[quote=davelj]
The recovery assumptions are based on what’s happening in the market at the moment, then discounted further by how bad things are likely to get (obviously, there’s some art in this process). No, they don’t actually evaluate the individual properties but rather evaluate large groups of properties with similar characteristics (geography, FICO, LTV at origination, etc), just as an insurance analyst isn’t going to analyze every single life insurance policy that a company underwrites to determine the company’s value. You let the law of large numbers work for you.
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True, but the insurance analyst’s valuation opinion is only going to be as good as the underwriting on each of those individual policies. For banks, the underwriting has been atrocious for the last several years. Garbage in, garbage out.
[quote=davelj]
Here’s the real problem that must be acknowledged. Since the advent of “modern” banking (I think in Italy in the 15th century or something like that), not a day has passed during which the world’s financial system could have marked its assets to market (that is, the price at which the assets could be sold within a week, let’s say) and not been completely, totally insolvent. Pick the most prosperous period you can find in modern history and there’s no way on earth that there would be enough buyers out there to take on such an enormous deluge of assets given the leverage involved, even if leverage were cut in half. That’s axiomatic if you think about it for 5 seconds.
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No one is making the banks sell their assets within a week, so this is hyperbole on your part. Asset prices will likely continue going down throughout 2009 (absent massive government stimulus) so banks could be given a year or more to sell and they would still be insolvent. Banks are insolvent because they are insolvent.
In an ideal world where there wasn’t all this financial “innovation”, banks would borrow long at x% and lend for the same time period at x% + y%. Further, banks would value collateral conservatively and only lend against a portion of that collateral (say 80% maximum). If banks did this, and the borrower stopped paying, then they could liquidate the collateral in a reasonable period and pay off their obligations.
But they didn’t do that. What banks did during the recent “bankster” era is borrow short, lend long against 100+% of collateral, and push for crappy underwriting (stated income, inflated appraisals, etc). I’m no bank historian, but I would imagine that any time banks get away from sound money management principles you get these types of bubbles.
So the problem isn’t that banks are being forced to sell their assets within a week, the problem is that the assets are feces and, like you say below, everyone is trying to liquidate their feces at the same time.
[quote=davelj]
We’re seeing a micro example of this phenomenon in our efforts to liquidate Bear Stearns and AIG. Now they have some crappy assets and were overleveraged. No doubt. They deserved to fail. But if you force these folks to sell even the “good” assets immediately, well the prices are going to be a fraction of what they’d get given a little breathing room. Our financial system is not, and has never, been able to accommodate everyone’s desire to get liquid at the same time.
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Maybe the market recognizes that the “good” assets were only “good” during a housing bubble? Who’s to say what assets are going to be “good” on the other side of this recession/depression?
[quote=davelj]
A slavish adherence to mark-to-market accounting does not recognize this fact. Again, I don’t have a good answer. I’m just saying that it’s a lot more complicated than many would have you believe. And anyone who believes otherwise is either (1) lying, or (2) doesn’t understand how the pieces fit together.[/quote]
What happens if we just let all the bad banks fail? Obviously we have massive unemployment, but the government could just extend unemployment benefits and do massive public works projects to help reduce that. To me, this is preferable to propping up the value of crappy assets as it will force people into productive work.
Philosophically, I’m opposed to the government getting involved in propping up asset prices as it just further distorts the market and keeps people employed in unproductive jobs. Capitalism is all about creating efficiencies and propping up the prices of crappy assets is not efficient. I would rather see the government invest in research, alternative energy, infrastructure improvement, or something that is likely to benefit society (DARPANet anyone?) than get involved with propping up the prices of crappy assets. Maybe the government makes money on those assets, but buying crappy assets is more likely to benefit banksters than society as a whole.
