Steve Forbes on "Mark to Market"

[destintide]

This argument that these assets have inherent value is silly, if they had inherent value people would want to purchase them.

i respectfully disagree. the inherent value is the future cash flows of the underlying securities.....note that while the default rate on residential mortgages is some where around 4-5% (i believe)....so this suggests that roughly 95% of Americans are paying their mortgages in a timely manner. Now, while no one may be willing to buy collateralized security instruments on the open market due to a lack of transparency, or increased uncertainty, or an inability to leverage the assets, or a number of other possibilities.....the value of the cash flows still exists.

a more appropriate valuation technique for accounting purposes would be a mark to model...you derive a net present value based on a series of assumptions. Those assumptions must be well founded & stress tested but this technique will provide a more accurate pricing mechanism than marking to a nonexistent market. in fact, the mark to model is already in place for some assets where market inputs are not readily available.

 

[Averanicus]

From practical point of view it boil down to this. Either you keep mark to market, have all your financials shorted to penny stock, subjected to vicious downgrades, and driven to eventual bankrupcy leading to a vicious long term depression.

Or, you can suspend mark to market, stabilize your financials, have a stock recovery, and eventually stage a recovery next year.

Doesn't matter to me either way. If M2M remain, I'll keep shorting your financials; after they go bk, I'll move on to short the rest of the market. However, if it get suspended I'll go long on them.

That's the simple choice. Given how ignorant the government is, I feel pretty comfortable shorting until told otherwise.

 

[Mango]

Mark to Market isn't really the problem. The central part of the problem is way too much leverage in the system, and unwinding that leverage is not going to be pretty. Also, Forbes leaves out some important factors. I'm also surprised knowing he is a staunch Republican and wanting any government intervention at all.
The way I understand it is there are three levels. Level 3 encompassing subprime and Alt A mortgages.

In the fair value hierarchy, Level 1 is simple mark-to-market, whereby an asset’s value is based on an actual price. This would mean that AAA securities, like full doc, good credit loans would not be priced at mark to market due to low risk... low DTI and low loan to values.

Level 2, known as mark-to-model and used when there aren't any quoted prices available, is an estimate based on observable inputs.

Level 3 consists of unobservable inputs, such as those that reflect the reporting entity’s own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort, according to FASB. There is no verification requirement if the assumptions are in line with those of market participants.

The problem is there was no oversight over the ratings agencies and no one could figure out what really was a AAA in the tranches. Lack of transparency was what froze up the markets.

Forgive me if I am wrong, but that's my understanding of it.

Here's an interesting link to what the major finance houses had in level 3 assets.
http://www.portfolio.com/views/blog...1/06/mark-to-model-on-wall-street-the-numbers

I am opposed to naked short selling. Put some clothes on.

 

[SHELLY]

What will result if they drop MTM accounting will be "Stated Value" -- which might be more appropriate seeing that a good deal of the toxic assets the banks are holder were based on "Stated Income."

Hiya Goofer--haven't seen you around campus lately.

.

 

[Linda]

marking to market implies that you mark an asset's value according to what it may fetch on the open market. in a market which is characterized by a lack of demand (i.e. willing buyers) the market price may be well below the intrinsic value of the asset.

for example, lets say you own a basket of real estate mortgages on people's homes. b/c of uncertainty in people's ability to repay the underlying debts or a lack of transparency into an esoteric financial instrument the value of the asset is discounted heavily to account for said uncertainty a/k/a risk.

in reality the present value of the expected future cash flows (your monthly mortgage payments) may result in a greater value than the market implied price.

therefore, marking to market may result in financial institutions taking a larger "haircut" than what is really necessary.....which is the complaint with mark to market.

with that being said; mark to market is a problem but resolving its inefficiencies is not an end all be all solution by any means.

It may not be an end all be all solution but it seems to me to be a step in the right direction. It is certainly more preferable to me than throwing billions of taxpayer dollars at the problem.

Thanks to everybody for taking the time to respond.

 

[destintide]

It may not be an end all be all solution but it seems to me to be a step in the right direction. It is certainly more preferable to me than throwing billions of taxpayer dollars at the problem.

Thanks to everybody for taking the time to respond.

make no mistake that i am a proponent of modifying the mark to market rules....my point is simply that doing so will not solve the underlying causes to our problems

 

[Linda]

make no mistake that i am a proponent of modifying the mark to market rules....my point is simply that doing so will not solve the underlying causes to our problems

I agree - thanks!!

 

[30ashopper]

From practical point of view it boil down to this. Either you keep mark to market, have all your financials shorted to penny stock, subjected to vicious downgrades, and driven to eventual bankrupcy leading to a vicious long term depression.

IMHO, this has nothing to do with MTM. Financials are falling because nobody knows what's on their balance sheets and we all fear the worst. Asking the banks to define what thier assets are worth through mathamatical models rather than markets isn't going to stop people from wondering so these stocks will continue to fall.

Or, you can suspend mark to market, stabilize your financials, have a stock recovery, and eventually stage a recovery next year.

Doesn't matter to me either way. If M2M remain, I'll keep shorting your financials; after they go bk, I'll move on to short the rest of the market. However, if it get suspended I'll go long on them.

That's the simple choice. Given how ignorant the government is, I feel pretty comfortable shorting until told otherwise.

"your financials"?

You can't short something that has inherent value so "moving on to the rest of the market" isn't plausible. (Unless you have a thing for loosing money. ;-))

 

[rapunzel]

If those opposed to MTM would prefer to state intrinsic value in a down market, would they stick with intrinsic value in a booming market?

Besides, if you are truly a conservative, how can you even say that the market value of an asset shouldn't be tied to the market? That is completely illogical.

The fundamental flaw in that system is demonstrated by a house down the street from me. It was financed a few years ago for $1.1M. It was on the market for ages at $800K. Recently, the bank listed it at just over $200K. It hasn't sold yet. If you are with the bank, how do you value that asset? If you are a potential investor in that bank, how do you want that asset valued?

The problem is that this is going to devastate financial stocks, and people holding those stocks were buying them knowing there was no incentive not to take ridiculous risks for the bankers. Now, that risk-taking is causing a massive loss. Taking out MTM will only serve to draw out the problem, and remove the disincentive to bankers.

 

[Bob]

From practical point of view it boil down to this. Either you keep mark to market, have all your financials shorted to penny stock, subjected to vicious downgrades, and driven to eventual bankrupcy leading to a vicious long term depression.

Or, you can suspend mark to market, stabilize your financials, have a stock recovery, and eventually stage a recovery next year.

Doesn't matter to me either way. If M2M remain, I'll keep shorting your financials; after they go bk, I'll move on to short the rest of the market. However, if it get suspended I'll go long on them.

That's the simple choice. Given how ignorant the government is, I feel pretty comfortable shorting until told otherwise.

spoken like a true patriot