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Message
re: mark to market
Posted on 9/30/08 at 9:31 pm to Colonel Hapablap
Posted on 9/30/08 at 9:31 pm to Colonel Hapablap
Well this thread exposes me as ignorant.
1
Posted on 9/30/08 at 11:55 pm to Meauxjeaux
Posted on 9/30/08 at 11:55 pm to morgcl
here is one explanation i found today .
===============================================
Hi everyone. Crazy times. Whatever the political posturing, a plan needs to be passed. Credit markets are frozen and banks are going bust every day. This is not totally because of "toxic" mortgages. This has a lot to do with FASB 157, also known as "mark to market".
Each day lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.
Why is this so bad? Because as lenders mark down their assets the amount that they have loaned previously becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue.
And a quick look at the holdings of these loans show that 95% are problem free. Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages, are relatively safe. But this requires a bit of understanding. You see, when a pool of mortgage loans is put together it isn't just A paper or B paper etc. it's everything. Its got some A paper, B paper, C paper, and even what looks like toilet paper. An "A" investor buys the whole pool but because they are an "A" investor their safety is greater because they can avoid the first 20% (an example) of defaults. So they own the whole pool but are sheltered from the first batch of defaults, and for this they get the lowest rate of return. As you can figure from here the more risk investors want to take, the higher the return. So the investments are relatively safe, but the accounting rules currently place undue pressure on the banking institutions.
Now add to all this the opportunistic shorting done on the financial stocks, much of it illegal because those shorts did not legitimately borrow shares (called naked shorting), and you exacerbate this whole problem. Thank goodness for the recent temporary ban on shorting in the financial sector. As for the plan the government is the only one who can step in to do this. And they have to do this. And they will do this. The nauseating political posture from both sides is just part of the process.
===============================================
Hi everyone. Crazy times. Whatever the political posturing, a plan needs to be passed. Credit markets are frozen and banks are going bust every day. This is not totally because of "toxic" mortgages. This has a lot to do with FASB 157, also known as "mark to market".
Each day lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.
Why is this so bad? Because as lenders mark down their assets the amount that they have loaned previously becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue.
And a quick look at the holdings of these loans show that 95% are problem free. Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages, are relatively safe. But this requires a bit of understanding. You see, when a pool of mortgage loans is put together it isn't just A paper or B paper etc. it's everything. Its got some A paper, B paper, C paper, and even what looks like toilet paper. An "A" investor buys the whole pool but because they are an "A" investor their safety is greater because they can avoid the first 20% (an example) of defaults. So they own the whole pool but are sheltered from the first batch of defaults, and for this they get the lowest rate of return. As you can figure from here the more risk investors want to take, the higher the return. So the investments are relatively safe, but the accounting rules currently place undue pressure on the banking institutions.
Now add to all this the opportunistic shorting done on the financial stocks, much of it illegal because those shorts did not legitimately borrow shares (called naked shorting), and you exacerbate this whole problem. Thank goodness for the recent temporary ban on shorting in the financial sector. As for the plan the government is the only one who can step in to do this. And they have to do this. And they will do this. The nauseating political posture from both sides is just part of the process.
Posted on 10/1/08 at 12:00 am to novabill
No offense, but whoever wrote that clearly does not understand anything about the current crisis.
Posted on 10/1/08 at 4:39 am to novabill
quote:
This is not totally because of "toxic" mortgages. This has a lot to do with FASB 157, also known as "mark to market".
I am most powerful... hear me roar! Remember kids, it is not underlying business reality that is causing the meltdown... no you can do whatever you want as long as you hide that reality with a Dr and Cr (or lackthereof in this case)
quote:
Each day lenders must mark their assets to the marketplace.
Just like they have to do with cash. Isnt it ridiculous that you cant say you have as much money in the bank as you did a month ago. I mean seriously, just because you bought that TV doesnt mean you should act like you dont have the cash.
quote:
It's like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress.
Ah my favorite line in 157 is when it says you have to use the duress price. Where is it again... oh wait it states that an orderly market is required. Oh well, it was a nice thought.
quote:
You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.
"Normal market place"... I love it. Lets pretend these high risk tranches are not worthless, put our heads in the sand and blame the debits.
quote:
And a quick look at the holdings of these loans show that 95% are problem free.
Virtually all are under collateralized.
quote:
Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages, are relatively safe.
:rotflmao: :rotflmao: :rotflmao: :rotflmao: OK I aplogize for responding to this... until I read that line I thought it was a serious post.
Posted on 10/1/08 at 10:29 am to igoringa
Im not a CPA so I could be off base here so please correct me.
So in the case of Enron, Skilling and Co. were able to value assets based on their percived/expected ROI, when in fact the assets were underperforming and/or illiquid thus leading to collapse?
And since Sarbanes/Oaxley Mark to Market accounting is based on current value?
Am I anywhere near the ballpark on this?
Thanks Guys
So in the case of Enron, Skilling and Co. were able to value assets based on their percived/expected ROI, when in fact the assets were underperforming and/or illiquid thus leading to collapse?
And since Sarbanes/Oaxley Mark to Market accounting is based on current value?
Am I anywhere near the ballpark on this?
Thanks Guys
Posted on 10/1/08 at 10:53 am to Ryan 11
quote:
So in the case of Enron, Skilling and Co. were able to value assets based on their percived/expected ROI, when in fact the assets were underperforming and/or illiquid thus leading to collapse?
No they kept certain investments at book based and were able to keep losses off the financials.
quote:
And since Sarbanes/Oaxley Mark to Market accounting is based on current value?
Currently with financial instruments you have to value them at market and disclose any assumptions used to reach that price (thereby, theoretically, allowing the user to see how you got there).
quote:
Am I anywhere near the ballpark on this?
Yup
Posted on 10/1/08 at 1:05 pm to igoringa
The only real similarity between Enron and the current conditions is off-balance sheet financing. Enron made up SPE's and booked fake revenue and expenses, amongst other outrght fraudulent behavior that I am sure every one is aware of. ABS' are, in some cases, essentially SPE's. They take risky assets, move them into a SPE, then issue bonds to pay for the "acquisition" of those assets. It is just a pass-through (and the financials of such ABS state as much) and allows the bank or what ever organization held those assets to move them off of their balance sheet and replace them with revenue from bonds. By selling the bonds to outsiders, and thus having >10% ownership by any one entity/person, they can achieve the QSPE status.
Posted on 10/1/08 at 1:24 pm to kfizzle85
quote:
The only real similarity between Enron and the current conditions is off-balance sheet financing.
Completely agree... the purpose though is to hide losses (and in Enron case debt).. same with removal of MTM
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