Well obviously they should change the model they mark to then . . . : P
Derivatives have never destablized the markets as much as people have claimed they have the power to (yet) but these modern derivatives are very hard to control or regulate. The SEC attorneys take forever to figure them out enough to act. The SEC and CFTC uses investigators that are “street smart” but are not usually mathemeticians and are frankly not even in the same league academically as the fellows creating the derivatives, so it takes the regulators forever to figure out where a violation occurs and usually requires a whistle blower of some kind to explain the issue. I guess I’m saying that if the model is significantly flawed, the property related derivatives could be another layer of things that could destablilize the market further, rather than explanation of why it’s a good time to buy . . .
I’m the kind of guy that calls out that the market is falling more often than it happens . . . but . . .
No.
There should be no “mark-to-model,” period. If you want to price something, you put it out into the market.
The reason why the credit markets are blowing up is that the mark-to-model CDO’s hid the deteriorating value of sub-prime infected debt instruments from the market for far too long.
Suddenly when the funds holding the CDO’s were forced to put the CDO’s into the market, they found out just how far off their models were.
The root problem here is that the valuation model for CDO’s was created by the same banks selling the CDO’s. So if we wanted to keep mark-to-model valuations, then the models need to be created by some other bank not selling the instrument, which would remove the obvious conflict.
Your assessment of the SEC’s brains vs. the banker/fund brains is correct, which is why I believe that mark-to-model should be simply banned. Let the market do what the market is supposed to do: value assets in open outcry.