Another "I Was Wrong" Post

From, um, "Inspector Asshole." Anyone who's been reading these threads knows he's lived up to his name, at least as regards being a real burr in my sock.

It is -- to be unavoidably insulting -- my opinion that the more one actually knows about this crisis, the more one accepts it is, in fact, a crisis. (And quite likely a fixable one.) In this case, Inspector Asshole read something about the mark-to-market rules and it changed his mind.

What are those rules? Basically that whenever someone conducts an arms-length (legit) transaction in an asset, anyone holding similar securities must mark down the value of their securities to reflect the new market price. And thereby reduce the level of assets they show on their books. And since valuable properties (not as valuable as they once were sold for, God knows, but still valuable) are being deleveraged down to near zero value (sometimes by intentional manipulation -- some want these companies to go bankrupt in order to buy them out during bankruptcy proceedings), this not only reduces a company's paper assets, but it invokes rules about how much cash a bank or lending company must keep on hand in relation to its assets and obligations. As many of a bank's assets (these artificially diminished toxic assets) are now pretty close to zero, a bank can wind up bankrupt on paper when, in reality, it actually has a fairly decent balance sheet.

Some propose temporarily suspending these mark-to-market rules... perhaps let them value these assets on paper according to their best price in a two-month window after the housing bubble broke. That would, hopefully, reflect a diminished but still somewhat realistic value, far less than the prices they once sold for, nicely corrected by the bubble burst, but nowhere near the close-to-zero value these assets supposedly have now.

Before you take this to be a panacea-- the only thing we need to do --bear in mind Newt Gingrich was proposing this (among other measures) two weeks ago but has now decided that some sort of rescue is now required, and that simply reforming the mark-to-market rules is not, at this point, going to stabilize the markets and get credit flowing again.

Helpful, probably. But not helpful enough. Because the reality is that these assets can't be sold at the moment, so even if they're marked up on paper to something resembling a realistic value, banks and institutions holding them are still currently sitting on billions in unsalable, illiquid assets.

More on Mark-to-Market: From November 7, 2007. Predictable.

If you think banks are writing off large amounts of assets now, wait until new accounting rules take effect this month.

The Royal Bank of Scotland Group estimates that U.S. banks and brokers, already under massive losses caused by the collapse in the subprime credit market, potentially face hundreds of billions of dollars in write-offs because of what are called Level 3 accounting rules, according to Bloomberg.
Related Articles

* The SECís New Take on Loan Commitments

The U.S. Financial Accounting Standards Board Rule 157, which is effective for fiscal years that begin after November 15, 2007, will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, the wire service reported.

''The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ''mark-to-make believe,'' Bob Janjuah, Royal Bank's chief credit strategist, reportedly wrote in a note published Wednesday.

Janjuah noted that, for example, Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, Goldman Sachs has 185 percent, Lehman Brothers has 159 percent and Citigroup has 105 percent, according to Bloomberg.

On the other hand, Merrill Lynch has Level 3 assets equal to 38 percent of its equity. As a result, Janjuah believes Merrill ''may well come out of all of this in the best health.''

In the fair value hierarchy, Level 1 is simple mark-to-market, whereby an assetís value is based on an actual price. Level 2, known as mark-to-model and used when there aren't any quoted prices available, is an estimate based on observable inputs, Bloomberg explains.

Level 3 consists of unobservable inputs, such as those that reflect the reporting entityís own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort, according to FASB. There is no verification requirement if the assumptions are in line with those of market participants.

Mike Pence is still claiming that repealing or modifying mark-to-market would substantially fix the problem. Well, for one thing, that allows companies to hold on to these for longer and perhaps avoid bankruptcy, but it doesn't actually fix the problem of these assets having a current value of zero.

Further, the Pence plan also involves loans and insuring the value of mortgages -- which seems to me to be an even bigger intervention in the market, and potentially putting the US on the hook for even more obligations it couldn't possibly cover if they all went tits up.

Allowing holders of these securities to suddenly mark up their values does little at all to restore market confidence or get the markets in these assets functioning again.

I just think the more loans you give these guys, the more you're increasing the odds they won't actually pay them back. Balance sheets don't look much better with huge loans on them.


Anyway, Inspector Asshole (ahem) weighs in below:

Ok, so I've read some and I see that the reasons include something I do understand - accounting rules for 'distressed' assets. I'm an accountant. A manly accountant, not a nerdish- okay, so I'm a nerd too. Anyways...

They (these distressed assets) have to be shown on the balance sheet and marked down to marked down to market value. This means that suddenly, normally healthy companies have assets that actually have value, but have been artificially and temporarily valued at fucking zero goddamned dollars even if they bought them for several million. Even, and I want the market-valuation absolutists to read this very carefully - even when those assets are ownership of actual real property that have intrinsic worth. Due to this rule, the credit markets are being affected in a way that is not tied directly to the fact that loans were made to itinerant phrenologists and spastic mimes. Those were the root cause. The problem with valuation of these loan packages including defaulted mortgages is a fucking multiplier.

Let's put it this way - think of the "credit drain" and bad things as a military force. The CRA loans to carnies and strippers with Tourette's Syndrome is like a company of infantry - pretty impressive. The problem with marking down to market prices is like giving each sonofabich a Davey Crockett nuclear howitzer.

This means that through temporary and artificial means, a company that would say own 30,000 houses/shitty mortgages, all with $3K worth of salvagable copper in them that could be torn out and sold- that they bought for $3 million - suddenly don't have jack shit on their books. All of it is valued at zero because no one will buy it. That isn't a rumor - that is actually happening. Marking down to zero isn't done on a goddamned whim. It is documented. People/entities with these assets that have intrinsic value cannot label them on their balance sheets as what they paid for them - they must write that they are worthless.

This makes huge companies suddenly in dire straits. They may not be able to make payroll NEXT WEEK. A number of companies, who might be loaded with these, will fail.

This is because they suddenly have to book a loss - huge paper losses - that have no real relation to the situation over just the next three months.

Let me repeat - healthy companies will be unable to prove they own enough assets to float a loan. Past liabilities will be dishonored. This will spread within 21 to 30 days up and down the food chain. Each 2 weeks will result in larger and larger cycles of shrinkage of asset valuation, sudden outlays for demand notes, inability to meet payroll, layoffs, and cancellations (with penalties) of contracts.

Distribution networks would be among the first hit. I haven't gone further than that in my research. But right there, we're looking at some severe dislocation. Severe as in diabetics having to stock up on insulin.

This does have the possibility of being retardedly bad - think what would happen if 1/3rd of the train and truck traffic ceased. Stopped without notice.

The problem is systemic - not just to the credit market - it is systemic to how we do business between states. It is systemic as in "No Produce Scheduled Until Next Week" type signs in your Safeway.

If it doesn't get fixed in 2 weeks, by January some communities will be isolated due to no diesel for the road crews. In New York.

I was wrong.

Posted by: Inspector Asshole at September

Posted by: Ace at 08:55 PM



Comments

1 You lose Newt, you might as well call it in, fellas. Bailout = good, voluntary financial mass extinction = fucking stupid.

Posted by: Vercingetorix at September 29, 2008 09:00 PM (QaVQ6)

2 He oughta change his name to Inspector Suckup!

I keed, I keed.

However, it does seem that mark-to-market rules need to be reformed immediately, bailout or not. Why in God's name were they ever instituted in the first place?

Posted by: Rajiv Vindaloo at September 29, 2008 09:05 PM (Rn2+D)

3 "Inspector Suckup"

Christoph already has that title.

Posted by: Ann at September 29, 2008 09:06 PM (c3H+i)

4 I am sooooo glad I ate pie for breakfast today.

Posted by: ArandomPerson at September 29, 2008 09:06 PM (2PwTK)

5 Ace-
It is my understanding that mark-to-market accounting was for investment banks and not commercial banks. With Goldman Sachs and Morgan Stanley converting to bank holding companies there are no stand alone investment banking firms left so mark-to-market accounting changes would do nothing. On the other hand i see so many people in the know (congressional blowhards etc.) talking about the need to change mark-to-market accounting rules that this info may be wrong. Have you found (or do any of the morons on this board know) whether my info is correct or not?

Posted by: scofflaw at September 29, 2008 09:06 PM (u4+XZ)

6 Is this where I collect my cult of personality?

Posted by: Inspector Asshole at September 29, 2008 09:07 PM (/2QNq)

7 Who do you think will at last start a campaign to urge President Bush to fire Secretary Paulson for his Chicken Little self-fulfilling prophecy panic and mishandling of the situation?

Posted by: Christoph at September 29, 2008 09:09 PM (hawOV)

8 I was away from the computer for a while.

Is Congress doing anything? Are they just dicking around? Did Pelosi JUST FUCKING RECESS THE HOUSE FOR TWO DAYS!?

Also, I read the top item on Insty's list (another cleverer-than-thou lawyer expounding on the economy) and remember the all-too-true line:
First, kill all the lawyers.

Posted by: someone at September 29, 2008 09:09 PM (2z2WN)

9 Would saying "inspector sockpuppet" get me banned? Just fuckin' with you, Ace. After all, you have my IP. Still, we deserve a few days to lick our wounds. The Asian market will be shit tomorrow, but I'll be buying heavy. The market will be stable if not up dramatically.

Posted by: JDW at September 29, 2008 09:10 PM (lLRnM)

10 "Christoph already has that title."

No, he's the Official Canadian Concern Troll of AoSHQ (tm).

Posted by: someone at September 29, 2008 09:10 PM (2z2WN)

11 I'm still not buying it. I'm tired of playing by the rules and getting shat on. I've watched politicos get filthy rich and my neighbors bulk up on material goods like the piper would never call. I've got nothing to lose. Anyway, I may end up being a czar or general in the breadlines or work camps.

Posted by: Winston at September 29, 2008 09:10 PM (6i/jj)

12 Short article on mark-to-market.

Pay attention to the date.

Posted by: Andy at September 29, 2008 09:12 PM (iIvIk)

13 "It is my understanding that mark-to-market accounting was for investment banks and not commercial banks."

Thank Sarbanes-Oxley.

Posted by: someone at September 29, 2008 09:12 PM (2z2WN)

14 You distress me, padawan. You know this is what I do for a living and you do not trust my same opinions on this matter which I have posted here for weeks.
We have heard time and again that if the market price for these assets were higher then the market would be paying that price. NO. Don't let anybody even try to float that bullshit. Markets are always right in the long run. In the short run is where fortunes are made because markets are not always right in the short run.
I oppose government intervention but I know a great trade when I see one. Sometimes you have to swallow your principles and watch the money roll in. This is a no-brainer.

Posted by: spongeworthy at September 29, 2008 09:12 PM (rplL3)

15 The psychological reason you can't immediately rescind mark to market accounting rules is that if you change your accounting during a crisis, people will wonder whether or not you're just papering over a problem.

It needs to be changed, but let's not spook our overseas friends. Fix the liquidity trap, then change the accounting.

Posted by: counter at September 29, 2008 09:14 PM (8/0ME)

16 Yeah! No more mark-to-market! My assets aren't worth what the market will bear. They're worth what I think they're worth!

That'll push the bullshit out of the economy!

Posted by: Masturbatin' Pete at September 29, 2008 09:14 PM (E7Fcd)

17 Do we intervene and fix the fucker or do we sit here saying, "The computer will work itself out"?

This intervention isn't fixing it. It's more like applying a Windows patch and hoping the new software will fix the hardware later on.

You need to replace the hardware at the same time.

(I hate metaphors)

Posted by: lorien1973 at September 29, 2008 09:14 PM (fE4SP)

18 Stephanopoulos post at ABC: "We calculate there are about 31 competitive House races divided between Democratic and Republican House members, and 24 of the 31 members in competitive districts voted against this package. "
Holy crap. Their phones must have melted.

Posted by: ArandomPerson at September 29, 2008 09:14 PM (2PwTK)

19 "it's the mark-to-market rule that keeps this stuff honest.... mostly."

What's wrong with appraisals?

Posted by: Christoph at September 29, 2008 09:14 PM (hawOV)

20 BSOD!

Posted by: JDW at September 29, 2008 09:15 PM (lLRnM)

21 So, what's the deal? Is it simply a matter of re-writing accounting rules, or spending $700,000,000 to prop up the financial industry?

Posted by: mrp at September 29, 2008 09:16 PM (HjPtV)

22 Oh, and mark-to-market is not the enemy here. Mark-to-market + Sarbanes-Oxley, that's overkill. But mark-to-market, generally is good practice. Perhaps the Treasury should be able to suspend it, with warning and disclosure under certain circumstances (like these.)

Posted by: spongeworthy at September 29, 2008 09:17 PM (rplL3)

23 Boortz has been going on about Mark-Market for some time...

Posted by: Kaptain Amerika at September 29, 2008 09:17 PM (hepLe)

24 No. No. No.
Come on now.
Don't start that.
You may get excited sometimes, but you are NOT Andrew Sullivan. That's 2 'emails' you've posted now...

Posted by: Entropy at September 29, 2008 09:18 PM (HgAV0)

25 First, kill all the lawyers.
Posted by: someone at September 29, 2008 09:09 PM (2z2WN)


That's gonna be hard to do.......................................




..they breed faster than rats.

Posted by: Old Hippie Vet at September 29, 2008 09:19 PM (dzE9C)

26 OK, I get it now - no problem is too big, nor too small, that it cannot be overcome with central planning.

Posted by: shit-house lawyer at September 29, 2008 09:19 PM (SxgfN)

27 "What's wrong with appraisals?"

An appraisal deals with the house, not the value of a mortgage.

Banks don't want houses, they want future streams of mortgage payments.

Posted by: counter at September 29, 2008 09:20 PM (8/0ME)

28 Thank Sarbanes-Oxley.

People keep saying this, but the only change SOX made was provide federal funding for the FASB (paid by public companies). The ivory tower dweebs in Norwalk bent over regularly for the SEC way before SOX, and I think we'd have probably had to deal with FAS 157 regardless.

Posted by: Andy at September 29, 2008 09:23 PM (iIvIk)

29 14Short article on mark-to-market.Pay attention to the date.
and Citigroup has 105 percent, according to Bloomberg.
The above is from Andy's link (Para. 5) -- what am I missing here?...Citi just got Wachovia today for the bargain price of $2B. Andy -- was Citi able to dump (some of)their toxic debt; or, able to absorb more; or, were they misreported within the CFO article?

Posted by: billygoat at September 29, 2008 09:23 PM (vlmzk)

30 I wonder what's going to happen to all the just-in-time retailers when the credit crunch gets really bad. Just-in-time only works when credit is easy and fast. What happens to Wal-Mart or Home Depot or Dell Computer when the cost of credit goes way up?


Posted by: Monty at September 29, 2008 09:23 PM (dCZbI)

31 Well, I'm not an accountant, but I am a financial analyst and have been since, well, let's just say I was on the trading floor of a major Wall Street firm for the crash of '87 (and it wasn't "take your kid to work day").

I think we are in a financial crisis. However I know that any proposal made by an investment banker is designed primarily to benefit investment bankers. It's what they do. It's all they do...

There are other approaches to addressing this problem. Loans are a less bad idea vs. the treasury trying to value illiquid assets (a stunningly bad idea, as in "Wham! reunion tour" bad, as in "Cop Rock remake" bad, that kind of bad). Over funding the FDIC is another less bad idea. Putting in place incentives to free up the CP market is another (lots of tax approaches to that, lots of capital waiting on the sidelines). And of course, get rid of "mark to market."

Beyond some short term benefits, the Paulson plan will likely make things worse. You want a credit crunch? I mean a real one? Suck $700 billion out of the economy with new federal borrowing and sink it into a pool of depreciating illiquid assets.

It's not socialist. It's just dumb.

Address the crisis, yes, but not with this plan, and not with any version of this plan.

Posted by: Planet Moron at September 29, 2008 09:24 PM (tqQkH)

32 I can't tell if FVM is used in all banks or only commercial banks unless it is defined on access to markets for valuation (if so, it depends). I've been reading the FASB exposure drafts back to 2005-2006 for FAS 157 but I'm not a banker, just an accountant. But for what I've read, the scope of it is for those entities :
that both buys and sells in blocks as part of its regular, ongoing business activities
So, if they "regularly" sell and buy blocks of securities, yeah, it applies. Which means that if such securities compromise a non-material amount of assets, they're fucked. There should have been a regularization over a set period of time applied to the valuation - as was discussed I think back in 2005 when they were working on this. But really, this situation wasn't directly contemplated as far as I can see.

Posted by: Inspector Asshole at September 29, 2008 09:25 PM (/2QNq)

33 Actually for you computer analogy a trojan horse would be better. A bank gets infected with assets that have had their value forced to zero. That valuation causes the problem to spread to other companies that do business with the bank. In a computer you would run adaware here we inject liquidity and after the credit lines open up again give the banks a 6 month window to revalue their assets. If we want o be dicks about it we make the revaluation subject to an IRS audit to insure the assets are valued fairly.

Posted by: chad at September 29, 2008 09:26 PM (YICPL)

34 Just my two cents to back up Inspector Asshole:
I retired from the IRS (left the dark side) 11 years ago. The mark-to-market shit was out there for several years before I left, and IT WAS A MAJOR PROBLEM THEN. It was to "properly" value securities. It just created major work with little reward to do the "revaluation".
These "bundled mortgages" are treated as securities (paper assets) WITHOUT REGARD TO THE UNDERLYING REAL ESTATE'S VALUE. (Mortgages are secured loans, secured by the real estate)
So, mark-to-market is being applied to stuff it was NEVER DESIGNED TO APPLY TO.
But the buzzwords shore sound good, don' t they?????

Posted by: codekeyguy at September 29, 2008 09:26 PM (+WuRB)

35 Mark-to-market + Sarbanes-Oxley, that's overkill.

Explain.

Posted by: Andy at September 29, 2008 09:27 PM (iIvIk)

36 You left out some zeroes

That's why I'll never be a staffer on the House Ways And Means Committee

Posted by: mrp at September 29, 2008 09:28 PM (HjPtV)

37 I just cut myself shaving.

Posted by: Blarg the Destroyer at September 29, 2008 09:28 PM (PcJ/l)

38 Suck $700 billion out of the economy with new federal borrowing and sink it into a pool of depreciating illiquid assets.

Well, sure, but those assets exist in the economy, no matter who actually holds them. The hit must be taken; the only question is will we take the hit all at once (as a market correction), or spread it out over time (as a government bailout). There's no way to make these assets simply disappear.



Posted by: Monty at September 29, 2008 09:30 PM (dCZbI)

39 The psychological reason you can't immediately rescind mark to market
accounting rules is that if you change your accounting during a crisis,
people will wonder whether or not you're just papering over a problem.

Yeah, that's true... but the government has already made a couple moves along those lines in recent days. As of Saturday you couldn't short 900 companies. I haven't checked, but I'll bet every single dow stock was on that list. If that's true "Teh Market", which is the Dow 30 to Joe Schmoe, is already being temporarily inflated because people can't make money on the downside.

I'm sure they could change mark to market and say "well, we're just going back to the old system to reduce volatility" or somesuch.

Posted by: Ace's liver at September 29, 2008 09:31 PM (XIXhw)

40 I wonder what's going to happen to all the just-in-time retailers when
the credit crunch gets really bad. Just-in-time only works when credit
is easy and fast. What happens to Wal-Mart or Home Depot or Dell
Computer when the cost of credit goes way up?
It hits JIT manufacturers and distributors, too. Basically the entire supply chain these days.

Posted by: Andy at September 29, 2008 09:31 PM (iIvIk)

41 If what Inspector Asshole was saying was all true and the root of the issue, it just makes the bail-out seemthe most godawful stupid thing I've ever fucking heard.
We're spending $700B so we don't have to re-write accounting regulation?

Posted by: Entropy at September 29, 2008 09:32 PM (HgAV0)

42 I only know about three things well: the look in a hobo' eyes as he confronts his mortality, low-carb dieting with Klonopin and distressed assets.
All our convert here is saying is what I've been commenting upon since this began. But who's going to listen to me? You, however, are the smart military blogger. Use your resources and maybe we convince this guy before today, when it's a little late.
I just want to be a resource, okay? I don't really have much of a life.

Posted by: spongeworthy at September 29, 2008 09:33 PM (rplL3)

43 We seem to be missing an explanation of how this spreads from companies that are holding toxic waste to companies that aren't.

Posted by: Cerebral Paul Z. at September 29, 2008 09:33 PM (BOQRp)

44 The psychological reason you can't immediately rescind mark to market accounting rules is that if you change your accounting during a crisis, people will wonder whether or not you're just papering over a problem.So the solution is to.... paperover the problem...with money?!?

Posted by: Entropy at September 29, 2008 09:34 PM (HgAV0)

45 I was going to post another question about mark-to-market, using my house and the house across the street as hypotheticals, but codekeyguy just answered it for me, and explains why this doesn't make sense: mark-to-market is for securities, and now it's getting applied to hard assets. That's insane.

Also, if there was a Wham! reunion tour, I'd probably go.

Posted by: Rajiv Vindaloo at September 29, 2008 09:36 PM (Rn2+D)

46 As of Saturday you couldn't short 900 companies. I haven't checked,
but I'll bet every single dow stock was on that list. If that's true
"Teh Market", which is the Dow 30 to Joe Schmoe, is already being
temporarily inflated because people can't make money on the downside.

If not for this rule, would some short covering today have cushioned the Dow's 777 point slide? Thanks to the brainiacs at the SEC, we'll never know.

Posted by: Andy at September 29, 2008 09:36 PM (iIvIk)

47 Without Mark to Market there is no way for the bail out to work. IF the Treasury gets the approval to start buying this crap paper, they will effectively set the market. Having an effect on balance sheets throughout the financial sector.


Posted by: Stephen Macklin at September 29, 2008 09:38 PM (R7LgM)

48 I still don't understand how these bundled mortgages can be valued at or near zero. Doesn't that imply the potential buyers think every loan in the bundle will go 100% default? What am I missing?

Posted by: Ace's liver at September 29, 2008 09:38 PM (XIXhw)

49 #30, Old Hippie Vet, yet the younger right-wing vet give you a piece of wisdom from our friends in the Klingon Empire:

"A thousand throats may be cut in one night by a running man."

I'm sure if we all work together on the problem we can deal with it effectively.

Posted by: SGT Dan at September 29, 2008 09:38 PM (up/so)

50 Obama's AG will sort this all out by indicting Republicans in perpetuity.
When do I get the chip for my neck?

Posted by: Jones CO/the next Dillinger at September 29, 2008 09:39 PM (KOkrW)

51 Take a hypothetical minimum wage lifer - $6.65 / hour x 40 hours / week x 50 weeks / year x 50 years / useful working life = $665,000 / useful working life --OR-- 1.5 million working stiffs per $1 Trillion [DOLLARS!].

Suggest we go whole hog on central planning and make entering the States w/o clearing immigration a life sentence at hard labor - need only round up 10% (give or take) and we'll get 1:1 on this bail out...

... or we can embrace the suck...

... or we can kick the can to our sons and daughters (and grandchildren) and put them to work so we can enjoy our well deserved 401k... YEAH, that's the ticket!

Posted by: shit-house lawyer at September 29, 2008 09:39 PM (SxgfN)

52 Do those two things, and you're not only taking the taxpayer off the hook and putting the irresponsible parties on the hook, but you also give all these valueless mortages a real standing value, and you're even avoiding foreclosures.THAT is how you solve this financial crisis. But I bet you've never even heard anyone suggest it. That's cause no one can make a mint that way
HOW THE HELL IS THIS BLOG POST SUPPOSED TO CONVINCE ANYONE?!?
Well I mean the way Ace wants, anyway...
It sure as fuck makes me adamantly opposed to this bailout, whereas before I was sarcastistic and detatched...
Is it really THIS goddamn stupid of a plan? 700B just and explicitly so they can continue with the shit that caused the problem?

Posted by: Entropy at September 29, 2008 09:40 PM (HgAV0)

53 Quinn,
We were discussing that very thing at the office today. I think we are way smarter than the idiots in charge. (I could be biased)

Posted by: Vmaximus at September 29, 2008 09:40 PM (aXeIB)

54 Can we use some of this bailout money to kill people in comas?

Posted by: Masturbatin' Pete at September 29, 2008 09:41 PM (E7Fcd)

55 Just off topic, where has Obama been hiding? I didn't hear a peep from him today, or did the networks not show it? What is his plan?

Posted by: Craigm68 at September 29, 2008 09:41 PM (0nkpj)

56 Ace's liver, if they changed it the following way, it might work and not freak anyone out.

Proposed change:

If you agree to hold the mbs to maturity, then you are exempted from mark to market capitalization requirements. Then, it's pretty easy to argue that you're dealing with an NPV type value calculation rather than a market type value calculation.

But, in the middle of a crisis, I don't know if it (psych-wise) flies to say both a) it's worth its discounted future cash flow and b) it's worth its market price.


Posted by: counter at September 29, 2008 09:42 PM (8/0ME)

57 Explain? A CEO has to account for the financial position of his company before he signs off on his audit. If I choose not to value my assets at market and they turn out to be shit I'm going to jail.
Now, I think they should be marked to market, don't misunderstand. But why should S-O require me to swear to thier value when MTM requires me to mark them down already? That part of S-O seems overkill to me.
If I had a well-capitalized company willing to hold an undervalued asset to its maturity I can't see why I'd need to be restrained by both S-O and MTM. But I'm willing to hear the other side of that.
Tomorrow.

Posted by: spongeworthy at September 29, 2008 09:42 PM (rplL3)

58 Let's put it this way - think of the "credit drain" and bad things as a
military force. The CRA loans to carnies and strippers with Tourette's
Syndrome is like a company of infantry - pretty impressive. The problem
with marking down to market prices is like giving each sonofabich a
Davey Crockett nuclear howitzer.

I'm sorry, but I stopped reading here. Anyone who uses such retarded analogies has nothing intelligent to say.

Posted by: Masturbatin' Pete at September 29, 2008 09:42 PM (E7Fcd)

59 Well, sure, but those assets exist in the economy, no matter who actually holds them. The hit must be taken; the only question is will we take the hit all at once (as a market correction), or spread it out over time (as a government bailout). There's no way to make these assets simply disappear.
What hit?! The post was claiming the assets were undervalued. The correction will send these companies books soaring, not faultering. What hit?

Posted by: Entropy at September 29, 2008 09:44 PM (HgAV0)

60 sigh.
i know i'm flipflopping here, and i was screaming moral hazard at the top of my lungs last week.
hell, still am. but it looks like (as someone else said) that this is the best of our one options.

Posted by: jdub at September 29, 2008 09:44 PM (hUStE)

61 Doesn't that imply the potential buyers think every loan in the bundle will go 100% default? What am I missing?
That the market, for a variety of reason, a dearth of lending among them, cannot and will not pay you what the asset is worth. The "bailout" addresses that with authori-ty.

Posted by: spongeworthy at September 29, 2008 09:46 PM (rplL3)

62 More bad news!!!

http://biz.yahoo.com/ap/080929/oil_prices.html

hs)

Posted by: Kasper Hauser at September 29, 2008 09:47 PM (oWAHQ)

63 Pence is deeply, and destructively, in love with his own cleverness.

His flipping on amnesty should have taught y'all as much.

Posted by: someone at September 29, 2008 09:47 PM (2z2WN)

64 "So the solution is to.... "paperover the problem...with money?!?"

Entropy, if you'll take it down a notch or two, I'd be happy to give you my thoughts, for what they're worth. But, you just keep taking such aggressive shots at Ace and being so hyperbolic in general, it doesn't seem fruitful.

Posted by: counter at September 29, 2008 09:48 PM (8/0ME)

65 Doesn't that imply the potential buyers think every loan in the bundle will go 100% default? What am I missing?
That the market, for a variety of reason, a dearth of lending among them, cannot and will not pay you what the asset is worth.

Exactly. Thanks to the credit crunch, they couldn't come up with the money even if they wanted to!

Posted by: someone at September 29, 2008 09:49 PM (2z2WN)

66 Kasper,

Futures markets. Global recession = lower fuel consumption.

Posted by: Monty at September 29, 2008 09:50 PM (dCZbI)

67 Explain? A CEO has to account for the financial position of his company before he signs off on his audit.

Oh, o.k. That was a '34 Act requirement before the stupid Sarbanes-Oxley certifications they sign now, though. The SOX 302 and 906 certifications are about 99% form over substance.

Posted by: Andy at September 29, 2008 09:52 PM (iIvIk)

68 Kasper,

They're pricing in the likelihood of a massive worldwide recession/depression and you're cheering?

Posted by: someone at September 29, 2008 09:52 PM (2z2WN)

69 62
Can we use some of this bailout money to kill people in comas?

You don't need money for that. Just go in their hospital rooms and flip some switches. Free and fun!

Posted by: RajvVindaloo at September 29, 2008 09:53 PM (Rn2+D)

70 Look, if I don't do this, then I can claim an asset is worth WHATEVER I want to say they're worth.
There are other ways to value assets. Discounted cash flow is one.
.

Posted by: Warden at September 29, 2008 09:54 PM (QoR4a)

71 So allyou folk whosaw all this coming down the pike, what did you do personally do as far as financial protection? And what do youadvise for those whodidn't know.?
We have four sons we need to send to college and as we watched the market we decided last spring to put everything into 'safe harbor' = goverment securities. Was that wrong?
And seriously, pretend I'm a 4 year old - which I cop to - what is the actual fallout of this for the average suburbanite family and for the average American who owns a business/farm?

Posted by: Mainstreet at September 29, 2008 09:54 PM (8nB5X)

72 63
Just off topic, where has Obama been hiding? I didn't hear a peep from
him today, or did the networks not show it? What is his plan?
He put out a press release today directly blaming Bush, McCain and the GOP in general for everything. Beyond that, he could coast and let the media do the work for him.

Posted by: RajvVindaloo at September 29, 2008 09:54 PM (Rn2+D)

73 I consider myself a fairly somewhat intelligent guy with a basic, rudimentary grasp of basic economics, but reading these recent post and comments of those involved in finance, and trying to keep up,makes me feel a bit likeRalpie Wiggums.
"I'm... confused. My head hurts." [/Wiggums]
I can only imagine those out there who don't bother to even keep up. Let's just say I'm glad I bought my house last year, and that my rate is fixed.

Posted by: Lee at September 29, 2008 09:54 PM (Xb3DR)

74 What I still don't understand about mark-to-market:

Why is a shitty mortgage is worthless under the rules? Because there are no cash flows from it in the form of payments?

Why isn't the value of the property considered? Wouldn't the holder have the right to the property if the borrower defaults? If the property has a market value, then shouldn't the shitty mortgage have a value as well? I'm obviously missing something here, but I'd like to know what.

Posted by: bunny boy at September 29, 2008 09:55 PM (kHWwK)

75 That's about the third or fourth thread now where some commenter has mentioned oil dropping as a plus.

Oil dropping because supply is up = good.

Oil dropping because demand is going down = bad.

Guess which instance this is.


Posted by: counter at September 29, 2008 09:55 PM (8/0ME)

76 I appreciate that, Host. But Hunchy already made it clear that my thoughts are not fit for consumptiom here, thatI need Tina Brown or even Hunchy herself to edit my coarse musings.
And it is frustrating. Like I said earlier and JackStraw agreed, intellectual rigor and principles are fine and good until real money is on the line, and this is real money.
For now, I have little to offer going forward that I haven't bored the shit out of the collected morons with. That said, I do speak from authority on the subject but who would know that, right?
My nickname should have been Vulture Investor Who Will Pick Your Pocket Really Bad If You Don't Buy A Friggin' Clue Here.

Posted by: spongeworthy at September 29, 2008 09:55 PM (rplL3)

77 The issues I have with a bailout (other than the philosophical ones I can set aside, assuming it works and prevents future crises) are the lack of guarantees. Can we be reasonably sure it will do what is intended? Are we sure the folks who created this mess can be trusted to correct it? What are the alternatives - and not just "do something or prepare for the Armageddon" - but is there a less intrusive way to correct the market.

And the biggie, is this only going to delay the inevitable at the expense of eternal government interference with the markets?

I don't think anyone wants a total meltdown. I admire the ideological purity of those who say they do, but I can't see an upside. I am, though, willing to accept a market correction over the short term if delaying a bill achieves something permanent with the lowest possible taxpayer liability.

Color me skeptical but hopeful.

Inspector Asshole's a cocksucker* for rolling over though.

*Used entirely for most profane conservative blogger purposes.

Posted by: Baron Von Ottomatic at September 29, 2008 09:56 PM (4ZOxD)

78 The real question here is should we all just stop making our mortgage payments if the government is just going to give us a better deal down the road? I want to get in on all the fun too.

Posted by: BTM at September 29, 2008 09:57 PM (v0dke)

79 So, just to add more to the conversation, what's the word on Lowry's "Plan B" , which also seems to be Kudlow's "Plan B," if, as some suggest, a resurrected bail-out becomes a vehicle for total-left insanity?

It would seem to me that, if this is as serious as those supporting the bail-out say it is, that this ("Plan B") option should be exercised, regardless.

Anyhow, it beats the hell out of my personal "Plan B," which involved an investment of $1 in Powerball Futures last Friday, which apparently became so much worthless paper on Saturday night.

Posted by: notropis at September 29, 2008 09:58 PM (evPvV)

80 > Distribution networks would be among the first hit. I haven't gone further than that in my research. But right there, we're looking at some severe dislocation. Severe as in diabetics having to stock up on insulin.

> This does have the possibility of being retardedly bad - think what would happen if 1/3rd of the train and truck traffic ceased. Stopped without notice.

> The problem is systemic - not just to the credit market - it is systemic to how we do business between states. It is systemic as in "No Produce Scheduled Until Next Week" type signs in your Safeway.

> If it doesn't get fixed in 2 weeks, by January some communities will be isolated due to no diesel for the road crews. In New York.

This reminds me of a novel I read once. All the smartest people in America went and hid away at a ski resort and let the dumb people (mostly Democrat types) run it into the ground. Then came a bunch of stuff like those examples above. Finally the nation collapsed and the smart people all celebrated by smoking golden cigarettes.

There was more to it than that, but I think I got the salient points. It was a pretty good book, though I have to admit it seemed a little unrealistic at the time.

Posted by: The Chap in the Deerstalker Cap at September 29, 2008 09:59 PM (O3qBM)

81 Oh, also sponge, don't think I'm defending SOX. I think it's about the biggest overreaction evah.

You want to talk about fucked up, try this one. FAS 123(R) requires companies to fair value employee stock options. Most companies use the Black-Scholes model to do this, but BS wasn't designed to cover some of the unique features of employee stock options (no active market, very long life, restricted exercise periods, etc.). The FASB basically says they know all this, but so what - just value the options, take the expense and STFU.

So under SOX, the CEO and CFO have personal liability for the accuracy of the financial statements but are required to apply an acknowledged broken model under an accounting standard to produce said statements. Come to think of it, this is a lot like mark-to-market.

Posted by: Andy at September 29, 2008 09:59 PM (iIvIk)

82 #35
It's the company relying upon a bank overdraft to smooth out the liquidity bumps between Wal-mart paying it's 120 day account and their suppliers holding 30 day notes, who are most vulnerable in any credit squeeze.
Which means practically every small business.
And if the US is anything like Oz, 'small business' is the largest employer in the country.
Not Ford or IBM.

Posted by: lotocoti at September 29, 2008 10:00 PM (bU9dc)

83 And seriously, pretend I'm a 4 year old - which I cop to - what is the
actual fallout of this for the average suburbanite family and for the
average American who owns a business/farm?

First: consult a professional, don't ask morons on a moronblog. Seriously.

Second: Having said that, the watchword as always is diversify. As we have learned, traditional "safe havens" like money markets and T-bills aren't as safe as they were assumed to be. Every financial transaction contains a particle of risk. You have to gauge what your financial requirements are versus how much risk you're willing to take on. Bonds and money markets tend to be low-risk, but they're also low-yield (especially now). They're not going to appreciate much -- if at all -- over the next couple of years. And bonds aren't that liquid now, so if you need money on short notice, money markets and CDs are probably your best bet. If you have the money you might even want to invest in gold; even if everything else goes to shit, gold will retain at least some value.

But most important is to not freak out. Don't just lash out blindly because you're scared. Have a plan. Sit down with a financial planner or a banker you trust and set some goals.

Posted by: Monty at September 29, 2008 10:02 PM (dCZbI)

84 Qwinn, @#70: As for the securitized mortgages and the 8% going down to 5%, well, this is done by correcting the ludicrous AAA rating that's on them.
That can't be done, because many companies who hold such debt require them to be AAA-rated.

Posted by: INCITEmarsh at September 29, 2008 10:02 PM (ULsz9)

85 Actually emotions play a large part in all of this,and sad to say anyone that has seen Nancy Pelosi's speech or John Kerry's performance on O'Reilly tonight will find it hard to support any sort of bail out. They'll probabaly be wrong to decide that way, but anger makes people do things they normally wouldn't. I suspect this bill is dead barring some major financial pain between now and Thursday. Of course, that's what Congress is counting on, I bet. We'll see.

Posted by: The Obvious at September 29, 2008 10:03 PM (1g+FW)

86 Monty: "Well, sure, but those assets exist in the economy, no matter who actually holds them. The hit must be taken; the only question is will we take the hit all at once (as a market correction), or spread it out over time (as a government bailout). There's no way to make these assets simply disappear."

The assets have already disappeared. And yes, they could very well be worth zero. These are not straight up bundles of mortgages, they are strips of mortgages with varying degrees of rights to the mortgage payment streams (and properties) underlying them. The ones lowest on the totem pole could be wiped out with a fairly modest default rate.

So now the government steps in, borrows $700 billion and pays too much for these assets (almost certainly) and gives the money to the banks. Will they lend the money out or will they just use it to shore up capital?

None of these government interventions are "great" but some are worse than others. The Paulson plan is among the worst. Needlessly complex, prone to disastrous mispricing of assets and fraud, sucks up a huge amount of available capital in a very short period of time, and offers the fewest protections for the taxpayer.

Posted by: Planet Moron at September 29, 2008 10:03 PM (tqQkH)

87 I'm still a little confused on one point (not trying to stir shit, honestly confused): How is any of this discussion regarding M2M supposed to make us more pro-bailout? I still can't understand why it's not a screaming siren alarm that the M2M rules need to be temporarily relaxed/suspended/whatever. I mean, "toxic" or not, bad mortgage debts are not truly worth ZERO DOLLARS. They do have value, and if the investment firms aren't allowed to assign them any value whatsoever ... that's nuts, far more nuts than any bailout plan (or the failure of said plan) might be. And it would seem to be an unbelievably direct immediate cause of this crisis.

Shouldn't the very first move be to amend that rule, at least temporarily? And if not, why not?


Posted by: RajvVindaloo at September 29, 2008 10:04 PM (Rn2+D)

88 Ace, I think that what you are missing here isa part strawman - there are people who are on the "anti-socialism" bandwagon but certainly not the majority opposed, not even among the commenters here.
Lots of people have doubts about this whole deal,not just commenters, not just Republicans, recall some 40% of the Democrats in the House couldn't/wouldn't vote for it, an overwhelming majority of the public doesn't support it, and they surely are not all members of the von Mises Institute or whatever the hell it is.
I doubt that most of the people want ot "burn it all down." I surely don't. I agree that something must be done, I am not convinced this is the something. Remember, 2 weeks ago the sky is falling people saw nothing wrong. So why is it that we are to accept their perfect perspicacity now? If our elected leaders thought this was as serious as all that, they would be serious. Instead, they are pissing on each other and us. They have more info about what this bailout is than you or the rest of us do, they seem to think its a joke.
So why should we think any differently? If this is going to all be great and we are going to be farting through silk once the actual values of these securities is realized, then how come Hank Paulson came out and said I need $700B of your dollars or else!
I mean Barney Frank and the Black Caucus mau maued everyone into going along with this gig, and somehow it is my fucking fault that Speaker Pelosi is a twit?

Posted by: blaster at September 29, 2008 10:05 PM (BiphJ)

89 It is correct that if all the loans in the bundle were foreclosed on, there would still be more money than the what the bundles are currently valued at. The loans are worth nothing, but even with depreciation the homes are worth something. Thank you I.A. for pointing that out. People need to realize that it isn't just the CRA and evil wall street/government entities that is suffering because of this- it is bleeding throughout the system. It could be your pension, your bank, your paycheck that can't be met...
Qwinn,
You can't solve it by modifying mortgages. A: the mortgage backed securities are valued for the scheduled payments, so if you put all the payments off they are still worth nothing. Also,a big majority offoreclosures (even now) are caused by loss of income. If someone loses their income or spouses income there isnt a modification possible - or if they get transfered and need to move, etc. Please do not believe that everyone who is struggling is there because they are over 35% Debt to Income.

Posted by: susanita at September 29, 2008 10:05 PM (Dw3vY)

90 Wait, correct me if I'm wrong, but the Paulson plan essentially gives the government the ability to buy up these toxic bundles of mortgages, and the power to renegotiate terms with borrowers who are about to default. I know it is more complicated then that, but that is a feature no?

Posted by: BTM at September 29, 2008 10:08 PM (v0dke)

91 Interesting article, for those who can read. (We've been talking about FAS 157 and associated problems for days now, but someone wasn't paying attention.) This guy blames changes in Fed policy in the last few months for the TED climb. Also notes the obvious, that Ben and Henry have been signalling bailout for some time, inclining holders of crap assets (Lehman Bros?) to keep on holdin'on, in the hope of a good price from gummint suckers.
http://tinyurl.com/3lrbbx
For the record: "Let the motherfucker burn." We dodged a bullet today.

Posted by: lukemcgook at September 29, 2008 10:09 PM (1hkXr)

92 Well go ahead you scaredy-cats and shiver all you want to, but Michael Moore is on my side:

http://tinyurl.com/5ydvnx

Got that? MICHAEL MOORE agrees with me!














I think I'm going to kill myself.

Posted by: Kasper Hauser at September 29, 2008 10:10 PM (oWAHQ)

93 The real question here is should we all just stop making our mortgage payments if the government is just going to give us a better deal down the road? I want to get in on all the fun too.Heh.
It's bad enough that those who wantedcertain houses who couldn't afford them gotthem anyway. Thatirked me. What kills me is that these losersmay ownmy kids' future monies and cheat them out of their due.
I thought there were rewards for delayed gratification - I guess I was a sucker.
Mad but till hopeful that enough Republicans can turn things right.

Posted by: Mainstreet at September 29, 2008 10:15 PM (8nB5X)

94 i don't think so. the dems wanted to add a mortgage-readjustment feature but I believe it was stripped out.

Nope. See section 109 of the bill, entitled "Foreclosure Mitigation Efforts."

You're thinking of the Donks' original bankruptcy cramdown proposal.

Posted by: Andy at September 29, 2008 10:16 PM (iIvIk)

95 I tried to post along the lines of Planet Moron (96), but it got silently eaten because you can't create a fucking link on this moron blog any more.

My understanding of these assets is that they pool a bunch of mortgages and then split them into "tranches" based on risk. An example on Wikipedia (tranche) splits them into four pieces. The lowest one takes the first 25% of the loss, the highest takes the last.

The problem, it seems to me, is if you bundle all these junk mortgages together, the bottom tranche seems truly and thoroughly fucked. You've got a high default rate and the properties are highly devalued relative to the mortgage. You have additional "Socialism risk", as in the Dodd plan, where friendly bankruptcy judges mark down your assets for your benefit. If you're truly last in line to get paid from out of this crap, your assets very likely ARE worth zero.

The only reasons it seems they wouldn't be worth zero:

* You expect the market to recover substantially. (In the example above, the entire pool would have to recover to at least 75% before you got a penny).

* There's some other complexity where you get a stream of payments, even if your entire principal is eaten in the end.

* Somebody is willing to pay *something* for this shit, gambling on a broad market recovery.

It sounds like the Paulson plan would buy this shit for cheap, but sometimes you get what you pay for.

Posted by: pbrown at September 29, 2008 10:19 PM (vxGjP)

96 and the Asia markets are dropping in early trading. HK down 6%.

Posted by: ArandomPerson at September 29, 2008 10:19 PM (2PwTK)

97 ArandomPerson, yeah, this is where it could get scary.

Posted by: counter at September 29, 2008 10:22 PM (8/0ME)

98 Nikkei's down about 6%. Shanghai composite down about 4% (although with the Chinese regulatory rules, who the hell knows what the real number is). Hang Seng is down 6%. Commercial paper markets are moribund. Commodity futures markets are tanking, probably because everyone's expecting exports to take it in the shorts.

In short, every market indicator I've looked at today is going down like a two-dollar whore.

Posted by: Monty at September 29, 2008 10:26 PM (dCZbI)

99 46
We're spending $700B so we don't have to re-write accounting regulation?
Sorta. But they can't apply it in time if it were changed tomorrow in order to make payroll/free up the markets. It's as if your dog, allowed to drink from your toilet for the last 10 months, got his head stuck in there. And you already flushed the toilet just a couple seconds ago without realising it. He's going to drown unless you do something and his head's swelled up too big to pull him out.
I have no opinion on whether you should use a hammer (Paulson Plan) or blow air up his asshole (Dodd Plan) or something else like bailing out the water. I'm just an accountant.
All I wanted to figure out was "How bad can it go and what kind of screams will I hear as it gets going? What kind of concrete things will happen?"
I also couldn't figure out how carnies could take down our financial system.
I can just give you analogies. CRA is like the habit children have of wiping snot on their sleeves and sneezing in crowded places. The credit "crunch"/valuation problem combined at this point in time is pneumonic plague.
The "systemic crisis" is of everything that occurs - mail, food, diesel deliveries, medicine, electricity, paper, agriculture, tools, software, spot removers, radios, vitamins, well, you get the picture. Distribution networks (trucks, trains, potheads driving panel trucks, etc)get shit from one point to another. They live on short term loans for payroll, benefits, lights, fuel, and maintenance. They, like most businesses, bill their customers 10 net 30, so they often float commercial loans.They're healthy businesses that require credit to operate smoothly.They are also necessary for life. Not merely convenience.
There's a way to anticipate/predict what will go on once you understand the nut, and it is frightening when you realize how quickly this will resonate. It won't happen to youin a week or a day most likely, but will affect your life within a month, month and a half. And by January, a lot of you will be out of work, banks will be restricting withdrawals/transfers, and lots of suppliers will be shuttered at at best. Farmers will be saying "Fuck it" a lot more than ever. And that means starvation in some places outside of the US within 6 to 8 months.
Another analogy/metaphor. Pretend that getting a paycheck from a business (not government) is like turning on hot water in your bathtub. This credit issue is like a bunker-buster bomb went off at the water company's very first valve.You might get a bit for the next little while, but it ain't going to be a verylong shower.

Posted by: Inspector Asshole at September 29, 2008 10:27 PM (/2QNq)

100 Where is Milton Friedman when we him?
He would ask us to think about the market and why this has occurred. Look for the causes and fix them. Patching them will only prolong the problem. I use to teach Econ., this is not a short blog post, it will be many dissertations in the future.
Most of the artificial valuation of assets can be corrected. Why are they in place? Trust, or lack of it. I suspect these rules where a results of the SL problem years ago, but I don't know the history.
Simply buying the assets will not fix the problem and creates many more. Which asset do you buy and for how much? We now want a master of the credit universe? Does the next Treasury Sec start only buying assets from Democrat areas or banks? What's to stop him. What's to stop him from setting up Union home loans? This could become a cluster fuck.
Friedman would also see opportunity in all this. Surely the assets of Wachovia once worth $57 a share didn't evaporate to $1 in a year. Citi Bank stole the bank.
We can come up with a better plan, rushing it is not good or smart.
Chill out, as Z would say.
Kemp

Posted by: kempermanx at September 29, 2008 10:27 PM (2+9Yx)

101 I posted this on the wrong thread, I'm reposting here. Appears we have some bright bulbs burning, perhaps we can shine some light.

I don't get what all the hand wringing is about. Something is going to
be done...hopefully something better than the crap that was put up for
a vote. The Dow had its 17th worst day in history... the 17th worst,
not the first or the second.

Look, if there was no market for
sub prime loans, bankers wouldn't make them. If you can't sell you
don't make it. The banker's aren't at fault, the CRA is not at fault,
the people (institutions) that rated these loans as AAA and the fools
that believed them are the ones at fault. Somebody did not do their
due diligence and consequently a bunch of bad paper is floating around
and in all liklihood after the blood and dust settles it is probably
worth about 40 cents on the dollar and it is sort of like musical
chairs....whoever is holding it when the music stops takes the bite.

If
I was made the "Financial Dictator" this would be my plan for
straightening this mess up, without any taxpayer funds involved:

1.
Suspend the mark to market requirement. Let the bankers (mostly
investment banks anyway, no FDIC funds involved) value these securities
as they want, not based on the current market. So what if they end up with securities that are currently valued 20-40 percent over the existing market.

2.
All capital gains on investments from this day forward for a period of
three years will be taxed at the rate of 0%. If what you want is a
capital infusion and capital moving through the market, get it out of
cash accounts and get it working. A lot of risk can be taken when the
tax bite on profits is nil.

3. Remove the secondary market for
non-conventional and/or sub prime loans. If there is no market for
them they will not be made. No bank is going to originate and retain
any substantial amount of loans as they are counted against their
lending limits and capital requirements.

I haven't been in the
banking business for some years but I did spend about 15 years in it,
including being a bank consultant with PMM in the 70's. One of the
things we learned early on was that every loan underwritten was a risk;
deviating from standard qualifications increased the risk, increased
risk required increased rewards (higher returns), or higher security
(more down payment or additional pledged security).

Perhaps
others can add to my list of recommendations. I know I'm not the
brightest bulb in the chandelier, but I don't think you have to be to
come up with some logical, realistic solutions without giving away the
farm.

Posted by: rls at September 29, 2008 10:28 PM (glLuS)

102 "We can come up with a better plan, rushing it is not good or smart. "

EXACTLY. Why are we trying to ram a bailout through that doesn't remedy the problems that caused this crisis in the first place? It. Makes. No. Sense. And to see all these politicians scurrying around makes me even more suspicious.

Better to do this right the first time I say.

Posted by: h2u at September 29, 2008 10:29 PM (gp/if)

103 Monty,

But you left out how well everyone is going to sleep tonight, tucked in under their blanket of ideological purity. So we've got that going for us.

Posted by: DrewM. at September 29, 2008 10:29 PM (hlYel)

104 You guys want to fix the root problems of the patient but aren't willing to stop him from bleeding out right now. Dumb.

Posted by: XBradTC at September 29, 2008 10:31 PM (Y7Bv8)

105 How many days of trillion dollar losses before spending 250 billion in the first wave sounds like a good idea?

Posted by: XBradTC at September 29, 2008 10:32 PM (Y7Bv8)

106 To add to Andy's observation, making modifications to the terms of residential mortgages is addressed in Sections 103, 109 and 110.

In fact, in Section 103 it is specifically identified as one of the goals the Secretary is expected to "maximize" under the legislation.

Fortunately, they're only talking about changing the interest rate, the principle amount and "similar modifications." You know, just some technical accounting stuff. Nothing to see here, move along...

Posted by: Planet Moron at September 29, 2008 10:32 PM (tqQkH)

107 Friedman would also see opportunity in all this. Surely the assets of Wachovia once worth $57 a share didn't evaporate to $1 in a year. Citi Bank stole the bank
Well, Wachovia is down 80% from just today, and they've been tanking lately in general.
Citi has also been tanking as of late and is down like 20% just today.
Out of these two, I am reasonable certain one of them got screwed.
The other is a mad profit ability.
Frankly they both may be. I think Wachovia got the raw end of the deal but maybe not THAT raw.

Posted by: Entropy at September 29, 2008 10:33 PM (HgAV0)

108 Monty @ 35,

I expect that's a rhetorical question.
But the short answer is WAF.
And not in a good way.

Posted by: Nom de Blog at September 29, 2008 10:33 PM (nOQ1R)

109 Qwinn,
I've worked in the industry for years. The main problem is: You can't adjust the payment to 35% of income for someone who doesn't make any money. And alot of people who have to move/get sick/get divorced/yada yada/ don't even want to do what you are saying. Modification is something that already is being done - always has been done - for people in a bad situation with the means to pull themselves out in time.And something like 75% of modifications end in foreclosure. Those modified loans also, as far as I know, can't stay in the MBS pools. I guess you could try to force the investors to play along, but it isn't as secure as you are thinking.
There are many many people paying their payments just fine at more than 35% of their income. And some that are sending back the keys at much less debt ratio. If what you are proposing was in the interest of the investors of MBS it would have been done last September by the investors themselves. At least that is my feeling.

Posted by: susanita at September 29, 2008 10:33 PM (Dw3vY)

110 "You guys want to fix the root problems of the patient but aren't willing to stop him from bleeding out right now. Dumb."

What good is a band-aid when what's needed is far more invasive and uncomfortable?

Posted by: h2u at September 29, 2008 10:33 PM (gp/if)

111 Eh, fair enough, it is a smaller part of it all. Just thought since we are going to go down in flames, I might as well get something out of the deal.

Posted by: BTM at September 29, 2008 10:33 PM (v0dke)

112 And as for Moron Planet bitching about 700 billion tightening up the money supply? Once again, that would have been easier with that additional trillion dollars of economy, wouldn't it? But here's the thing, when the government spends that money, it will put liquidity (cold hard cash) in banks while removing toxic assets, which will lower their margin requirements, resulting in a much healthier institution.

Posted by: XBradTC at September 29, 2008 10:34 PM (Y7Bv8)

113 One more point, about the Sec of Treasury picking which loans to buy and for how much.
Think that will lead to any contributions to the party in power?
Like Freddie and Fannys contributions to the Dems?
This will lead to pure bribe government, Chicago style, pay to play. Want me to buy your loans? Have you seen my boy The O? Just asking, maybe you can sleep over at the Lincoln bed room and I see if I can help you.
Sound familiar?
Kemp

Posted by: kempermanx at September 29, 2008 10:35 PM (2+9Yx)

114 Look for the causes and fix them.

That's a pretty facile argument, particularly when both causes and effects are in so much contention right now. Some people argue that this isn't even a problem, but a built-in feature of the capitalist system (booms are inevitably followed by busts). I admire Friedman, but like many academics his models tended to underestimate the effects of...chaos. Of factorial combinations of inputs and outputs, of spontaneous complexity.

Remember that each "fix" introduces changes, with second and third-order effects that their creators often did not anticipate. Remember that SARBOX was itself a "fix" for the last financial debacle. Temporary "fixes" have a way of becoming permanent features of the landscape.

Posted by: Monty at September 29, 2008 10:36 PM (dCZbI)

115 h2u, the ER stabilizes a patient before sending them surgery.

Posted by: XBradTC at September 29, 2008 10:36 PM (Y7Bv8)

116 it will put liquidity (cold hard cash) in banks while removing toxic
assets, which will lower their margin requirements, resulting in a much
healthier institution.
Not to mention putting the brakes on the downhill slide in the economy, keeping people in their jobs and current on their mortgages.

Posted by: Andy at September 29, 2008 10:36 PM (iIvIk)

117 "One more point, about the Sec of Treasury picking which loans to buy and for how much.

Think that will lead to any contributions to the party in power?"

As far as I''m concerned, that's the most salient argument against that I've yet seen offered.

This whole thing smells a bit too strongly of "Third Way" Clintonism to make me very comfortable.

Posted by: notropis at September 29, 2008 10:40 PM (evPvV)

118 I am really loving the shower analogy um, Inspector. Please now go on TV to explain.
We can catch the bombers tomorrow, but we need hot water today.

Posted by: susanita at September 29, 2008 10:42 PM (Dw3vY)

119 Monty,
You make good points, that's why econ is so complex, so many things affect other things.
One thing about econ though, we are the only social science that has a score card. It's called money. If we make a prediction or policy, if it doesn't work we know because MONEY is involved here, not thin air. We are also pretty damn good now at making complex formulas to test our theories. Only problem with them, is they always have damn assumptions, which can be total BS. Give me my assumptions and I give you the outcome I want.
It can be done, with some serious work.
Kemp

Posted by: kempermanx at September 29, 2008 10:42 PM (2+9Yx)

120 "h2u, the ER stabilizes a patient before sending them surgery."

XBradTC, the bailout in its current form isn't going to stabilize a damn thing. The reforms need to be part of the bailout or it's simply a toothless joke. Trying to ram this monstrosity through congress obviously didn't work, so maybe -- just maybe -- congress should be focusing on getting it right the FIRST time.

For fuck's sake, guys, if this crisis is so damn critical why are we not fighting to do the best job we can instead of settling?

Posted by: h2u at September 29, 2008 10:42 PM (gp/if)

121 h2u, perfect plan later isn't nearly as attractive as good enough now.

It will stabilize the balance sheets and liquidity of banks. It will free up credit to flow. We can dance around all the perfect solutions (and I'd probably agree with a good many of them) but in the meantime, our economy is shedding a trillion dollars a day.

Posted by: XBradTC at September 29, 2008 10:48 PM (Y7Bv8)

122 I know the answer!

JUST PRINT MORE MONEY!

Posted by: Kasper Hauser at September 29, 2008 10:48 PM (oWAHQ)

123 Kasper, that is what the Fed has been doing for months now by messing with the Fed Funds rate. Devalue the currency and print more money, fun time promised for all.

Posted by: BTM at September 29, 2008 10:50 PM (v0dke)

124 I also think Paulson is an investment banker, he only sees buying assets and then holding them and selling. I am surprised Bernake hasn't come up with a better plan, but he was at Princeton, NOT Chicago.
What we need is to define what we want and try to get to it.
Do we want more of what we have now? The bail out will only prolong what we have that has failed.
What do we want to replace what we have now? And how do we get there?
We need to define our goals, we won't be able to get to them, if we don't know what they are.
Ace should start a thread on our ideal economic plan. We could throw out ideas, for the morons who read this rag to think about, and we know at least one person on McC staff reads this shit.
So get it on, Ace. We need to stay off the valu rite until we have saved the economy!
Kemp

Posted by: kempermanx at September 29, 2008 10:52 PM (2+9Yx)

125 Well, Kasper, they printed 630 billion today, good enuff?

Posted by: XBradTC at September 29, 2008 10:53 PM (Y7Bv8)

126 "It will stabilize the balance sheets and liquidity of banks. It will free up credit to flow. We can dance around all the perfect solutions (and I'd probably agree with a good many of them) but in the meantime, our economy is shedding a trillion dollars a day."

ONE day, XBradTC, has passed and it didn't even break the top ten loss list. Our economy isn't some Latin American house of cards. Let's get this right instead of half-assing it. We aren't some weak-kneed, lilly-livered sissies! We're fuckin' Americans and we can handle tough times when necessary.

I'm never going to approve of a plan that simply kicks the can down the road. NEVER. It's just plain fucking stupid.

Posted by: h2u at September 29, 2008 10:53 PM (gp/if)

127 If we make a prediction or policy, if it doesn't work we know because MONEY is involved here, not thin air.

How much of your money actually exists as cash in your hand versus bits in some bank's computer? Most money is, in fact, little more than "thin air".

Money is really just a kind of battery, when you think about it. A way of storing energy for use in a later place or time. I work now, and my labor is repaid with currency which I may then spend at a later time for goods or services. Our main problem is debt -- spending labor we haven't performed yet, at a rate of exchange that may or may not be fair.

I often prefer to use the word wealth rather than money because I think it better encapsulates the concept. I can be wealthy without having much money; I can have a lot of money without being wealthy.

Posted by: Monty at September 29, 2008 10:53 PM (dCZbI)

128 #145
Monty,
I taught Econ, not Philosophy. Again monks can be wealthy in what they value, economist work with number and usually treat all assets cash or stock as money. Wecan discount non liquid assets and do all the time

Posted by: kempermanx at September 29, 2008 10:57 PM (2+9Yx)

129 I'm buying some calls later this week.
This is all a huge market manipulation.
There'll be some kind of deal worked out this week; this one barely failed.
I agree with Rush - the timing of this is more than a little curious.

Stop all the fucking hysteria, already.

L'shana tova! (Happy Rosh Hashanah!)

Posted by: TexasJew at September 29, 2008 10:59 PM (Ctjeq)

130 Well, h2u, I guess when we lose the elections, our calls to the Democrat congress and President will make damn sure what little is left of the economy will get fixed right.

Tomorrow will be rough. And it ain't gonna get better if Congress doesn't act soon. Remember, the deeper into a credit crisis we get, the more cash it takes to get out.

Posted by: XBradTC at September 29, 2008 11:00 PM (Y7Bv8)

131 Ace, you know the saying, there's nothing more dangerous than a little knowledge. I am not arguing against action, I agree totally that there is a major crisis. I am not one of those burn the house down on principle people. But I think you are wrong about the Paulson plan. Because the Paulson plan, as this guy explains very clearly, will simply not succeed in its stated goal of creating liquidity:
http://tinyurl.com/3wl9zm
PLEASE READ THAT LINK!!!
Do not let your disdain for the extremists and the ignorant rush you into support of a plan that will not work. Look, what do I know, I'm just a kid linking to his economics professor's website like a total goody-two-shoes nerd, but I thought I should at least put up my little knowledge to maybe try and expand yours (and thank you by the way, i read all the economics links you post, i really enjoy them).

Posted by: Adrian at September 29, 2008 11:02 PM (Eu/Um)

132 Kemp, that's the problem with economists, too many think the market is numbers. It's psychology.

Posted by: XBradTC at September 29, 2008 11:02 PM (Y7Bv8)

133 h2u - Our economy isn't some Latin American house of cards. Let's get this right instead of half-assing it. We aren't some weak-kneed, lilly-livered sissies! We're fuckin' Americans and we can handle tough times when necessary.
----------------------------------

As a country, we are bankrupt. Don't think about that, realize it. We have a negative national savings rate. We have a perpetual federal deficit. We are paying the interest on out debt with more debt. We are, as a nation, paying our mortgage with a credit card. Everyone talks about the ability of Americans to sacrifice, but when the rubber meets the road, the majority of citizens won't do, nor will the pols that feel at the trough of the American tax payer.

Posted by: Some Dude at September 29, 2008 11:02 PM (+dnnZ)

134 I taught Econ, not Philosophy.

They are related fields. How could it be otherwise?

I suppose it's the Calvinist in me coming out.

Posted by: Monty at September 29, 2008 11:04 PM (dCZbI)

135 Hey Monty I somehow missed your post. Thanks for the advice. We do have a guy but appreciate your info.

Spent 2 hours today in a waiting room. It was a hematology/oncology office. All around me were older folk who wheezed and coughed and sighed and one wept. Most were bald from chemo anda fewlooked on deaths door. Ibecame terrified wondering why my GP sent me here. I tried toreadbut it was hard to think things could possibly turn out okay.
Turns out I have Von Willebrands Syndrome and need to eat better, drink less and havea Flintstone vitamin along with some shots. Not even kidding - Flinstone vitamins! Pretty grateful considering what many who walk away have to deal with.
I'm NOT dying. Just need some healthy adjustments and a priority check.

I'm just a moron who has nothing really to bring to the table except this little antidote.

Posted by: Mainstreet at September 29, 2008 11:09 PM (XWJh5)

136 Here's another one for you, Ace!

Dear Ace,

I thought you were not excitable, like Andy.

I was wrong.

Posted by: Kevin at September 29, 2008 11:11 PM (KO6dP)

137 151, 153,
How can I argue that? We do have fudge factor assumptions in most formulas, where you can adjust certain factors like consumer confidence, etc. to see how it changes the outcome.
But it is a "dirty science" because there are so many variables, that why establishing our goals is what we usually do first, then we try to figure out how to get there.
Kemp

Posted by: kempermanx at September 29, 2008 11:11 PM (2+9Yx)

138 "I'm buying some calls later this week."

Wooh, I dunno, TexasJew. You've got to have gigantic, elephant-sized cohones. I'm drizzling in some long buys, but I'm as gay as Ace and Excitable Andy when it comes to options. Maybe if there were 6 month calls...

No way. Hats off to you.

Posted by: Kevin at September 29, 2008 11:18 PM (KO6dP)

139 The stock market plunge does not mean anything except the market was EXTREMELY overvalued coming into this week. It was showing a forward P/E ratio of about 20, which is insane.
Today's fair value for the SP 500 is somewhere around 1000 or so, and the sooner we get there, the better. Next spring/summer's fair value for the SP will probably be around 800-900, so don't be surprised to see us somewhere around that figure.
Banks not being able to lend and stock prices dropping another ten percent are apples and oranges.
I have tons of available credit and I'm not touching any of it. The bozos on TV today were whining about McDonald's not being able to get a loan to sell coffee. Bullshit.
McDonald's can do a stock offering of billions of dollars any day of the week. McDonald's can tap pre-existing lines of credit large enough to choke a herd of horses the size of Jupiter any time it wants.
The credit "crisis" is nothing more than a temporary credit slowdown that will sort itself out in a few weeks, after banks realize they still have buttloads of equity and cash.
People are freaking out right now and guess what? They are depositing mountains of cash into... BANKS.
The Fed has been and will continue to inject tens (today it injected HUNDREDS) of billions of dollars directly into financial institutions.
Paulson is a world class dumbass who told us non-stop for two years there was NO FUCKING PROBLEM. Then, all of a sudden, there's A FUCKING PROBLEM. Bullshit. The only problem is his lack of ability to do his GD JOB.
Benranke, thank the Lord, has been the only competent one of the whole bunch. He set up several lending/re-finance institutions in the spring and summer of this year and it is through these mechanisms that he is injected more capital into our economy than you can imagine.
How is he doing that? By BUYING THESE FUCKING MORTGAGES we have been talkingabout.
The bailout already exists. It has been going on, in slow motion, for six fucking months.
And it will continue for the next year-plus, through the direction and management of the Fed.
In the next 12-18 months, stocks will continue to drop another 25-35%, and they will re-test the 2003 lows. After that occurs (and it is time PLUS price, not just price), it will be time to go in and buy like you're Donald fricking Trump, because we will be past the bottom of the recession curve and all the bad news will be priced into the stock market.
Are we going to melt into chaos if we don't throw several hundred more billion dollars at Wall Street RIGHT FUCKING NOW? Nope.
Remember, Wall Street is, without a doubt, the greediest place on Earth. It has the highest cost of living anywhere, the highest salaries anywhere, the most expensive real estate anywhere and the most greed anywhere on the fucking planet.
Putting hundreds of billions of dollars of government (our) money anywhere near those fuckers is the WORST fucking thing we can do. Why? Because they SPECIALIZE in figuring out a way to put that money into their pockets. They will lie about the cost of assets, they will sell the worst assets and lie about the quality of them, they will screw anyone they can and then they will brag about it six ways to Sunday.
Why? Because that's what they fucking do.
I am proud to have the US House of Representatives as my government today. I am proud they voted down this piece of shit. And I hope they don't pass anything remotely resembling this. Ever.

Posted by: Dogstar at September 29, 2008 11:18 PM (PQZBi)

140 Qwinn - What happens if a person's overall lifestyle is what they can't afford. Some borrowers have housing debts that are lower than 35% of gross income(that is how borrowers are typically qualified, so it should be kept constant in modifications), but have another mortgage payment worth of revolving and term debt. How do you determine which creditors are senior? Do you screw the CC company out of $100,000 but let them keep the 360 Sea Ray?


Posted by: Some Dude at September 29, 2008 11:18 PM (+dnnZ)

141 h2u, the ER stabilizes a patient before sending them surgery.

Uh, not really. The ER will rush the patient to sx or icu so they die there and not screw up their stats. The OR will rush them to recovery so they die there and not screw up their stats. The recovery will rush them to ICU to die there and not screw up their stats. And if possible, the ICU will send them home to die at home so as to not screw up their stats.

Posted by: Booben at September 29, 2008 11:19 PM (xst8M)

142 Monty, @#114: Nikkei's down about 6%. Shanghai composite down about 4% (although with the Chinese regulatory rules, who the hell knows what the real number is). Hang Seng is down 6%. Commercial paper markets are moribund. Commodity futures markets are tanking, probably because everyone's expecting exports to take it in the shorts.In short, every market indicator I've looked at today is going down like a two-dollar whore.

In fairness, Asia's markets have been losing money ó dareI say it? ó diarrheatically for months now.

Posted by: INCITEmarsh at September 29, 2008 11:22 PM (ULsz9)

143 161, OK, booben, you have a point. But I think you get what I mean. They'll at least hang two units of OPOS and slap a bandage on 'em.

Posted by: XBradTC at September 29, 2008 11:23 PM (Y7Bv8)

144 Regarding Asian markets- they are probably going down because we went down. Are they leading us or are we leading them? Hard to say.
US stock futures are up big time as we speak.

Posted by: Dogstar at September 29, 2008 11:25 PM (PQZBi)

145 Qwinn - No. I'm talking about people with a $1500 mortgage, two $500 car payments and $500 in minimums on revolving debt. Its a lifestyle issue.

If you own more than one home and need a workout you sell the one that isn't your primary residence and pay the piper. You need a pretty compelling reason to maintain more than one residence in, what is essentially, a bankruptcy proceeding.

Posted by: Some Dude at September 29, 2008 11:27 PM (+dnnZ)

146 Maybe if there were 6 month calls...

There are.

Posted by: Andy at September 29, 2008 11:29 PM (iIvIk)

147 And regarding mark-to-market, nothing MUST happen overnight. It is easy to delay that kind of shit for weeks/months. It is easy to slap a figure on that stuff higher than what you can justify, and then go back later and re-do it.
Dig? The sky is not falling. It's just numbers on a 10-K, and they get manipulated, adjusted and revised all the fucking time. Seriously, all the fucking time.

Posted by: Dogstar at September 29, 2008 11:30 PM (PQZBi)

148 If the accounting rules reflect the financial reality -- that is, those zero-value assets truly provide zero future discounted net cash flows -- then the accounting rules are not an issue, and no government fix will help in any but a cosmetic way; whereas the government suddenlyborrowing hundreds of billions of dollars would hurt the economy in a non-cosmetic way.
However, if the asssetsare expected to provide a significantly greater future financial benefit than zero, then fixing the accounting rules (or the regulations based upon them) should provide immediate relief.
Why am I wrong?

Posted by: Ken at September 29, 2008 11:33 PM (zPwDp)

149 If the accounting rules reflect the financial reality...

Heh

Posted by: Andy at September 29, 2008 11:36 PM (iIvIk)

150 Ken - Changing the rules in the middle of the game is what fucked Japan. If you change accounting rules and allow banks to dick with their balance sheets, in the midst of a banking crisis, then there will be even less confidence in the transparency and accuracy of data being presented for public consumption. Investors would flee because they would have no idea which firms had good books and which firms held shit. Its a CONfidence game.

Posted by: Some Dude at September 29, 2008 11:39 PM (+dnnZ)

151 150 Adrian. Oh, yeah! I read the Shimer post earlier and was going to link it, but I'd forgot where I'd read it. Funny that Mankiw's defense of the Paulson plan was basically "Ben Bernanke is real, real smart, so I'm real scared." Sounds like Mankiw would fit right in at AoS.

Posted by: lukemcgook at September 29, 2008 11:44 PM (1hkXr)

152 Some Dude,

That's a great point. These assets can't go from zero to two million or whatever on paper overnight and have any expectation that people can or will act on that new price.

Now, that problem (attaching a value) exists if the government buys them but the one thing the federal government can do that private equity investors can't do (even if they could raise the capital to buy in the first place) is hold these securities on their books for 2 or 3 years while the market gets reestablished.

Yes, it's a risk in many ways but the alternative is beyond shitty.

Posted by: DrewM. at September 29, 2008 11:46 PM (hlYel)

153 For fuck's sake, guys, if this crisis is so damn critical why are we not fighting to do the best job we can instead of settling?

Because the rest of the world, equipped with their very own Paulsons, sees that we have had a workable plan for more than a week. Now it looks like we're getting stuck on irrelevant details and lack the political will to implement it. Why should they hang around and watch their investments devalue even more when we aren't even interested in saving ourselves? Why should they risk getting inextricably caught up in this same cascade failure? The bus is speeding toward the cliff and we're staring in the rear-view mirror.

All the hyperventilating over this issue is getting old. I know it's a helluva lotta money, but this afternoon's Dow plunge ate up more market value than that in one single afternoon and there's no reason to think it's over. For heaven's sake, we're not suspending the freakin' Constitution here, we're passing a specific bill to fix a specific and well-defined problem. There will inevitably be a lot of worthless junk attached, since the last Republican temper-tantrum put the Democrats in charge, but we can deal with that later once the situation cools down a bit.

Posted by: Bryan C at September 29, 2008 11:56 PM (fmzOJ)

154 Ace, thanks for replying! His 'unfair' shtick comes at the end, it was lame, I know. I'm talking about the middle part, around the whole "This program does not solve the lemons problem. The government purchases a lot of lemons at an inflated price" thing.
As I understand his point, the newly repriced assets (through the treasury auction) will *still* be worthless and illiquid. They might have a non-zero price and thus appear to have some value again, but the ones with the highest newly determined price will actually be the most worthless. And people still won't want to buy them, because they will fear that this government-determined price still hides a worthless asset. So the whole auction thing won't work.

Posted by: Adrian at September 30, 2008 12:03 AM (Eu/Um)

155 btw, this is probably really dumb, but here goes. two things we know in this great depression (assuming...)that we didn't know in the last one:
1) that ourmilitary is the most powerful the world has ever seen
2) that the only way we've ever successfully gotten out of a great depression before was through the stimulus brought about by a huge national war effort (that would put the iraqi war to shame)
So, if things get real bad, are we going to try and invade China or something?

Posted by: Adrian at September 30, 2008 12:15 AM (Eu/Um)

156 Look for a relaxation of FAS 157 in the next few days.
http://tinyurl.com/4fef5k
And, btw, the Japanese didn't start dicking with their financial accounting rules until the economy had been in the toilet for years.
Next regulatory move could be a relaxation of capital requirements. Arnold Kling suggests doing this "at the margin" -- ie let the additional capital to offset a new loan be set at half the applicable rate on old loans.

Posted by: lukemcgook at September 30, 2008 12:31 AM (1hkXr)

157 Look. The problem right now is that these mortgages and the securities
based on them hold NO VALUE. Zero. That makes the balance books
crumple. All we need them to do is get -some- value, right? Because
the multipliers are so huge that even a small value is enough to keep
them liquid.

As I understand it, and I could be entirely wrong about this, it's not that the securities have NO value but that no one is very sure what the actual value is. People aren't buying because they're not sure if what they're offering is a price that'll allow them to make an acceptable profit on their risk.

A securities market where the value of the securities is temporarily unknown is different than a market where the value is zero. Because, as I understand it, M2M requires that they put down some value, the value becomes zero for the same reason that a pitcher gets an ERA for pitching to three batters and getting none of them out. In baseball, like accounting, you need an actual number. The "inf" in the box score won't work.

It seems to be that what's needed is a little breathing room and some stability so that the market can establish the value of these securities. Again, I could be seeing this exactly wrong, but it looks like the biggest problem is that the institutions holding this paper are under the gun but if they could get a little time - a few months, perhaps - they could get a handle on their situations.

Posted by: Jimmie at September 30, 2008 12:37 AM (lYBsv)

158 First couple times through, this plan looks kinda cute.
http://tinyurl.com/3ww6o8
See, there's a ton of approaches to the liquidity crunch besides "gimme 700 large cubed or die."

Posted by: lukemcgook at September 30, 2008 12:59 AM (1hkXr)

159 Most of the "worthless" of "toxic" assets involve real property mortgages bundled and soled as some sort of derivative. They are supported by real cash flow and real estate. Even if half the properties are in default and all are overvalued in terms of loan amount outstanding, there is still value. And that value is likely in the range of 50% to 75% depending on the specifics of the security. Some people will continue to pay, some will default. For those that default, the property eventually gets sold.

The value of the underlying real estate may fall a lot but it is not going to zero.


Posted by: Fernhopper at September 30, 2008 01:11 AM (sV6AN)

160 "People/entities with these assets that have intrinsic value cannot label them on their balance sheets as what they paid for them - they must write that they are worthless."
That must be a governemt rule, since only the government could come up with something that insane.

Posted by: flenser at September 30, 2008 01:13 AM (Ek5Aa)

161 So, umm...
change that silly fucking rule.

Posted by: flenser at September 30, 2008 01:14 AM (Ek5Aa)

162 And that value is likely in the range of 50% to 75%...

While true, these pools of mortgages get sliced and diced into "tranches" (segments), apparently based on risk. If the overall pool loses money, the lowest segments apparently get wiped out first. The highest segments aren't particularly risky. When assets gain value, the lowest segments get larger payouts since their holders assume much greater risk -- just like junk bonds.

This is part of the funny (but sad) "Subprime Explained" presentation, search for "subprime google docs".

Guess which tranches the asset holders want to get rid of?

Posted by: pbrown at September 30, 2008 01:23 AM (vxGjP)

163 But if the new SFAS that is causing this balance sheet problem is first effective this year, why not suspend its application and go back to the old method until the kinks are worked out? It's not like the FASB has never donesmething like that before -- remember the income-tax accounting FUBAR in the 1990s? Year-to-year consistency would actually be better served by not using the new rule, would it not?
What we are considering here isan ad hoc after-the-fact stupid-business-decision insurance payout. Why won't thishappen again in two or three more years? After all, we are determined to socialize all losses while privating all gains -- where is the incentive for prudence? Where is the risk to the investors?
Where is the free market? When did we suddenly start to believe that a central economic plan had a prayer of long-term success? Wasn't the government fixing one problem when they created this even bigger one? What even bigger problemwill this solution bring us?
Has everybody simply lost their heads?

Posted by: Ken at September 30, 2008 02:03 AM (zPwDp)

164 bitch ate my comment, again!

Asia's down, but not tanking

^AORD All Ordinaries 4,631.30 2:12AM ET Down 207.90 (4.30%) Components, Chart, More
^SSEC Shanghai Composite 2,293.78 Sep 26 Down 3.72 (0.16%) Chart, More
^HSI Hang Seng 17,447.66 2:17AM ET Down 433.02 (2.42%) Components, Chart, More
^BSESN BSE 30 12,527.48 1:54AM ET Down 68.27 (0.54%) Chart, More
^JKSE Jakarta Composite 1,832.51 Sep 29 Down 13.58 (0.74%) Components, Chart, More
^KLSE KLSE Composite 1,019.72 Sep 29 Down 0.81 (0.08%) Components, Chart, More
^N225 Nikkei 225 11,259.86 2:00AM ET Down 483.75 (4.12%) Chart, More
^NZ50 NZSE 50 3,090.22 12:31AM ET Down 98.32 (3.08%) Components, Chart, More
^STI Straits Times 2,311.60 2:17AM ET Down 49.74 (2.11%) Components, Chart, More
^KS11 Seoul Composite 1,448.06 2:02AM ET Down 8.30 (0.57%) Components, Chart, More
^TWII Taiwan Weighted 5,719.28 1:46AM ET Down 210.35 (3.55%) Chart, Mor

Posted by: moronizer at September 30, 2008 02:40 AM (OeLz9)

165 I have a question...let's say Paulson buys all of the MBS...now, people are saying that "bails out" people who bought a house they could not afford.

But does it? I assume those folks will still get foreclosed, just maybe not right this second.

The MBS are related to individual mortgages but not exactly.

Posted by: Harun at September 30, 2008 03:39 AM (oT2Z0)

166 Why do we need to reform any "mark to market" accounting rules? Why do we need to reduce our corporate taxes ... which are some of the highest in the world? Why would we want to reduce Capital Gains to Zero like China? Why would we want to repeal the CRA ... which got us here? Why in the hell would we want to actually oil the gears of the capitalist machine when ...

We can simply fix this all by throwing $700 billion dollars and some Democratic party oversight and .. voila! We're all going to be just dandy!!

The money would fix nothing. Nothing.

Posted by: HondaV65 at September 30, 2008 06:57 AM (9vlDt)

167 "He oughta change his name to Inspector Suckup!"
No...I think he has the name just right. What an asshole.

Posted by: Jaibones at September 30, 2008 07:38 AM (8DbK4)

168 Good for Inspector Asshole to have realized what he has.

Now if only the preening morons in Congress would do the same. Only, I bet when they get a second chance to vote on it, they will now have to vote on something that includes money to ACORN and various other things designed specifically to elect Democrats.

This country needs a better class of morons.

Posted by: Enigmaticore at September 30, 2008 07:56 AM (8V2F2)

169 Planet Moron:

"Address the crisis, yes, but not with this plan, and not with any version of this plan."

Please give us your idea for a plan that would:
1) Work, and
2) Be able to get through the Democrat controlled Congress and Senate.

Please pay particular attention to requirement number two, as it is just as important as requirement one. Violation of either requirement means failure.

Posted by: Enigmaticore at September 30, 2008 08:01 AM (8V2F2)

170 Has anyone said ... Throwing $700 BILLION at this problem WILL prevent a recession? No. Has anyone said throwing this money to Wall Street WILL allow people to get loans? No.

All of them say ... "HOPEFULLY ... wasting $700 billion will do these things"

"Hope"

The Audacity ... of "Hope".

Meanwhile Donald Trump says this is more difficult than flying a man to the moon. No one knows that this $700 Billion will work. It is simply the FIRST plan to be put on the table and many say it's not even a good plan. Do something ... but do something that will WORK.

Enough with "Hope" ...

Posted by: HondaV65 at September 30, 2008 08:20 AM (9vlDt)

171 Let's all put aside the bickering for a moment to appreciate the gallows humor in this crisis. Namely, the unfortunate credibility-destroying sabotage of Ace's "I Was Wrong" converts' nicknames --- c'mon, having Ace to hang his hat on the words of "Inspector Asshole" is pretty funny stuff.
Now that that's out of the way, I must say that I, too, have had a change of heart on this crisis.
The sooner we realize that opposition tothis bailout means the road to serfdom actually becomes a Superhighway to Marxist re-education Maoist saltmine killing fields with 5 year plans and the nationalization of Taggart Transcontinental, the sooner we can get started campaigning against and dismantling this travesty.
But only after the vote is successful, the marketsare calmed and liquidity restored.
So, yes: I, too,was wrong.
{hangs head}

Posted by: Professor Fussybritches McTaintstain at September 30, 2008 10:04 AM (uOvAE)

172 the stench of retard runs deep in these comments, but none moreso than qwinn's 35% plan. congrats buddy!

Posted by: PR at September 30, 2008 12:01 PM (k7SeR)

173 Oddly enough, I just finished reading a Robert B. Parkernovel entitled "Bad Business" a couple of weeks ago wherein the World's Greatest Accountant actually explained mark-to-market in a way I could understand. That probably says more about meand whereI get info than anything, but a complete ecomonic nebbisch like me has to take where hefindsit.

Posted by: Hucklebuck at September 30, 2008 04:57 PM (oQLnX)

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Posted by: jahxg at October 23, 2008 07:18 AM (wN+zM)






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