in a car wash
Should we go back to the old Vanilla Greed days with three simple shells on the table? Fuck no! I say its time to revisit the whole concept of parasitic usury that functions as slavery, exploits and oppresses us all and destroys our social fabric. Ban it entirely!
Deception is the strongest political force on the planet.
When Das says “The standards emerged from the past financial crisis where the use of “historic cost” accounting meant that losses on loans remained undisclosed because they continued to be carried at face value” – does past financial crisis refer to the great depression, or some other specific financial crisis, or just to any previous financial crisis that has happened?
I am just curious because it seems as though this is the worse financial crisis since the Great Depression. It seems whatever crises the last accounting methods caused is small potatoes compared to the current problems. Is the current accounting solution causing much, much bigger problems than the old accounting standards did? Maybe we should have the old, smaller problems than the new, ginormous problems.
Also, I don’t understand the statement “In 2007, as the credit crisis commenced, paradoxically, nobody actually defaulted” – exactly why did Lehmann, Bear, and almost AIG and all the forced mergers occur, if not due to defaulting on debt? They went out of business because they didn’t have reserves required by law? Is this semantic? – that house in Fresno on the banks’ books (or a derivative it held) with a loan of 350K, that the mortgage borrower couldn’t make the payment on (aka, used to be called “default”), and that has now been repossessed and put on the market for two years, and the bank (mortgage holder) finally have sold for 70K (BTW, I look at Trulia almost daily, and that is a real example) is not a “real” default, but only a semantic default?
It just seems to me that if you build a system that depends on something whose value fluctuates, you either don’t use those “things” or you accept that at some point those “things” will be near worthless or worthless and that your “reserve” does not exist.
Great questions. One could assume “historic cost” and “face value” here mean peak bubble values, which is why there is such an enormous shadow inventory of foreclosed or defaulted homes held off the market. It is why clever defaulters, ‘strategic’ and otherwise, are able to stay in some cases up to two years without payment daring the banks to foreclose and sell the house at 50% of face value. Banks in most cases can’t sell the homes take the losses and stay alive so the FASB lets them “extend and pretend” for up to three years so far—just kicking the can down the road. So while homelessness rises, banks hold empty homes off the market, taking small losses in the vain hope that Benny can re-inflate the bubble and save their sorry butts. Meanwhile, the pipeline continues to back up, and that doesn’nt even begin to count commercial real estate collapse.
They did not fail until 2008, and NONE OF THEM did default, technically, not a single one failed to miss a payment on a debt obligation, although they were expected to.
Yah, but just to clarify possible mis-interpretation in your statement: just who the hell stop-gapped them? And what did Lehman auctions bring… $0.15 on the $$$?
To me, that’s almost like saying grandpa had a massive coronary, blew 2 valves in his heart a the aorta. They rushed him to the hospital, installed a couple pumps, a couple stents, hooked him up to life support for a week, sent him home for rest of his life in bed and on an oxygen tank… and declared him: stable.
And on top of that, he’s still eating french fries. :)
What does it matter if IASB does something about this? Despite their “commitments” to work together, the odds that FASB will do something just because IASB does are close to zero. We would be better off it FASB disbanded and the US stopped being quite so exceptionalist.
Our ‘great financial system’ is a HOUSE OF CARDS on THIN ICE but sold as a ‘castle on cement’ by MSM!
We can ALL claim, behave and pretend blind then the conses will be that LIGHT is an ‘illusion’ to be disregarded.
This is the essence of my understanding of M to Model accounting!
The MtM rule is supposed to end on April 1st, right? The banks gave all their toxic mortgages to the Fed in exchange for Treasuries, this a scheme to recapitalize the banks by paying them 3+%, right? Those damn mortgages (MBSs) are currently only fetching 12 cents on the dollar when the FDIC has been auctioning off those -when they close failed banks. The asshole banks are valuing those MBSs (traded to the Fed) at 97 cents on the dollar, STILL! Right? And the Fed WILL NOT ALLOW AN AUDIT because they also are valuing them at what the paid the banks (97-100%), in spite of 4 1/2-6 million more foreclosures on the horizon, these MBSs AREN’T WORTH 12 CENTS!
Indeed, many are worth close to ZERO, the worst sub prime was the first crap to swap to the Fed.
Additionally, they won’t allow bankruptcies (on residential primary residential mortgages), although there’s talk of it, this Banking Cartel Lobby is going to kill it because any judge has the duty to “discover” fraud in these MBSs, and could throw out entire pools of mortgage “contracts”, the Fed’s worst nightmare. I personally, hope Geithner, Bernanke, et all have much worse nightmares! NIGHTLY!
For those of you defending MtM when there’s no market, you are nothing but shills for the industry, or academics, this political incest is PURE CORRUPTION!. All this corruption is intertwined, starting with Paulson’s lie to use TARP to buy these toxic mortgages, the AIG-Goldman payoffs, and this FRAUD and CORRUPTION entails (entrails?)
ZIRP, which is punishing the savers-class, and pushing Grandmas into risky investments. This is also part of the grand conspiracy to move money into stocks, using Goldman’s HFT. Surely, you know that.
Those defending MtM here make me want to throw up! You are part of the problem, sickening. Housing isn’t going to recover for a decade. The Fed is silently moving that crap to FHA/Fannie/Freddie. Then what? The Pension Benefit coming next?
Lot of venom there, lot of frustration. Understand it; but, can’t help you. You have to calm down.
The holders of CDOs and related trash can’t mark it to market because if they do, they are bankrupt.
Now, don’t fault the mark to market concept. If there is no market, then the so called asset is worth zip. To the extent that you’re exercised. consider the holders of the trash, why did they buy it? They are avoiding bankruptcy at the pleasure of the Fed, the Treasury and the Administration because the politcal situation here is getting very bad.
Think about the world, it’s bad there too. Think about the potential for violent demonstrations. Think about those retirement accounts that have been destroyed. Think about the persistent erosion of purchasing power of the all mighty dollar.
Just what is a CDO? It’s the stuff the market won’t buy. It’s the stuff that takes the first hit in the event of default. On it’s face, it has an expected value of zero!
Why Buy it? Well, there was this greater fool party in progress. Das is doing us favor by describing the nature of the toxic assets that have yet to be marked to market. What hasn’t been presented is a recourse to sanity.
The easy shot at nationalizing the zombie institutions has passed. Watch for the next crunch, maybe then we’ll see some change.
Above all, be calm, meditate.
You say “The holders of CDOs and related trash can’t mark it to market because if they do, they are bankrupt.”
This again is an excuse for no transparency. You are part of the problem, or you work in finance or your precious stock market trumps all truths, and you believe it controls the economy. Obama had Goldman/JPM use HFT to manipulate the market up 70% because he believes that saves his office and the world also. It’s fraud, Biderman @ Trim Tabs agrees.
The Fed needs to be audited so we know what those MBSs are worth. The banks will(are) not be solvent,we know that. They will have to declare the loss, raise capital, issue more stock, not show any earnings for another 2 years. SO FKING WHAT. Again, you are concerned with your stock market going down, right? Share prices rule the world, right? Bring on the buybacks once again and accounting tricks
to show cash using depreciation/inventory tricks. More 5-yr loss carry-backs! Let the home builders get a refund for all the taxes they paid in 2004-5, BOOM YEARS. Yea, that makes you happy. That’s why corporate tax collections are down 50%. Anything for share price, right?
We were promised transparency. Take the pain. It’s bad debt.
You provoked the familiar FEAR tactic that the world will come to an end if we have the TRUTH. That’s BS. I don’t buy it.
“Alan Greenspan once noted that: “It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person’s ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making.” He may be the only one qualified to understand modern financial statements.”
If the author actually believes geekspeak is qualified for anything, I won’t be listening to this person for anything.
If all the debt and derivatives in the world are gotten rid of, can almost all the of risk consultants be fired?
Any author who favorably quotes an Greenspanian insight has clearly not seen Mr. Greenspan’s astonishingly pathetic and self-serving commentary presented by David Faber on the CNBC documentary that has reaired in the last several days. If this man is regarded as a titan of Finance then truly it is a world of Lilliputians he inhabits.. His remarks may well reach the level of clinical delusion. May he find a special circle of hell generated by algorithms and mathematical modeling.
Please re-read that section. Das is being tongue-in-cheek, he said in effect that Greenspan must have been the only person able to do this.
I was wondering when/if SOMEBODY else would take issue with the arrogance of Greenspan’s statement (which yes, is quoted ironically). What Greenspan really meant was: “In my experience, I’ve discovered that those who cannot be persuaded by an array of facts and conjectures presented for some proposition often succumb to the dazzle of bullshit obscured behind a language – mathematics – which they have encountered but which they simply do not employ with sufficient regularity and fluency to construct a counter-argument. Most people in America are mathematically insecure, and even those who have successfully worked their way through some higher mathematics for some other purposes will bite their tongue when challenged with mathematical arguments on matters with which they readily acknowledge only vicarious experience.”
Somebody should meet Greenspan in a dark ally with copy of Lakatos’ “Proofs and Refutations” and beat him about his head with it…
Das:
Outstanding post, brought a lot of clarity to stuff I only knew generally.
Thanks.