Posted on 09/24/2008 5:28:23 AM PDT by silverleaf
"A quick summary: Companies that had billions in subprime loans were feeling the effects of their stupid decision to make those loans in the first place, and practically gave them away for pennies on the dollar. But since no one wants these loans, and they've had to mark them down to market value, it has frozen the market. If we temporarily change the rule that forces companies to do that, that will free the market up...."
http://www.daveramsey.com/tdrs/index.cfm/2008/9/23/Fix-the-bailout-with-mark-to-market?ictid=sptlt
http://www1.daveramsey.com/etc/fed_bailout/economic_cleanup_10887.htmlc
Links
This show was on FOX Business last night
http://www.daveramsey.com/tdrs/index.cfm/2008/9/23/Fix-the-bailout-with-mark-to-market?ictid=sptlt
http://www1.daveramsey.com/etc/fed_bailout/economic_cleanup_10887.htmlc
So we pretend that worthless is worth something? Don’t know much about it, but lying to yourself seems like an odd solution to a problem.
The short answer is yes—but it would be seen as “forebearance” in the regulatory world and critics would attack it as a rerun of the thrift crisis.
There are many securities (especially the senior pieces of large securitizations - even securitizations of subprime and ALT/A loans) that are very unlikely to default—but that are caught up in the maelstrom of markdowns. Were banks allowed to value the expected cash flows on these securities at the original purchased yield—as they can for a single troubled loan—their writeoffs would be less and capital higher.
It all depends on the definition of “Market”
bookmark
Yeah...sure...right. So to solve the drug problem plaguing the country, just "change the rule" and make drugs legal. That will solve the problem? IDIOTS!!!!
It would be insane and accelerate the loss of confidence in the economy.
What he is proposing is effectively making up a number for the value of the portfolio.
Not positive but believe Forbes was the first to suggest this and that was some time ago..
If a security has a public market, it should be valued at market. Since many of these do not, it is foolhardy in this market environment to write down to a level below what the true long-term value is.
We used to call this ‘cutting off your nose to spite your face’ in another time.
Given the nature of accounting for financial institutions that rely on minimum capital levels, we need to err on the side of the expected holding period of the debt. Just because one condo tower in Miami has an 80% vacancy rate, we would not value the condo tower next door with a 20% vacancy rate at the same amount, just because the market for that month panicked into believing the 80% vacant building was the true market.
The true long-term way to view any security is the traditional dividend discount model, which summarizes the future expected cash flow of the security or debt item discounted by an inflation rate.
Buffett was very clear this morning on CNBC that if he had the ability to borrow $700 billion he would do exactly what the government is proposing. He feels that the net cost would be at most $50 billion and that the government will likely profit from this.
Unfortunately for us free-marketers the government is the only source of the $700 billion that is available right now.
Actually, I believe this is more like a run on the bank. The problem is not that these securities have no value, but that if everyone needs to unload them at once, THEN they have no value. And since current rules require accounting on your books what you could sell them for today, many banks liquidity is severely affected.
Changing the rule allows the bank to take into account its longer term value, if sold in a measured manner. That doesn’t seem unfair to me.
I wrote both the committee and my Senator this morning.
Unfortunately we don’t get the FBC on our DISH network at this time so thanks for posting the links.
Exactly !!! Thank you.
Until the banks give up the “level 3” accounting fiction and ark these so-called assets at market value, there is no solution.
No trust can be restored to the markets until the banks stop lying to each other, their investors, and the market.
If they think the market can’t value level 3 assets, why do we think the government, under this bailout plan, will do any better ?
Has government ever done anything better ?
"Mark to Market" was introduced to keep firms from postponing their day of reckoning, which allowed them to deny insolvency until they were also illiquid. But, mark to market assumes a rationally functioning market, so it may be too strict for now, but it is better than the alternative.
Level 3 assets are a disaster. The idea was to allow management to value (and accounting firms to review) the occasional difficult to value asset, but it became a dumping ground to hide losses. I think the right path for now is temnporary forbearance, with the goal a return to full mark to market, and some sort of future restraint on allowable Level 3 assets--such as a mandatory high-percentage charge against capital.
“Brilliant!”
Full fair value should be a disclosure for most financial institutions for these instruments - and should not be recorded through capital and income. Essentially, the banks have been told to mark their long-term assets, for accounting purposes, like a big trading book-which is essentially at liquidation value. Further, the FASB and the SEC have declined to call even the worst of these markets distressed, which in and of itself even under the existing accounting guidance would provide relief from relying on fire sale prices to mark them. This is doubly dangerous, because it works both ways (exaggerates booms and busts).
“Changing the rule allows the bank to take into account its longer term value, if sold in a measured manner. That doesn’t seem unfair to me.”
That is in effect what the bailout is supposed to do. Buy them and hold them until the panic is over and the real value becomes apparent. I agree, this doesn’t seem unfair.
There is still a LOT of value in the assets behind the paper. The problem right now is that no one knows what that is.
Capitalism means the opportunity to fail spectacularly. A $770B-plus bailout destroys any pretense of an efficient market.
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