Did Mark-to-Market Create a Phony Banking Crisis?

The Fix Is In

Last spring, the banks and the Feds had a clear choice:

A) leave M2M as-is, and allow all these securities to be valued at "???" (which essentially means ZERO) then act as if the sky was falling, scream bloody murder, "too big to fail", etc, and get a huge chunk of free taxpayer money AND have the government take the worst assets off your books. Gratis.

-or-

B) let M2M be amended to something more sane, allow the assets to be properly valued, but lose anywhere from 20-50% because you made bad business decisions.

Hmmm... I know which one I'd choose.

ed of NY @ Mar 19, 2009 23:08:00 PM

Izak

I think the flaw here is that if you can hold until the asset runs off (To the maturity

of all of its parts)it is worth more than if you have to sell it under the hammer.

For example if you get a margin call when you have borrowed against it. Problem is I agree with you if it gets low enough someone will buy it. And so we have the vulture funds like Buffet who will buy assets of banks but not banks.And of course he is right and so are you. My point is that m2m exacerbates the problem.

The cash question is a fact that can be measured. If it stops or slows the value of the asset must be concurrently reduced on the balance sheet and that reduction hits the P and L.

FASB will look at this and hopefully they will modify the m2m rules to the benefit of

the investor clarity and reality.

nspart of HI @ Mar 19, 2009 20:55:55 PM

This is not a Phony Banking Crisis

Don't take anyone seriously who suggests this is a phony bank crisis - it is for real. Creative accounting ideas to hide the risk of rigged gambling operations are a joke. To show the inflated assets without the liabilities is fraud.

The banks have brought this on themselves for reckless investing and being grossly over leveraged. For sure, the suspension of any enforcement by watchdog agencies were key accomplices. While some think its OK to hide severe risks behind the chances of government bailouts, its not.

These advocates of Casino Economics will say anything to further their fiction, but they are essentially defending fraud.

Excuse me if its almost unreal for folks like you to keep defending Madoff capitalism.

Paul of WA @ Mar 19, 2009 17:54:28 PM

There is a market for CDO's

it is just a distressed market.

The question is, is the market irrationally distressed or are foreclosures and mortgage defaults a reasonable expectation. Were these CDO's created and rated using an incorrect model? (Historical foreclosure rates where the lending agency held the mortgage vs. current foreclosure rates for mortgages where the lending agency was able to repackage and sell them).

If CDO's are irrationally distressed and enough people (aside from the financial institutions holding these CDO's) believe that the value is artificially depressed, people will buy them and the price will increase.

I think here, the key is "As long as the cash flow continues." No one is betting that this cash flow will be long term.

As far as insurance and credit protection, we're sunk. AIG over-extended itself. Any insurance payouts coming from AIG at this point is taxpayer money. Privatizing gains, while making debt public is not capitalism.

Maybe I am missing something, if so I welcome clarification.

Izak of CA @ Mar 19, 2009 12:34:21 PM

M2M exacerbated this crises

m2m simply does not work in valuing an asset w/o a market.

The key is the cash flow of the asset. You can't fake cash flow.

It does not rely on a CEO or CFO saying what an asset is worth.

As long as the cash flow continues the asset is worth the discounted

value of that stream of cash. That is the simple principle. Muser is right

(for a change)modified m2m is needed. Accountants will have to work for their fees.

nspart of NM @ Mar 19, 2009 00:30:14 AM

Ummm...what is this credit protection?

"(since super seniors have AAA-rated subordinated senior tranches offering credit protection there is no chance the losses will wipe them out and get to the super senior)"

Are you talking about CDS derivatives made by AIG perhaps? Or is there some other super-secret voodoo behind this credit protection.

Regarding Mark-to-Market, how else do you value an asset? Let the holder determine the value?

If these assets are undervalued, buy them! You will be getting a deal. As far as I can tell, GB of CA is correct. Mark-to-Market uncovered this mess. If this isn't the case, please detail why these assets are undervalued by the market. The "insurance" is a taxpayer subsidy at this point.

Izak of CA @ Mar 18, 2009 19:06:21 PM

Mark-To-Market

Nope, Mark-To-Market didn't create a phoney banking crisis, it uncovered it.

GB of CA @ Mar 18, 2009 18:14:27 PM