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Apr 5, 2008 2:35 pm

Banks are supposed to mark their assets/liabilities to market; i.e., mark-to-market.

 
However, the SEC has given them an "out" for not doing so. That "out" is if the price of that asset/liability is the result of a forced liquidation or distress sale. If the markets are not "orderly", then the bank can use "unobservable inputs which reflect assumptions of what market participants would use in pricing the asset/liability".
 
www.sec.gov/divisions/corpfin/guidance/fairvalueltr0308.htm
 
So, what constitutes an "orderly" market? Would you rather invest based on "current" value or "hope everything returns to normal someday" value? Why not have the same policy for "bubble" economies?
 
I admit that there are compelling arguments for ignoring prices during "unusual" market conditions. But who's to say that those conditions will end and return to the previous "normal" levels? Does anyone see the opportunity for abuse, by corporate officers? 
 
Would you rather pay $5/share for bank stock containing "mark-to-market" assets/liabilities or pay $50/share for bank stock with "assumed value" assets/liabilities?
Apr 5, 2008 4:10 pm

It is not assumed value.  When there is no bid, banks can mark at par instead of guessing which is what they are doing.  If you own a $200m home, and owe $160m to the bank for it, you do not have to mark this asset to market everyday.  In fact, as long as you are not selling and can make the payment, it does not matter what the appraised value is.  If no one would be willing to make an offer on your home (your not selling anyway), would it be fair to you to value the home at some guesstimated price and have to make up the difference in appraised value and loan balance to the bank?  This is what banks are having to do.  This is a crisis of liquidity.  Banks are withdrawing liquidity, because they have to mark to these assets to market, therefore no liquidity is available in the market for these securities, driving down the guesstimate, banks withdraw more liquidity because they have mark these assets to market, taking even more liquidity out of the market, driving down the guess...... you get the idea.  If a bank actually need to sell the asset (and can) then they would have to take the hit to the balance sheet.  Why should they have too before?

Apr 5, 2008 4:32 pm

Take a look at John Mauldin's "Thoughts From The Frontline", he explains it better than I ever could.

Apr 5, 2008 6:42 pm
Bluetang:

  If a bank actually need to sell the asset (and can) then they would have to take the hit to the balance sheet.  Why should they have too before?

 
Because the alternative is ripe for the possibility for fraud. Just ask any investor and/or employee of Bear Stearns, Enron, Worldcom, etc. if transparent financials are important. Also, do you really think that banks will resume lending to each other with this new ruling?
 
Besides, your question presumes the return to a "normal" market. When will that happen? Everyone agrees that we went through a real estate bubble. That fact implies that anything resembling a "normal" real estate market will be valued considerable less than that of the bubble. Maybe, 20-30% less. Of course, the Fed could always inflate our way back to "pre-chaos" pricing levels and everything would be peachy-keen. (Of course, bread will be $15 / loaf, but Bernanke will get a big pat on the back for averting a disaster.) 
 
 
Apr 5, 2008 7:08 pm

There is a huge difference between this new ruling and Enron.  The assets are still on the balance sheet and can be monitored.  This rule would have at the least delayed Bear collapse (maybe they could have negotiated a better deal) and probably prevented Bear from going under.  Did the bad assets at Bear decline in price dramatically in 3 days and Bear collapsed?  No.  Confidence in Bear fell and they had a major run on deposits, pulling them under the debt coverage requirements.  The Fed did this same thing in the early 80's with Latin American (AAA rated) paper, allowing banks to write down assets over time and preventing a collapse of the financial system.  A normal market never returned in Latin American paper, and may not this time with the nuclear waste on the books.  But this ruling allows banks to write down over time, mitigating the damage.

Apr 5, 2008 7:57 pm

Bluetang:

But this ruling allows banks to write down over time, mitigating the damage.
 
I disagree. You're not "mitigating" the damage. You're transferring the loss (i.e. risk) onto investors by covering it up.
 
It's amazing. Everytime these big financial fiascos erupt, they usually involve the same players, decade after decade. And these same players get bailed-out by the taxpayer. But yet, everyone is surprised when another fiasco involving these same players erupts. No wonder we see a repeat of these schemes, decade after decade.  
 
Apr 5, 2008 8:20 pm

Dobe - Please have Joe introduce you to his Russian 'hair salon'.



I remember a few weeks ago we were talking about the 'kitchen sink' theory on CNBC. That was that because the market is accepting losses and writeoffs right now, the CEO's and risk managers of these same companies would be writing off everything and anything they thought had or could have a problem. This way when the asset begins to perform down the road they could book the income as a gain & look like heroes.



How else would you like them to value it? If there's no market for something, there's no indication for what the price on that thing could be. If these are all marked down to $.05 on the dollar, would that make you happy? That action would likely mean a global crisis on a level we've never experienced before. These things are worth less now than they were a year or two ago. So are muni's and high yield corporates. This isn't because they're all worthless(in 2002 high yield was marked down dramatically but didn't experience more than 7% defaults.) The market overreacts. This allows institutions to have discretion on marking the assets. Is this a problem, yes. It's absolutely the problem because there's not a uniform method to mark things & this is at the very heart of the crisis. This is why the fed is being so creative w/ term credit facilities & so loose w/ the discount rate. At the same time they've lowered the fed funds rate so these institutions don't have to pay much to savers(this, I believe, is also a huge a problem).





Rotten milk will always remain rotten milk, I agree. There's no reason to distrust milk within the sell by date, though. Allow the markets to correct. Provide confidence for your clients. Let's all make some money.

Apr 5, 2008 8:21 pm

I think many investors in banking stocks from the early 80's would disagree that mitigating the losses is not the best route to take.  Would it be better if we were not in this postion, absolutely, but we have to play the cards we have been dealt.  Love your tag line BTW doberman.

Apr 5, 2008 8:31 pm

Isn't it entirely possible that after all of these "write downs" companies are taking, that there could actually be "write ups"? 

Apr 6, 2008 1:58 pm
Ashland:

Dobe - Please have Joe introduce you to his Russian 'hair salon'.


Not sure what you mean by Russian "hair salon".

How else would you like them to value it?


At the market.
 
If there's no market for something, there's no indication for what the price on that thing could be. If these are all marked down to $.05 on the dollar, would that make you happy?
 
Yes, but a penny would be better.
 
That action would likely mean a global crisis on a level we've never experienced before.
 
That is an assumption. But even if true, you would prefer we not know about it? There are only two ways to get out from under this problem:
 
-Take the hit, financially punish those responsible, create new investment opportunities.
-Cover it up and inflate our way out of it.
 
This is why the fed is being so creative w/ term credit facilities & so loose w/ the discount rate.
 
The Fed can afford to be creative, since it isn't their money they're dealing with.   

Allow the markets to correct. Provide confidence for your clients. Let's all make some money.
 
My plan would allow the markets to correct, punish those who are responsible, and provide opportunities for those savvy enough to pick-up some cheap assets. Otherwise, it's corporate welfare.

 
With all due respect, y'all are not being consistent. If you were in the market for a house, would you pay the current (discounted) offering price or the price that was offered a year ago? Would you overpay for a share of stock in a bank with overvalued assets? Would you buy their bonds? What about any company with overvalued assets? Could you recommend this type of stock/bond to your clients? Should the Fed have propped-up internet stocks, when they fell? How about the Fed just guarantee a floor on the market, so nobody loses money?
 
Just call me a financial Darwinist. Hey, that's what made this country the most powerful in the world.
 
 
 
 
Apr 6, 2008 4:04 pm

[quote=Bluetang]  Love your tag line BTW doberman.[/QUOTE]




 
Thanks!
Apr 6, 2008 4:16 pm

Doberman - while I agree that securities ought to be marked to market, and then allow good ol' capitalism to sort things out. Maybe I'm off, but is your view of this just as much a political statement as well as a fiscal one?



I believe in efficient markets up until they become inefficient. I believe that we ought to have the freedom to choose what our tax dollars go towards until we start needing things as a society that individually, we wouldn't fund. I believe we should have a strong(er) UN, but retain the right to act unilaterally when it's in our national interest to do so. I believe that these securities ought to trade for what they are worth - unless the market(and what market is there in this case?) is indicating they're worth substantially different than common sense would indicate.



No, I'm not a Darwinist, and I'm not a socialist. My thought process is similar to that of a traffic cop... Some idiot just ran the red light & I'm doing my best to stop a 10 car pile-up. ... 1 ... times up.

Apr 6, 2008 4:25 pm

the Board of Governors and the heads of the Reserve banks orient their policies to the public interest rather than to the benefit of the private banking system.



.
This is pulled from Encarta definition of the Fed.  That is what they are doing.  This is not welfare for banks,  this is welfare avoidance for millions of investors.  If the financial system were to collapse (see Bear Stearns going under) who do you think gets hit the hardest?  Joe Sixpack does.  It would not matter if your money was in stocks, bonds, or cash, it would drop tremendously in a very short time.  Stocks would drop, causing more selling to get money out, causing stocks to drop further.  Bonds would drop as confidence in repayment abilities would go away, causing selling, causing bonds to drop faster.  Cash in banks are only covered up to $100m, the FDIC would not be able to keep up with defaults causing panic and a run on deposits putting more banks under (even the ones who had nothing to do with the current mess).  People would hoard cash in their mattress, but this would not save them as the dollar would drop so far that it would be worthless.  Unemployment would skyrocket in a very short time.  If any of this sounds familiar, it happened once.  This period in time was referred to as "The Great Depression".  The Fed did exactly what you are suggesting.  They TIGHTENED money policy, allowed massive private business failures, and used financial darwinism as the excuse.  Those who do not learn from history are bound to repeat its mistakes (paraphrased).
Apr 6, 2008 4:37 pm
Ashland:

Doberman - while I agree that securities ought to be marked to market, and then allow good ol' capitalism to sort things out. Maybe I'm off, but is your view of this just as much a political statement as well as a fiscal one?

 
Yes.

I believe in efficient markets up until they become inefficient.
 
I don't believe that markets are efficient and, in my opinion, never have been. That's why this business is still great, for those with the investing knack.
 
I believe that we ought to have the freedom to choose what our tax dollars go towards until we start needing things as a society that individually, we wouldn't fund.
 
Not sure what you mean by this statement. Sounds contradictory.
 
I believe we should have a strong(er) UN, but retain the right to act unilaterally when it's in our national interest to do so.
 
I believe the UN should be relocated to Ghana, our contributions to it cut by 3/4's, and our troops NOT be required to serve under it's flag.
 
I believe that these securities ought to trade for what they are worth - unless the market(and what market is there in this case?) is indicating they're worth substantially different than common sense would indicate.
 
I disagree. Who determines what is common sense? 

No, I'm not a Darwinist, and I'm not a socialist.
 
No offense, but what you propose is found in the socialist playbook.
 
My thought process is similar to that of a traffic cop... Some idiot just ran the red light & I'm doing my best to stop a 10 car pile-up. ... 1 ... times up.
 
Be careful!! But if you are hit, "super-size" your auto injury attorney. (Saw this on a billboard.)
Apr 6, 2008 4:44 pm

This is a useless argument. You're right, marking these things to their market current value would get us to the bottom of this thing real fast. But then what?



Be careful!! But if you are hit, "super-size" your auto injury attorney. (Saw this on a billboard.)

Apr 6, 2008 4:45 pm

Almost every single person on this board would be out of a job

Apr 6, 2008 4:49 pm
Bluetang:

the Board of Governors and the heads of the Reserve banks orient their policies to the public interest rather than to the benefit of the private banking system.

 
At the risk of sounding sarcastic: don't believe everything you read.


Those who do not learn from history are bound to repeat its mistakes (paraphrased).
 
Totally agree. However, critical examination of the history surrounding "The Great Depression" would reveal that the policies of the Roosevelt Administration exacerbated the length and depth of the depression.
 
Listen, I preach a conservative slant to investing: plain vanilla - no fancy schmancy. I'm as unexciting as they get. That keeps it simple, so I know who the players are and can determine potential risk. If Joe Sixpack wants to roll the dice with his money, so be it. The smart people are rewarded and the others...well, they work for them.