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September 30, 2008

Comments

stevesturm

Mark to market is not an end, it is but a means of having a company fairly report the value of its assets. And as Gingrich points out, it is not a perfect system, as 'value' can be calculated in different ways and MTM can result in assets being carried at less than the PV of its underlying cash flows.

The big problem with MTM, both when assets are appreciating in value and when they're going down, is the income statement contains unrealized profits and losses, and both are subject to manipulation, both on the part of those valuing the assets (as was the case with Enron) and those in a position to adversely affect the value of those assets.

So I'm all in favor of allowing companies to use ANY justifiable method of valuing assets provided they offer full disclosure to investors. If they want to value at purchase, fine. If they want to value at the PV of future cash flows, fine.

Appalled

TM:

The way I understood the stories, the bailout of WaMu hurt the balance sheet of Wachovia, which is why they had to hustle off to Citibank. (Earlier this month, they were considering buying Morgan Stanley.) Is this overstated? (Probably).

Gmax

Blaming the scorekeeper when the game results are not as desired. Trust me, if it were not for mark to market accounting, this problem would still be hidden and festering and sure to cause even greater problems when finally diagnosed.

Solutions, dont listen to smart guys from Manhattan who tell you they can show you how to take a mortgage worth a 100 cents on the dollar and make it worth 105 or 108. They probably did not emphasize how many of those unrated pieces you would have to hold onto, and how much of the risk was loaded on them either. Dont do tranactions that are mindnumbingly complex so as to make it difficult to assess cashflow due to priorities and varying assumptions, and people will always buy cashflow at some discount rate. Thus there never will a thin to nonexistant market.

I once upon a time bought land in great quantities from the RTC. No cashflow on land, but as Will Rogers once said, buy land they dont make it any more. Once it was priced correctly the land moved, and the pricing improved dramatically once it started trading again.

Gmax

What hurt Wachovia more than anything else was an acquisition in 07 off Golden West Financial. Golden West was owned by the Sandlers, and were famous for their "paick your payment " mortgages. Something like 12% of the loan portfolio has defaulted currently.

I think Wachovia was having some runs as well, and note that sub debt holder did not get whacked and Wachovia's holding company was allowed to keep the brokerage company which only has a $2 billion cashflow last year. This was a shotgun marriage to forego any further need for closures for liquidity for awhile, but the delay in Congress action may have made a few more smaller institutions wobble.

Liquidity will improve when confidence increases, and vice versa!

clarice

God bless America! For the third straight day Rasmussen is reporting consumer confidence is UP--It's up to 70.4 today.

Bill in AZ

In the continuing series of "unexpected" headlines, this time from Drudge:

Consumer confidence unexpectedly improves in September...

Jason

Even the Financial Accounting Standards Board’s couldn't figure out how to deal with the mark-to-market accounting shortly after the Enron debacle. Even the Arthur Andersen accounting firm had problems with it which led to its failure too. Enron filed for bankruptcy 2001. The Financial Accounting Standards Board’s has had 7 years and they did nothing. nomedals.blogspot.com

clarice

I have no idea if this is true--it came over the transom from someone I do not know at all but I share it with that caveat:
"European banks are even more overleaveraged that their American counterparts. Part of the reason the Fed rushed to save AIG was that AIG had provided large amounts of "regulatory relief" CDS's to several Eurozone banks so that the banks would have a AAA credit rating, since their deposit to loan ratio was way too low. Now that AIG has been toasted, it is no longer writing the CDS's for the Euro banks, and the chickens have come home to roost across the pond.
This was probably the main reason for Paulson's desperation to get $700 billion from the American taxpayer. Most of the money would have gone to write new CDS's for Euro banks. Admittedly, that would not have been in a straight line (take the mortgages off the books of the big banks so that they can write new CDS's), but the net effect would have been the same. Since the cost of a CDS has gone up so much in the last few months, Paulson's buddies at Goldman Sachs would have made a killing - until the Euro banks defaulted anyway and then Paulson would be back asking for $7 trillion!"


Gmax

FAS 157 took effect for year beginning after November 2007, it had nothing to do with Enron.

Enlightened

"The Financial Accounting Standards Board’s has had 7 years and they did nothing."

Precisely. And the republicans have got to stop blaming the democrats for the situation we are in.

Yes, they pointed out many times the impending disaster of FFMac/s, but as the econo-heads start sorting out this mess, it is becoming more apparent that stop gaps could have been implemented - and that they did not need congress to implement. So yeah - the repubs were onto the mess - but still did nothing! They blame the dems for voting all the bills down - and so just shrug your shoulders and scurry off? Why didn't ANYONE scream at the top of their lungs that we are in trouble? They all deserve the scorn being heaped on them.

Barney Frank

FAS 157 took effect for year beginning after November 2007

I know correlation doesn't necessarily indicate causation but isn't that just about the same time this fnancial meltdown started glowing cherry red?

Enlightened

"Enron incorporated “mark-to-market accounting” for the energy trading business in the mid-1990s and used it on an unprecedented scale for its trading transactions. Under mark-to-market rules, whenever companies have outstanding energy-related or other derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular quarter, they must adjust them to fair market value, booking unrealized gains or losses to the income statement of the period. A difficulty with application of these rules in accounting for long-term futures contracts in commodities such as gas is that there are often no quoted prices upon which to base valuations. Companies having these types of derivative instruments are free to develop and use discretionary valuation models based on their own assumptions and methods.

The Financial Accounting Standards Board’s (FASB) emerging issues task force has debated the subject of how to value and disclose energy-related contracts for several years. It has been able to conclude only that a one-size-fits-all approach will not work and that to require companies to disclose all of the assumptions and estimates underlying earnings would produce disclosures that were so voluminous they would be of little value. For a company such as Enron, under continuous pressure to beat earnings estimates, it is possible that valuation estimates might have considerably overstated earnings. Furthermore, unrealized trading gains accounted for slightly more than half of the company’s $1.41 billion reported pretax profit for 2000 and about one-third of its reported pretax profit for 1999.

http://www.aicpa.org/PUBS/jofa/apr2002/thomas.htm

Gmax

When you started seeing the glow?

If early warning allows correction, dont put sunglasses on and miss the glow.

Perhaps if it had been in place back in 2006, we would have gotten early enough warning to notice the liar loans of 2006 were an especially noxious brew.

Enlightened

"FAS 157 took effect for year beginning after November 2007

Wouldn't that be this coming November?

Gmax

Enlightened that was for trading accts, which have always been either market or lower of cost or market. Its not the subject of FAS 157, and the issue with Enron was that they just made a few things up. "Lying" where I came from.

Gmax

NO most companies are calendar year ends. So their year began Jan 1 2008. And wierdo company that runs Dec 1 to Nov 30 would be too. Those companies with fiscal years beginning prior to December 2007 might still not be subject.

Of course early voluntary adoption is always allowed and if anyone had gains, they probably did early adopt so they could book them.

Sara (Pal2Pal)

However, if the problem is a lack of investor confidence

Don't make fun of me if this is a really dumb question, but could someone explain to me the difference, in real terms, between investor confidence and consumer confidence. The report today is that consumer confidence is at a high of over 70%.

Rick Ballard

Clarice,

That over the transom piece sounds like the end of a game of telephone. There are some Euro banks which are leveraged more highly that WaMu or Wachovia (assets around 12 X equity) but very few at the 30 X equity of our masterful investment banks (the ones which are still alive, at any rate). For example - Wells Fargo has an asset/equity ratio of 12, Goldman Sachs is 33 and Morgan Stanley is 26.

AIG may well have sold CDS paper spinning Eurodross into gold but how does the $700B force our brilliant investment bankers to write more idiotic CDS trash? I don't think even the dumbest of the Ivy League trained nincompoops will sit on that stove for again. A least not for a little while.

hrtshpdbox

"European banks are even more overleaveraged that their American counterparts."

Probably one of the reasons that the dollar continues to soar despite lack of clarity about our banking system's fate; relatively, the situation is worse elsewhere.

Gmax

I think both GS and MS have delevered for months, the bond business sucked and that is where a lot of the high leverage went. I cant put my hands on it right at the moment, but I saw a chart on Tier 1 capital ratio, and GS lead the pack with the highest capital ratio when compared to MS and the big 4 banks, Citi, JPMChase, BAC and Wells Fargo.

If I find it I will see about a link. But I think its right.

Gmax

September 21 2008 Press Release from Goldman Sachs:

We have maintained our Tier 1 capital levels well above the Federal Reserve’s “well-capitalized” threshold of 6 percent since these ratios were first calculated in 2004. For the past several quarters, in light of the difficult market environment, we have been reducing our risk exposures and increasing our capitalization. Our Tier 1 capital ratio at the end of the third quarter was 11.6 percent.

clarice

I put not much stock in it , Rick. OTOH last night I heard some credible complaints that Paulson appeared to be acting in a way most helpful to his old firm GS. Indeed, GS's connections to DC are increasingly sticky.

Gmax

Guess who might be poised for some vulture purchasing once the Congress gets done whatever they are going to do? Almost 12% capital means leverage of only 8.5 to 1. Plenty of room to add a few well priced morsels.

jimmyk

However, if the problem is a lack of investor confidence, increasing the opacity of financial reporting will not restore that confidence.

Can't we separate reporting the information from basing regulatory requirements on it? One of the big issues with MTM, as I understand it, is the requirement to act on it. It would be possible to suspend MTM for the purposes of capital requirements and still maintain it for transparency purposes. Two sets of accounts, in effect. Businesses do this with depreciation--one set of numbers for tax purposes, another set for establishing book values. Then we'd get the best of both worlds.

MAM

It seems a little strange to be discussing these options for federal intervention when in two days approximately $2T moved on the market. I wonder what this amount of money moving around signifies about the amount of private investment capital available.

One thought that comes to mind is to encourage private capital to take over the "bad" debts with some combination of insurance/guarantee, or even a capital gains tax holiday, provided in the short term by the federal government to support private capital's takeover of these "bad" assets. One thing is sure, the federal government is not equipped to properly valuate and service these assets; it is virtually guaranteed that the federal government will lose money on this bailout.

No amount of manipulation of the capital markets is going to sustain the "recovery" unless the underlying disfunctions introduced by Congress and the Executive are removed.

This is what I call trying to squeeze jello: you can keep it from coming out in one place, bit it oozes or squirts out somewhere else. The only fix for this kind of situation is to either fix it fundamentally, or to let it fix itself, i.e. let the bankruptcies occur.

In any case, the capital markets have been highly distorted by the Government through regulations, taxes, etc. and a correction is needed. At some point, whether this year or in the future, the correction will take place. The lack of political will, due in part to the voting habits of the target groups to which the politicians are pandering to with "affordable" housing initiatives, will be the cause of the collapse.

More regulations are not the key, as the collapse of the well regulated economies of the USSR and Warsaw Pact countries are a prime example. The rebound of those countries and their economies, primarily due to free market principles, should be instructive to those advocating this bailout.

Rick Ballard

Clarice,

The $85B loaned on the AIG deal stinks to high heaven. I foresee some very uncomfortable questioning in Paulson's future. I think that the "it's good to be king - and unsueable" language that he originally proposed was a type of cover for what he had done on AIG. GS should be put through a wringer concerning their exposure to AIG prior to that loan and the use of the loan proceeds examined as carefully as Enron's books. The CDS Whorehouse & Casino needs to close up shop. Too many customers are dieing of CDS pox.

Gmax

Suspend mark to market for just regulatory purposes. Sounds like the old FSLIC GAAP versus RAP ( Regulatory Accounting Principles ). Despite not fooling anyone, it ultimately brought great derision. We used to call it CRAP ( creative regulatory accounting principles ). And it will be CRAP again if brought back.

SteveMG

Apparently the SEC is clarifying this matter: Mark-to-Market Change.

"When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

Won't hurt.


matt

One of the fundamental issues is that you have lawyers deciding financial and accounting policy. Gingrich is a historian and politician. Limbaugh is a sports radio guy who got a talk show going. So far, the dialog has been overwhelmend by them, Nancy, Harry, Barney etc al who have virtually zero market experience.

If your tooth hurts, you find a good dentist. If you car is broken you find a good mechanic. I could say the same about economists fixing an economy, but they typically can't argue themselves out of a paper bag. You need the money guys in the game with a bunch of green eyeshade accountants watching over them....and let the lawyers in at the last minute to make sure it's legal.

Charlie (Colorado)

I could say the same about economists fixing an economy, but they typically can't argue themselves out of a paper bag.

I think I said this elsewhere in a comment, but I like it so I'm going to say it again.

Asking academic economists about this is like asking a collection of priests about the advantages of doggy-style over cowgirl and missionary for the woman's pleasure.

I'd rather ask an old whole like Paulson who had actual experience with the issue.

jimmyk

Despite not fooling anyone, it ultimately brought great derision. We used to call it CRAP (creative regulatory accounting principles).

The point is not to fool anyone. The point is accuracy. MTM can be misleading in a crisis. What I was suggesting does not disregard or conceal the market information, but doesn't force business to act on it when it may be counterproductive. But I guess a cute acronym is one notion of a persuasive argument.

bunky

Suspend mark to market.

Change of subject: The right in the media, esp. Fox are a bunch of p---ies. Does anybody else feel like me in that Palin was a great pick? I still think she is. WTF happened with these guys? She effs up a question here and there and they all jump overboard. pathetic. I must be way out of it gang.

Just remember all of this behavior when you watch these guys over the next four years. They'll all be bitching about Obama and they helped put him in the WH with their double standards. Sammons just defended Biden's gaffes because he is "avuncular."

TGO

Does anybody else feel like me in that Palin was a great pick?

You're not alone. Democrats wake up every day giddy that McCain put her on the ticket.

hrtshpdbox

"Just remember all of this behavior when you watch these guys over the next four years."

I'm tired of all of them, tonight even Krauthammer went out of his way to deride Palin. Sammons is a waste. Shepherd Smith is impossible to listen to, he lights up with glee over any Republican setback. Chris Wallace has worn out his welcome, too, as far as I'm concerned. Hannity is embarrassing, I can't believe he made it through high school. The biggest joke, of course, is the execrable Bill O'Reilly.

Sara (Pal2Pal)

Statement by McCain-Palin senior policy adviser Doug Holtz-Eakin on the SEC's plan to relax mark-to-market accounting requirements:

'John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets. In March, John McCain called for a meeting of accounting professionals to discuss whether mark-to-market accounting was magnifying problems in the financial markets.'
TGO

Sarah in the Oval Office would do more damage to this country than OBL could have ever hoped to.

JM Hanes

Barney:

"I know correlation doesn't necessarily indicate causation but isn't that just about the same time this fnancial meltdown started glowing cherry red?"

You'll want to check out TM's link in Drill, Baby, Drill!

sbw

Avuncular? Too bad. It's not treatable.

sbw

Sarah Palin will do just fine, thank you. She'll stand tall particularly in a situation like D.C. where the yardstick is so short.

madawaskan

You mean Newt Gingrich the guy that squandered a Republican majority in the House,

after FIFTY years?

That guy.

The guy that's screaming for Paulson's head because he -Newt Gingrich- has a degree in history and knows better?

That's what the country needs right now-

fear and no confidence.

One thing you can say about Newt Gingrich he sure does know how to ride the beast of populism.


PeterUK

"You're not alone. Democrats wake up every day giddy that McCain put her on the ticket."

That is just the effects of the cranial liposuction,you'll get used to it.

PeterUK

Barrack Hussein Obama in the Oval Office would do more damage to this country than Fidel Castro could have ever hoped to.

MikeS

Doggy has advantages over cowgirl?

ex-democrat

"Sarah in the Oval Office would do more damage to this country than OBL could have ever hoped to."

i really wish you knew how ridiculous you sound

sbw

Sigh. Time to add another entry to trollblocker. PDNFTT.

Barney Frank

You'll want to check out TM's link in Drill, Baby, Drill!

Saw it JM. But the corollary to 'correlation does not necessarily imply causation' might be stated 'the closer the corollaries are in substance the liklier causation exists'.

Comparing Jann Wenners flunkies musical tastes to US oil production is not germane and obviously spurious.
If TM posted a graph correlating Rolling Stone subscription rates by cohort to, oh say, recreational drug use I'd be considerably less inclined to dismiss the correlation.

Bill in AZ

You're not alone. Democrats wake up every day giddy that McCain put her on the ticket.

Yep - a lot of dems are voting for McCain/Palin.

DebinNC

Dave Ramsey: Commom Sense Fix [see #2]

1) Insurance
2) Mark to market
3) Capital gains tax

glasater

Just hear a quick bit on Kudlow saying the Senate will vote on the same bill as the House tomorrow night.

A couple of additions/provisions-and one that I completely don't understand unless I heard wrong was--mental parity.

What in the world is that?

Sara (Pal2Pal)

"Sarah in the Oval Office would do more damage to this country than OBL could have ever hoped to."

i really wish you knew how ridiculous you sound

More On Pakistan Awakening

Aaaah, give the poor acokyte a break, More On Pakistan Awakening">he is being left out on a limb, while his cohorts join the good guys.

TGO

mental parity

Parity in mental health coverage? I guess we're all gonna need ssri's after this bill passes.

Neo

I'm sure the oil companies like "mark to market" as it lets them take big profits while blaming the accounting system .. the reverse of MBS market.

DebinNC

Parity in coverage of illnesses

PeterUK

The back story on mark to market There appears to be an international agreement.

Neo
ARLINGTON, VA -- Today, Doug Holtz-Eakin, McCain-Palin 2008 Senior Policy Adviser, issued the following statement on the SEC's plan to relax mark-to-market accounting requirements:

"John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets. In March, John McCain called for a meeting of accounting professionals to discuss whether mark-to-market accounting was magnifying problems in the financial markets."

Background:

In March, John McCain Called For A Meeting Of Accounting Professionals To Analyze The Current Mark To Market Accounting Systems. "[I]t is time to convene a meeting of the nation's accounting professionals to discuss the current mark to market accounting systems. We are witnessing an unprecedented situation as banks and investors try to determine the appropriate value of the assets they are holding and there is widespread concern that this approach is exacerbating the credit crunch." (John McCain, Remarks, Santa Ana, CA, 3/25/08)

srp

Tomorrow we are having a "town meeting" on the financial crisis at the business school. (It also naturally came up on the first day of my corporate strategy class yesterday. I normally try to stick to my syllabus but this stuff was just unavoidable given the topic of current valuation vs. realized long-term payoff.)

Some points I learned in lunchtime discussion with other faculty (a number of whom have significant market experience):

1) A big part of the problem in the banking system has nothing to do with exotic securities. Banks are sitting with large piles of whole loans whose payback rates are questionable or uncertain.

2) The TARP plan probably cannot work with MTM accounting in place unless Treasury "overpays" because at low prices all the unsold stuff gets marked down and institutions become regulatorily insolvent.

3) The financial system does not really need more capital. The problem is that it has too much debt. One simple but drastic solution: The government forces a restructuring that converts debt to equity in all the troubled institutions at one time, wiping out existing equity and less-senior creditors.
Fly in the ointment a): Foreign debtholders (especially sovereign ones) may get so pissed off that we can't borrow in the future, so we might have to pay them off another way or make the deal pretty sweet. Fly in the ointment b): Healthy firms might get sucked into this scheme, screwing over the equity owners and deterring future investment in the financial sector for a very long time.

More fun from the ivory tower.

Jane

Interesting article from 2006 on ACORN

matt

Palin came into this as a 2 year governor, and is now expected by all to be a Washington know it all. I would much prefer that she answer by saying that she will have some of the best advisors in the world and that she really doesn't know how spell that Iranian a**hole's name.

heck, them furriners are always changing their spellings anyway. Beijing- Peking - Pekin...etc....Osama, Usama...make up yer minds....

Jane

Oops - LUN

ex-democrat

some euros get it (or part of it, at least). LUN

matt

how do you turn debt that no one really knows what the value of into anything except frozen debt? That is the crux of the Wall Street issue right now. There are thousands of homes in forclosure, plus more on short sales and in pre-forclosure. No one knows if these are going to be worth a dime on the dollar or 70 cents on the dollar.

Further affecting this will be the level of maintenance of vacant properties affecting their resale values. As one with a family member in real estate, a lot of the properties are distressed, and the banks are not maintaining them. Until a market for the debt, and for the underlying homes themselves takes shape that is the $64 question.

sbw

Parity on Mental Illness.

The problem is deciding what is, in fact, mental illness. And once you have decided that something is mental illness. The problem is deciding how to treat it. And after you decide how to treat it, the problem is deciding when someone is cured.

All of that, of course, is complicated by the fact that the people who are deciding how to answer those questions are not paying for the treatment. And neither are the people who are voting to re-elect the politicians who stuff it into legislation.

Health care is the single most expensive item in my business. Money that goes into health care does not go into salaries.

The price signals are missing, and no one seems to care.

DebinNC

Plan for the Senate to vote on the House bailout bill tomorrow night; NRO

JM Hanes

glasater: "mental parity"

Just one more thing that Democrats think government can bestow.

bunky

The Obama revolution spreads: Gorbachev is forming a new party in Russia.

TGO

The price signals are missing, and no one seems to care.

And health insurance in general is fraught with disincentives. We also need a supply-side solution since more doctors would get prices down in a hurry.

Sara (Pal2Pal)

As one with a family member in real estate, a lot of the properties are distressed, and the banks are not maintaining them.

This, according to my daughter, is why her property management business is thriving, while the real estate side is tanking.

Property owners/holders are renting at bargain prices in her badly hit real estate market because it is better to have someone living in the property rather have it sit empty and abandoned. She says one guy told her that even the worst renter can't do as much damage as one night of vandalism on an empty house.

bunky

Watching some of the right leaning media, does anybody get the feeling there is a healthy dose of self loathing regarding Palin?

PS: I mean these guys can never pine for flyover country again with a straight face. Sad really, esp. Krauthammer.

TGO

This must make you all so very very proud.

link

DJH

Palin is a governor. We're supposed to like these because they're not Congress. Bush was a governor.

Palin said he'd been in office for 40 years, she meant term limits. Congress hates term limits.

She doesn't make her living on foreign aid, like Obama and Biden.

She's going to cut foreign aid and open up Congress and federal jobs by term limiting them, which is what we need. Anyone can become a Congressmen or work for the Federal government. America has needed this for a long time and we might become what we tell everyone we are.

srp

Matt: We're not talking about turning the individual mortgages into equity. We're talking about insolvent institutions that owe money to others. Fly in the ointment c) is that many of the banks that could be in trouble don't really have any creditors other than their depositors. With FDIC insurance, that would effectively make the government the creditor in extremis. (I don't think a lot of people would be happy hearing that the cash in their accoutn had been swapped for bank stock.)

sbw

M. Simon, Rather than Hypocrite, I think a better tag for the ads is:

Obama -- Ideas that never worked and never will.

ex-democrat

This is way OT but i'd be interested in the reactions of other JOMers to the video linked under my nom de plume

TGO

I think a better tag for the ads is:

McCain -- Ideas? Never had 'em, never will, my friends.

sbw

Ex-Democrat --

Obama jugend. Reminds me of "Tomorrow belongs to me" from Caberet.

Scary. Perverted.

srp

BTW, apparently non-financial companies are NOT facing the contagious doom being pressed upon us by the Wall Streeters:

http://www.bloomberg.com/apps/news?pid=20601109&sid=aAHCiRX_cqUo&refer=news

Lend away!

Chris

MTM relief would have been extremely helpful earlier this year. Now? Who knows? but it's worth a shot if it helps keep another bank from being unnecessarily liquidated. Funny that McCain was on it back in March. I'm sure BO was, as well. Or maybe he was waiting for someone, anyone (Hello, Harry?), to call him.

The FDIC insurance bump is very helpful and now we learn that it was stripped out of the bill by Pelosi before yesterday's vote. Why? BO said today he's for it.

In other news, CNN talking heads and TNR editors think Palin will blow it Thursday night. Should be a good one. Expect the gloves to come off.

Chris

ex,
That video is creepy, in extremis. Scarier still are the adults who think that stuff is helpful and are more than happy to use kids for their propaganda.

Life in Venice must be truly disheartening.

MayBee

You really have to read the background information that goes with the video. Those people really felt like they were Doing Something ™.
It reads like a Christopher Guest political parody.

TGO

MTM relief would have been extremely helpful earlier this year.

Yeah, the whole 'creative accounting' thing worked really well for Enron and Worldcom. Investors just love opacity and will enthusiastically bid up the stock of companies that engage in it.

bgates

One good thing about that video - with about 3500 votes, its approval rating is about 1.5 out of 5 stars.

clarice

TCO, I think Palin was remarkably well-contained in the face of Couric's unwarranted snottiness. If she asked ME what papers Iread, I'd say all of them--because I do--I read coverage from all over on issues of interest to me--that is to say, not who's doing what to whom on The View or what Krugman said today, but on issues of concern to me I read stuff from all around the world.

Captain Hate

ex,

I (and some familiar commentors) have some comments at Roger Simon's blog that you can click my nom-de-cyberplume to view regarding the creepy vid. Strangely enough, even the trolls that Roger usually draws aren't even trying to gloss it over.

bmeuppls

I posted this over at Megan's site on September 16th... now reading the link above I think I had a better handle on this mess than most economists much earlier...

What effect did the Basel Accords have on the underlying fundamentals that have come into play in this market? I was doing IT for a bank converting to these standards, and it was obvious that they had a poor grasp of the definition of how to go about the reclassification of their existing tranches to the Basel initiatives. They had begun reporting on the first Basel Accord standards and were still deciphering how to implement the second. Interestingly, the IBM SMEs they brought in to assist in the deciphering produced an incoherent and ungainly mess. I understood from reading the Accords in comparison to the Federal standards that they were more "nuanced" and seemed to generally require the banks to actually revalue their holdings to a more stringent reserve/risk requirement. But I could be wrong.

I AM just a lowly IT professional attempting to decipher the complexities of banking and finance regulations to produce data sets that have meaning - with conflicting meanings of what the proper tranch level and value of IS is.

Seems to me over-complication and silly word games killed the goose, but that's just me.

TGO

I think Palin was remarkably well-contained

Exactly the term I would use- 'contained'.

Palin was 'contained' by Katie Couric- that should tell you something right there.

bmeuppls

I thought that ass was banned...
Can I get a link to the trollhammer for this site?

Extraneus

It's a religion, ex. Who's to say someone else's religion is creepy?

Palin came into this as a 2 year governor, and is now expected by all to be a Washington know it all. I would much prefer that she answer by saying that she will have some of the best advisors in the world and that she really doesn't know how spell that Iranian a**hole's name.

Agree 100%, matt. All she had to do with Couric is say "I don't have any significant foreign policy experience, but I'm studying up on it. Fortunately, I have the master as a teacher. Meanwhile, Senator McCain has been looking to me for advice on other areas such as energy independence and government reform, and I'd be happy to talk about those areas if you're interested."

Simple as that, even Thursday.

Chris

Yeah, the whole 'creative accounting' thing worked really well for Enron and Worldcom. Investors just love opacity and will enthusiastically bid up the stock of companies that engage in it.


Posted by: TGO | September 30, 2008 at 09:17 PM

We're not talking about creativity, TCO. We're talking about using GAAP to properly value a debt instrument. Just because the market isn't willing to buy something today doesn't mean there isn't an underlying value. If your neighbor can't get a bid on his home does that make yours (and his) worthless? Markets are perfect, over the long term. In the short run, they can be very irrational both on the upside and the downside.

A pool of mortgages has a cashflow and an expected payoff date. From that and some other inputs you can derive a fair value. If bigbank X has 100 miilion in MBS's paying $300,000/month, albeit with a substantial # of defaults, is it really worthless or nearly so? If X must carry that on the balance sheet at or near zero, then it certainly reduces their ability to extend lines of credit and make further loans to people/businesses with even good credit.

So nobody is suggesting Enron as a solution. What they are suggesting is coming up with a means to fairly value a rather esoteric instrument.

TGO

Simple as that, even Thursday.

That'll make for a pretty short debate. But I'm guessing the Dems will be more than happy if she tries it- the resulting ad campaign practically writes itself.

centralcal

bemuppls: He (TCO) is homeless. He just keeps coming back. A masochist, I guess. Unwanted. Unloved. Unpersuasive. Uneducated.

M. Simon

Clarice,

WSJ Market Watch.

An excerpt from "The Best Congress..." with a link.

Again: many thanks for the kick in the pants.

Simon

TGO

If your neighbor can't get a bid on his home does that make yours (and his) worthless?

I think it does- if you can't even get a bid of $1, chances are that the house has a lien and is actually worthless.

If your neighbor is only accepting bids of $600k or more and the neighborhood only warrants a $200k price tag, the problem isn't market failure, it's just an unrealistic valuation being demanded by the seller.

I think the whole MTM ploy is just a contrivance to keep holders of this crap from collapsing on the first day Paulson starts buying. Once buying starts and the real prices on this stuff is established, the fantasy numbers go 'poof', and the dream is over. After Paulson buys 1 CDO, everyone holding similar CDO's will be crushed by true MTM rules.

The only way to keep the house of cards from collapsing as the treasury brings price discovery to the markets is to allow banks/etc the conceit of ignoring the newly discovered valuations.

clarice

You're welcome, M Simon.

TGO

Unwanted. Unloved. Unpersuasive. Uneducated.

Unimpressed.

Barney Frank

We're not talking about creativity, TCO.

Please note I am not FTT, but TGO and TCO2 et al are not TCO.

Pofarmer

2) The TARP plan probably cannot work with MTM accounting in place unless Treasury "overpays" because at low prices all the unsold stuff gets marked down and institutions become regulatorily insolvent.

Unintended consequences. That's why Paulson wanted one big bite.

Let's just kill this sucker.

KILL BILL.

I like it.

Charlie (Colorado)

old whole like Paulson

"old whore like Paulson."

I hate when I typo the punchline.

Chris

TGO,
Reverting to non sequiters, I see. There are plenty of homes not getting bids currently. They don't all have liens and they aren't all three times overpriced. There is a buyers strike in many areas, including for MBS. Will that be the situation once the credit crunch passes and banks start making prudent loans again? Of course not.

You are truly uninformed on this matter or deliberately obtuse. Are you hoping that the "crisis" continues long enough to get your guy elected? Heavens no, I'm sure. The left would never cheer economic turmoil. Ask Nan.

glasnost

I agree with Tom. And I notice how polite he is when he's pointing out the the favorite free-market solution du jour would make the problem *worse*, rather than better.

Next you might even opine on the value of suspending the capital gains tax, huh? *That* will sure help ... stop this... uncontrolled sell-off of assets... won't it.. oh wait. No. It will do the exact opposite.

Isn't it embarassing for you to be on the same side as these drooling idiots, Tom?

Charlie (Colorado)

2) The TARP plan probably cannot work with MTM accounting in place unless Treasury "overpays" because at low prices all the unsold stuff gets marked down and institutions become regulatorily insolvent.

Um, sorry, but, well, duh!

Right now, with no buyers, these securities are valued at zero!

Pay anything for them and you're "overpaying".

Of course, make a market, with an auction, and they're automagically recover a value.

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