Posted on 10/09/2008 12:59:03 PM PDT by Red Badger
The Dow Jones industrials fell under 9,000 this afternoon for the first time since the summer of 2003 as investor confidence that markets would stabilize appeared to collapse. At 3:40 p.m. ET, the blue chips were down 641 points, or 6.9%, to 8,617. The Standard & Poor's 500 Index was off 74 points, or 7.5% to 911. The Nasdaq Composite Index was down 94 points, or 5.4%, to 1,646. The S&P fell under a closely monitored support level of 960. A support level is important because it is supposed to trigger new buying. At those levels, the crash of 2008 has left the Dow 39% below its record close of 14,164.53 and the S&P 500 down 41% from its record close of 1,565.15. Ironically, both records were set exactly one year ago today.
(Excerpt) Read more at articles.moneycentral.msn.com ...
It was the Wall Street bunch and all the other current whiners who asked for mark to market accounting. The electronic trading and Internet news availability so sped up the process that everything was happening at light speeds. The uptick rule, a rule that worked when we priced stocks in fractions would be impossible to enforce with prices in the 100/ths of a penny via decimalization. The rating agencies are the culprits with the mark to market rule. The banks bought securities rated at triple AAA and they generally value them at face and hold to maturity while traders on the OTC were trading them hourly and needed mark to market for value assessment.
Then when thing went south they wanted the banks to revalue at mark to market to determine the bank's balance sheets on a daily or hourly basis as if it was trading.
The fault is that the banks never should have purchased this crap, but the bond ratings were what they were, at triple AAA.
Had the ratings agencies done their job properly, the more conservative banking institution would not have touched this stuff and would have left it to the investment banks who were not regulated as to their leverage.
That's where the mistake was made.
Now, they can't really change it much and have any credibility. I understand that they have settled on some explanatory rules which are being disseminated as we speak. They have to use mark to market to clear the system of the crap and it can work both ways, which it will in time and that is how the Fed will get much of it's investment in tax money back.
Regulated banking institutions never used mark to market. That was a need of the OTC traders, and the investment banks. The thing is, that mark to market is as natural as breathing. A market does not exist if a item cannot be sold at any price and it's just that simple. Any other way of pricing a item cannot be credible.
The issue really is not mark to market, it's the availability of the necessary data to form a educated opinion of what the price is, opposed to what it should be. That is the quick definition of market pricing.
The regulated bank buys items for short and long term investment. They don't actively trade the stuff so they set a value on it via the data that the ratings agencies provide. They still don't use mark to market unless as a result of a failure, they are required to sell it early and if there is no market for the item the write down is 100%.
Mark to market is being blamed for this, but it's just a descriptive term. It's not some sort of requirement for solvent banks.
The reason it is so controversial is because of a lack of trust. You can't fix that by marking assets above their true value. How would that solve anything?
Mark to market comes into play on the trade or sale. If we had never had the term, we would still need it now.
There is a basic undeniable truth here..........If there is no market or very little market for a asset today, the value will be close to zero or zero. That may change tomorrow.
That is all that it means and you can't get rid of it. You can't force a price. The fed, is now reconsidering it's ability to do that after the Lehman auction actually came up with a value and I think the market will take care of this. The fed will back stop it, but they can't create value either. It won't hold up. It can't.
Probably something like the comment that a democracy is the worst form of government except for all the others [well, actually a Constitutional republic would be better, but still...].
A major problems with mark-to-market is that it only works when markets actively trade assets that are essentially identical to the assets one holds. While the markets might previous have regarded a combination of an MBS and CDS as being comparable in value to another such combination of similarly-described assets, it has since become clear that such assets are not all identical even when sold by the same vendor. The only way to find out what a particular asset would be worth in the marketplace is to actually sell it. While it's conceivable that an identical asset might possibly be sold somewhere so as to suggest a market price, it's not terribly likely.
IMHO, assets need to have realistic upper and lower values attached to their worth. In some cases the upper value would be full face value; in some cases, the lower value would be zero. Indeed, in some cases the upper value might be full face and the lower value zero. In most cases, however, I would expect that some sort of useful bounds could be placed on asset values. Applying such bounds recursively wouldn't permit all valuations to be determined with any precision, but it would at least provide a useful starting point.
2 weeks ago I sold Ford at $5, for a loss, thinking by so doing I was as likely to send it up again and 'lose more' w/opportunity cost. Go figure.
The lowest possible price or fair value that you might suggest could be set by looking inside the package, tallying the real estate within and going to each and every property, looking at the deeds, the liens and the insurances, and trying to set a price for a foreclosed home in the various markets where they are located.................That's a real problem and then you add to this the real fact that the markets are still collapsing and depreciating.
How else, but mark to market, do you sell these assets? You can pick out the cream, bundle it at a best price, take the middle and call it the better and the crap can be called poor. The market will have to determine this or it won't be sold. If banks hold to maturity, then it must be temporarily written down.
It is this write down that is causing the insecurity. It is the how much on what assets that is causing the credit market seizure.
New rules will do nothing to fix the credibility of the assets in question. They will still not sell any better with higher values then they do at "0".
So the question remains......What are they truly worth?
They have to be written down to near 0 or somewhere in the low teens, and that won't move them, but it will, if done in a readable logical way,allow private capital to come in and assume the risks in hopes of a great profit at some point.
Lost all of mine when oil went up and the fund I owned collapsed. Lost the rest on SIRI.
g'luck trying to find that on CBSNBCABCCNN
But the recession that began in 2000 was when Republicans had control of the Congress. Were they responsible for that? If so, please inform Rush and the rest of talk radio. They’ve been blaming it on Clinton.
Lost mine on XMSR on conversion to SIRI...the equities poster child for 'market price with no market'. Couldn't sell for a few days!
As to my comments on Mark2market, I was referring to FASB's SFAS 157, 157-c, 159, ad infinitum. The FASB has created a fast moving target of monstrous proportion. Accountants are suffocating under mounds of paper, burdonsome implementation dates, all on top of Sarbanes-Oxley. My vision is that the mounds of paper MUST be removed before the 'market price' can be determined. and since in this case most of what we're talking about are mortgages (each with its amortization table), the math is relatively simple, if the homeowners stay in their homes! or if an assumed mortage life and payoff are chosen instead...either way, simple math! that's what accountants and computers do best! This ain't rocket science in this specific situation. (it's rocket science if you're dealing in rocket markets but not MBS's and CDOs). The FASB, SEC, Congress et al are complicit in a mark to market obfuscation plan to hide the corruption at Fannie, Freddie, Congress, ACORN, and perhaps the Fed, SEC, et al.
For instance, GE made the irrevocable election to use FASB 159 for $0.2 billion in financial assets (2007 A/R).bottom line--I'm just not ready to say that the 'mark2market as currently defined is necessary and sufficient' and definitely needs retracted and simplified for bank financial assets (specificly mortgages, MBS, CDO, etc). til then the obfuscation will continue (allowing us to see more of Barney Frank's finger than we'd really prefer)
Overall, from my perch, the regulated banks should be exempted from mark to market only because they really don't need it and buy to hold as opposed to trade. The problem rears it's ugly head because the entire CDS, CDO markets are in unregulated territory and it's the fault in my opinion of the ratings agencies for not recognizing this and throwing triple AAA ratings around like chicken feed and then upon recognizing their error, took them all back and pretended they never did it to begin with. (all this coming in the middle of the breakdown)
Now banks who bought into this crap or issued it, are looking down the barrel of the angry market's guns and asked to reveal it's internal accounting which certainly won't match up with the actual market values.
It's getting more and more likely that the Feds only hope to put humpty dumpty back up on the wall is to buy all this crap, or as much as they can. They have to do this under the table for all sorts of reasons if the banks are to survive, and the markets, and the mobs will not allow that to occur.
The markets and the taxpayers are demanding full and open visibility into this process and this is at odds with the intent of recapitalizing the banks. If the securities are sold to the fed at a price higher then market, the $hit hits the fan....
This is almost useless! The more I look into it, and the fed may be doing the same thing, the more it makes perfect sense to let this thing collapse and save as many of the stronger less affected banks as possible and let the chips fall where they may. The market activity in the sector on Friday seemed to indicate that the market is preparing to do just that. Citi, MS, BofA and a slew of others may be going down. It won't be very tidy.
This recession now has been reported for the last two years, and it never happened either.
Unfortunately, the data for the next quarter and in to 2009 will likely indicate one, which is precisely why the markets cratered this past week.
Recessions are products of market instability, and we have been stable until this election. As trust became a rarity, and a Obama administration a likelihood, the markets gave it up.
I don't personally think that a recovery will occur for some time. Perhaps a decade. But a big time bear market is a good trading opportunity, and the market will not stop producing wealth. It will just be different people getting wealthy.
I would guess that in many cases home prices will probably stabilize at something around their year-2000 values. Not a perfect measure, but probably as good as anything.
They have to be written down to near 0 or somewhere in the low teens, and that won't move them, but it will, if done in a readable logical way,allow private capital to come in and assume the risks in hopes of a great profit at some point.
Assets need to be liquidated, and values attached to all the little pieces. That may require consolidating the mortgages that are presently subdivided, but something like the consolidation lottery I've described should provide a fair way to do that.
Right now the situation is analogous to having bundles and bundles of lottery tickets for a drawing that has just taken place. If the person who is trying to sell the tickets might know what numbers were drawn, only a fool would buy from him. If the person who is selling doesn't know what numbers were drawn, but a would-be buyer might, the seller would have to be a fool to let the buyer examine all the tickets and then decide whether to purchase.
Unless buyer and seller are each assured of each other's ignorance as to what the winning numbers are (e.g. because the drawing hasn't happened yet), the only way the bundles of tickets can meaningfully be sold is for the buyer and seller to both inspect them, figure out which ones are winners, and trade them on that basis.
That's what I've been saying for awhile: The crash is inevitable, necessary, and not to be feared.
What I have learned over the past week is that the Credit default swaps and all the rest have been highly exaggerated by competent people........apparently????
If I'm reading this right, initial estimates of the size of the CDS markets are double or more of what they really are. Worse then that, they attributed far too much of it as being related to mortgages. The real figure is way lower.
I'm reading that the payouts for the Lehman bankruptcy for mortgage CDS's was only about six billion! Not 400 billion. The percentage of assets related to mortgages was only a pittance compared to the estimates.
I dunno anymore! This is freaking me out....
Ultimately, the assets are either worth something or they aren't. Trying to prevent a crash will simply leave unanswered the question of which assets are worth more than the paper they're printed on, and which ones aren't.
If there were 50 trillion dollars in credit default swaps that all expired tomorrow, I could understand trying to spend a little real money to preserve the illusion of some imaginary money until then. In practice, though, a lot of credit default swaps won't expire for years and the amount of cash that would be required to keep things afloat that long would be astronomical.
I think the real problem here is that this market is not well understood, or understood at all. It has created a great deal of fear, and fear is the real culprit. Looks to me like the current crop should clear by the end of 2009. They are not expecting a huge payout and that info checks with the thinking at AIG, until their stock crumbled and they were dragged into congress and called liars.
Very disturbing behavior from our democrat congress.
You work hard for the real money you put into the 401K. That doesn't mean that all of the money in the 401K is real. A lot of it is real, but a lot of it is imaginary.
If a company were to never buy nor sell shares after its IPO, its operations and dividends would be essentially unaffected by anything that happened with its shares on the stock market. If the expected dividends would be sufficient to justify a $10/share price, but some investors decide it's a hot stock and bid the price up to $100/share, then $90/share is imaginary money. The previous owners of the stock will have gotten some nice profits when they sold them, but every dollar of those profits must be matched dollar-for-dollar by losses by present or future owners.
To put things in even more concrete terms, suppose there were 10,000 shares outstanding, the present cash value of all future dividends is $10/share, and the company neither buys nor sells shares. The total value of all those shares outstanding would be $1,000,000. Suppose some people wanted to invest $10,000,000 in the company, but the company itself neither bought nor sold shares. In that case, the investors could bid the share price up to astronomical levels until they'd managed to spend all their money or acquire every single share, but the total value of all the shares would still only be $1,000,000. Any perceived value beyond that would be imaginary, and would disappear as soon as anyone tried to extract it.
In practice, many companies will sell shares when the price gets too high, and may buy shares when the price gets too high. If a company does so, then some of the money investors put into a stock will turn into real assets. A lot of the money will be paid out as profit to earlier investors, but at least some of the investment will be recouped when the stock is liquidated.
Concise analysis, to the point, well said....ahhh, if I had a nickel for every time a talking head said "we're already in a recession" for the last 300+ days on CNBC! The koolaid has been flowing liberally for more than a year. CNBC's experts have forecast a couple hundred of the last 2 recessions.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.