Market crash: are we there yet ?

[chucklesR]

What can be done to solve crisis without Congress - Sep. 30, 2008

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC. "It's way below their economic value. And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity."


I don't get this supposed expert at all.

When there is no market, there is no value. I'll say my basic economic principal once again:
White elephants, 2 for a quarter - is only a good deal when you a) have a quarter to lose, and b) need two white elephants.

Market Value: (wiki)
Market value is a concept distinct from market price, which is “the price at which one can transact”, while market value is “the true underlying value”. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations must prevail.

Pricing a MBS at economic value - the supposed return if life is hunky dory and the pre-calculated defaults and pre-payments occur, what the underlying loans will pay over the maturity - is a much higher amount and therefore would cause even greater losses.

Where did I miss on that?

[PBzeer]

My take on it Chuck, is that since most of the so called toxic assets are not in default, they do have value. But because of mark to market, there is no perceived value in them. Even though most of the mortgages in the MBS's are performing, there is no market for them due to the non-performing ones.

[PBzeer]

An interesting e-mail I found:

"When I was a Wall Street broker (for nearly 20 years), I would often tell advice-seeking clients, “If I really knew what the market was going to do, why would I tell you?” (At least that’s what I told those clients who had a sense of humor.) So I have no idea what will happen next to the markets. But I do have three vivid recollections of the 1987 crash:
1) The media (led by the New York Times and Dan Rather) immediately began trumpeting the next Great Depression. Wrong.
2) On the weekend after the crash, my wife and I decided to go to one of the New Jersey malls and were pleasantly surprised to find that the stores were jam-packed — I guess the people on Main Street didn’t get the message about the Depression.
3) The 1987 crash was the best stock-buying opportunity of the past 20 years.
I’ve been back and forth about whether Congress should bail out Wall Street, but then I remember 1987 and think, “What if we had a financial panic and the public decided to ignore it?”

[bubb2]

[Rickm505]

Originally Posted by PBzeer

My take on it Chuck, is that since most of the so called toxic assets are not in default, they do have value. But because of mark to market, there is no perceived value in them. Even though most of the mortgages in the MBS's are performing, there is no market for them due to the non-performing ones.

First off. I agree with Chuck.

The problem John, is they aren't saying which Tranches are 'toxic' and which are 'good ones'. Remember they were all mixed together to get them by the rating houses.

No one in the market will take a chance on them. Which brings up an excellent point. Who decided which Tranches the treasury dept buys? And after they buy them, and pronounce the remaining MBSs 'good ones'. Who's going to believe them?

The underlying problem is trust. These were all sold as an excellent investment vehicle. The investment banks maintained that illusion until the actual mortgages began defaulting. So, is a Tranch that's pronounced good today, suddenly a bad one if mortgages inside of it begin defaulting next month? If that's the case, where does it all end?

I hate this plan. I think we're throwing money at the wrong end of the spectrum.

[PBzeer]

Listening to Reid and McConnell this morning, one thing is clear to me. This Bailout is also about Washington covering up their responsibility for the situation by claiming to "fix" the problem.

[PBzeer]

Rick - you might as well accept that this is wholly a political solution that has nothing to do with the overall economic situation.

We know the bad debt is going to be bought up by somebody. What person in their right mind would sell it for anything less than the premium price the government will give them?

It's not economists who came up with this plan, it's a former Wall St trader. You decide where his loyalty lies.

[wind_magic]

Originally Posted by chucklesR

What can be done to solve crisis without Congress - Sep. 30, 2008

"The SEC has destroyed about $500 billion of capital by their continued insistence that mortgage-backed securities be valued at market value when there is no market," said William Isaac, a former chairman of the FDIC. "It's way below their economic value. And because banks essentially lend $10 for every dollar of capital they have, they've essentially destroyed $5 trillion in lending capacity."


I don't get this supposed expert at all.

When there is no market, there is no value. I'll say my basic economic principal once again:
White elephants, 2 for a quarter - is only a good deal when you a) have a quarter to lose, and b) need two white elephants.

Market Value: (wiki)
Market value is a concept distinct from market price, which is “the price at which one can transact”, while market value is “the true underlying value”. The concept is most commonly invoked in inefficient markets or disequilibrium situations where prevailing market prices are not reflective of true underlying market value. For market price to equal market value, the market must be informationally efficient and rational expectations must prevail.

Pricing a MBS at economic value - the supposed return if life is hunky dory and the pre-calculated defaults and pre-payments occur, what the underlying loans will pay over the maturity - is a much higher amount and therefore would cause even greater losses.

Where did I miss on that?

I don't disagree with what they are doing here, getting rid of the requirement for MTM, but that is with one giant caveat. The trouble with Japan over the past two decades, or at least from 1990 through 2000, was that they wouldn't write off the bad debt in their banking system. They were able to do that for exactly the reasons that we are talking about, all they had to do is just refuse to say that a house that was selling for a million $us was now only worth half as much, they simply wouldn't do that. At least MTM forces banks to reprice assets, that's what is good about it, the only problem now is that it's forcing banks to mark to an illiquid market, and they are getting margin calls to put up more capital, and that is forcing some out of business, which is forcing many to sell even more assets to try to generate cash, which is making the market even more illiquid, which is ... you get the idea. I think this is a case of MTM being perfect, so perfect it's working too well. But I also fear that abandoning MTM is going to allow banks to devise all kinds of really underhanded ways of valuing assets which just happen to be right above the threshold requiring them to come up with more cash, and we're going to end up Japan 1995. I'm not sure which is better. Is it better to let banks go out of business, or is it better to have a lot of banks that should be out of business. Personally I'd rather have the former, because that forces us to confront our problems and we get through this a lot faster, because by not repricing assets to market we are now going to have a lot of insolvent banks out there that we can't trust, because they're still in business when they shouldn't be. Sweeping it under the rug doesn't do anything but put off the inevitable. Bring on the pain - unfortunately it looks like we're abandoning MTM in favor of (?), so they've already decided on the path of slow misery instead of quick pain.

[sailhog]

I'm amazed all of these experts who are coming out of the woodwork with their "brilliant plan" that is supposed to be the magic bullet. Newt Gingrich was saying that striking MTM accouting would do all of these wonders -- without mentioning any downside whatsoever. Others were promoting that insurance concept, which baffles my mind. What I've heard is that it would not go very far toward solving the problem. One thing seems clear: there is no magic bullet. It's just white guys moving money around, trying to get someone other than themselves and their clients, constituents and customers to pay for this massive problem. If I trust anyone, it's Paulson. He's a gazillionaire working a government job. He's not doing this to line his own pockets. He's not doing this to accrue power. He's already announced that he's quitting at the end of the term. Everybody's got some brilliant idea... that dissolves under scrutiny. Paulson is in the difficult position of having to put forth an idea that actually bears the burden of potentially being implemented. It's easy for people like Gingrich to lob grenades from his bunker. His rear isn't on the line.

In this case I trust a lame duck president. I trust the guys who have nothing to lose. Saying that Paulson's motives can't be trusted because he's a former Wall Street guy is way off the mark.

[Valiente]

A guy with nothing to lose can still be horribly misguided, falsely premised and just flat-out wrong.

I offer this seamanlike observation: When do you ever bail out your boats just once? When is there ever just one bucket of water in your bilge? You usually need to do several small bails before you fetch the sponge, and eventually, you have to figure out where the water's getting in, from above or below.

No one here is identifying the source of the leak or its rate.