Amazing letter. Impressive.All should read even if there a few mistakes in it.
Some new things in there I did not know, eg:
‘All credit instruments must be subject to “Regulation FD” disclosure requirements. It is outrageous that bond
rating agencies are given details on the mortgages and other instruments inside “CDOs” that are not available in
the prospectus to buyers.’
The author and a poster above are wrong on why the rating agencies got it wrong. The truth is that they had not adjusted their models for the new paradigm of US mortgage lending in the the last five years: eg all those option mortgages, teaser rates with ratchets, prevalent fraud and above all the sudden dominance of mortgages that got packaged with accompanying ‘who cares’ attitude of those who passed the parcel. They were crassly incompetent, but more than that, I don’t think so.
The recommendation of the Denninger’s letter that ‘mark to market’ be enforced for all these mortgage and other packaged securities so we can see the true situation is a bit a Pandora’s box. Why? Because the values on the market for these securities is increasingly being generated by forced sales in a situation where many the usual investors , as Denninger himself observes, have taken their ball and gone home (or rather invested in two year Treasuries, commodities and index-linked bonds) , the bid price in the market can be well below the underlying value of such bonds and other instruments
*** even if such value were determined in a forward looking way by someone like Rich Toscano***.
It would be foolish to force institutions into bankruptcy if the long term/underlying value of these assets (securities such as mortgage backed bonds) is higher than the market price whenever that is recorded. In other words it is healthy for house prices to come down to sustainable levels , but not for the rest of the system to be forced to adjust to a worse situation than that implied a worse outcome in housing than that.
