July 01, 2007

Psst.. hey buddy. Remember these three words: Mark to Market

May not mean much to you today. Will mean everything to you tomorrow.

Nuff said.

26 comments:

Anonymous said...

Got gold?

Anonymous said...

Ok, thanks I've been seeing that alot ref the CDO/MBS debacle that is unfolding on Wall Street. So basically the holder of the asset gets to arbitrarily affix a value to the asset. I.e. mark to market has actually nothing to do with valuation that is market force driven. The hedgefund then uses that valuation as the collateral platform from which it underwrites all its investment activity. So any king maker/hedgefund manager is going to overshoot the valuation for the benefit of their fund and themselves and would not want the market to get a hold of it and produce a market driven price that is less. To do so would bring down the whole house of cards. So this is Enron all over again by just making things look good on paper, but in reality they are bleeding tons of losses!! Amazing, thanks Keith!!

keith said...

Exactly

Anonymous said...

I wouldn't say they get complete freedom to price their assets, but they do NOT have to respond to a changing realty.

In parts of the country (like Florida), housing is effectively down 25%. When you couple that with 100% financing, the cost of foreclosing, the fact that these subprime mortgages are essentially designed to force people out their houses in a few years, you have true valuations that would be 33% less than they're at. When you look at the 10:1 leverage that these investor houses use, you realize that they are WAY NEGATIVE (i.e., they could, theoretically absorb a 10% hit to their assets and be even - other than operating costs - any loss greater, and they're insolvent).

So what happened? The places were allowed to use old models for new loans. They old model said that mortgages were safe - as they assumed something close to 30 years fixed, with 20% down. The new one time-bomb mortgages - that, in the vast majority of cases, can never be paid back per the terms of the mortgage, were simply classified as regular old safe mortgage (albeit with much higher yields), and sold off to total idiots that way.

Now the chickens come home to roost.

One question for Keith - is there something specific that will happen tomorrow?

Anonymous said...

"knee jerk reaction" is exactly what's going to happen this week. Run for the exits on Monday by Tuesday the stampede will be in full force.

Anonymous said...

How do publicly traded banks get away with keeping assets on their books that are not at market value? Dont they have regulators and auditors?

Anonymous said...

HA!

I recall saying months ago "It's all about the derivatives market!"

To loosely quote Bruce Willis from Die Hard:

"Welcome to the party HP!"

wazzzup said...

Barry Ritholtz, of The Big Picture, has 10 questions on CDOs:

10 Questions About CDOs
Saturday, June 30, 2007 | 11:11 AM
in Credit | Derivatives | Hedge Funds | Investing | Psychology/Sentiment
James Hamilton at Econbrowser asks the remarkably sanguine question: CDOs: what's the big deal?

He does a nice job looking at many of the issues this topic raises. However, I still have some unanswered questions about CDOs:

Thus, I will respond to the Prof in true Socratic method by asking more questions. These raise the possibility that not only CDOs may be a big deal, but we don't have a clue how big a deal it may be -- Modest? Gargantuan? Ginormous?

Here are my 10 questions:

1. What would have happened had Bear Stearns simply let their two funds, High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund, dissolve?

2. If CDOs are not priced to market, what are the actual values of these holdings?

3. How levered up are the funds that own the bulk of the CDOs? 10-to-1? 20-to-1? More?

4. How many Hedge funds are or have been taking quarterly or annual performance profits, based in whole or in part, on hoildings that have been marked to a theoretical value ("Mark-to-Model") versus an actual value ("Mark-to-Market")?

5. Liquidity has been a driving force behind M&A activity, share buybacks, and leveraged buyouts. Might the CDO situation somehow impact liquidity?

6. Might a liquidation in a CDO/illiquid derivative fund spread to other asset classes?

7. How widely held are the toxic CDO tranches in funds that are self-decribed as "conservative" or "risk averse?"

8. How accurate are the major ratings firms (Moodys, Standard & Poors, Fitch) assessment of these products. Are these outfits arm's length objective raters, or are they merely corporate whores who play for pay?

9. After the final chapter is written on CDOs, what might the total losses on the $250 Billion in quarterly CDOs that Wall Street has created actually be? 10 Billion? 100 Billion? 1 Trillion?

10. How much will systemic confidence be impacted if there is a series of large fund failures due to CDOs? What impact might that have on the rest of the markets?

The big deal is that we simply know so little about these issues. Wall Street has gotten better, for the most part, about managing risk. But these CDOs are increasingly looking like unknown factors, with an unknown set of risk parameters.

Hence, that is what the big deal is . . .

Anonymous said...

How do publicly traded banks get away with keeping assets on their books that are not at market value? Dont they have regulators and auditors?
--------------------------------------------

A: Everyone else was doing it, so why can't we? Besides, if we get in over our heads, either we take it out on the public OR THE GOVERNMENT WILL BAIL US OUT.

Anonymous said...

Great links

Anonymous said...

wait just a god-damn minute! I was told that housing was going up for the following reasons:

1. they're not making anymore land
2. housing always goes up because it's a great investment
3. family formation
4. there is a housing shortage
5. everyone wants to move here...

...and now I'm hearing that it was due to something called a CDO and leverage?

Seriously, I wonder if the dumb-f@ck real estate brokers every learn about CDOs and MBSs on their brokers exam; I guessing not. Most of them probably think a MBS has something to do with their new Mercedes -- stupid untrained overpaid monkeys!!!

Anonymous said...

Anonymous said...
Got gold?

July 01, 2007 11:46 AM


yes.

Anonymous said...

Remember these words: Systemic Meltdown

borkafatty said...

Got gold?

----------

NA.... CASH IS KING!!!!!!!!

Anonymous said...

How do publicly traded banks get away with keeping assets on their books that are not at market value? Dont they have regulators and auditors?

Why do pathetic socialist libtards always go running to mommy government? Only morons think that government bureaucrats know the business better than successful capitalist bankers. Those regulations to "protect" the banks are really just there to give liability for bloodsucking trial lawyers, like faggot pretty-boy Edwards. Nancy-boy Kerry and Barney Frank only want to shake down successful private enterprise to give to their affirmative action union thugs and their chardonnay drinking shyster jew-fro buddies.


BTW: I just made all that crap up, but there are zillions of people who believe that spew. Many of them run the government (and the Wall Street Journal) now. Regulations are get in the way of extracting maximum wealth, and in the Church of Ayn DeLay, there's a fatwa against that.

K.W. - Southern Ca. said...

Don't feel too bad, some of these
monkeys are starting to panic themselves.

At the time of the housing frenzy, their only concern was making a big commission, it didn't matter how, and most had no clue of MBS's or CDO's - as long as they got paid.

They will now though, since they fed themselves some of the same toxic waste they were shoveling out to new house debters.

This is no longer an issue of renters, house debters, or home owners, it's a matter which will impact the broader economy in a very large and unpleasant way for many, many people.

~~~

Anonymous said...
wait just a god-damn minute! I was told that housing was going up for the following reasons:

1. they're not making anymore land
2. housing always goes up because it's a great investment
3. family formation
4. there is a housing shortage
5. everyone wants to move here...

...and now I'm hearing that it was due to something called a CDO and leverage?

Seriously, I wonder if the dumb-f@ck real estate brokers every learn about CDOs and MBSs on their brokers exam; I guessing not. Most of them probably think a MBS has something to do with their new Mercedes -- stupid untrained overpaid monkeys!!!

Anonymous said...

borka couldn't spell gold with both hands!

anagama said...

So basically the holder of the asset gets to arbitrarily affix a value to the asset. I.e. mark to market has actually nothing to do with valuation that is market force driven.

Isn't it "mark to model" that does this? I thought mark to market was what Bear-Stearns was afraid of because it would have shown the market value for their junk was lower than their model value.

cipa said...


How do publicly traded banks get away with keeping assets on their books that are not at market value? Dont they have regulators and auditors?


It's dishonest, but legal accounting rules by the SEC. When a company acquires assets, they can choose to value the assets at the price acquired until it is sold. Companies not in danger of going bankrupt will periodically M2M their assets. When you see a company that does not M2M while others in their industry are doing so, then you know that company has something to hide.

Anonymous said...

Gold and silver coinage

One who can see said...

These CDOs were a fraud from day 1. These Investment Banks, brokers,loan officers, hedge funds, pension funds, and investors could not be that stupid to think that these loans with no down payment, a low initial interest rate, and higher interest rates in 3 or 5 years that the buyers could not afford had the same level of risk as the 30 year loans at a fixed rate with 20 per cent down. This is exactly the same faulty assumptions as using vastly superior comparable sales to value a cheap house in a lower class neighborhood.

It was obvious from the start that the rate of problem loans where the buyer could not make the payments would be far higher than the default rate on the 30 year fixed rate loans yet everyone involved ignored the risk and treated the group of CDOs as though the default risk was say 2 per cent when they knew that after the interest rate had adjusted, 90 per cent of these loan holders would not be able to make the higher payments. Who could be so blind that they could not see this coming? It is obvious that they knew that there would be nassive defaults on these loans. How could the officials of the pension funds, hedge funds, and other organizations buying these loans not see the risk? They had a fidicuary duty to protect their members. How could the rating agencies not see this coming? They also participated in this fraud. If Bear Stearns, and Merrill Lynch suffer huge losses or bankruptcy for their part in this, it serves them right that they suffer along with the people holding these loans. I am livid that greedy people could allow this to happen which could by itself trigger a major recession or depression that would severely impact other people not even involved in the fraud.

It will be interesting to see if anyone is proseuted for this fraud and incompetence. The emphasis will probably be how to bail out the banks and the Investment Firms that caused the disaster.

FlyingMonkeyWarrior said...

http://www.itulip.com/forums/showthread.php?t=1549

Keith, you have GOT to post this movie from ITULIP!
It deserves its own thread and a hat tip to ITulip........

Shakster said...

Heard some homes sales stats today on MSM.15-20-30% declines in the first quarter.Mark To Market will nead a serious infusion of mass media bullshit tommorrow.

cipa said...


Isn't it "mark to model" that does this? I thought mark to market was what Bear-Stearns was afraid of because it would have shown the market value for their junk was lower than their model value.


Yes, they are currently using mark to model or acquisition cost to value their CDO's. If they had to use mark to market, hundreds of billions would be wiped off the books of banks and funds. Nobody want to touch this crap right now except at 30 cents on the dollar.

cobra2411 said...

Mark to market? kicking and screaming maybe... Maybe not...

The biggest problem? Nobody has any idea what these things are worth, not even the people that priced them to begin with.

BS withdrew their auction because no one knew what to pay for them. How would you like to prove to the world that you're holdings are worthless??

Right now the ratings agencies are agreeing with the banks on their computer pricings for them. As the housing market continues to unwind they will be forced to jump the fence and point their finger at the banks and hope that they don't get sued for keeping the lie going for so long...

Anonymous said...

Mark to market accounting was Enron's smoke and mirror (one of them at least).