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December 30, 2008 at 2:03 AM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321235December 30, 2008 at 2:03 AM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321583
TheBreeze
Participant[quote=davelj]
I can’t speak to this individual investment in IndyMac because I don’t know enough details, but John Paulson, the one guy who’s made more money on the real estate/banking decline than anyone else, is buying…
It’s completely anecdotal, but at least one guy that folks have universally deemed to be “smart” on the credit front is now taking the other side of the trade in some manner. Of course it could still blow up on him, but someone out there is seeing value in these turds. Only time will tell.[/quote]
Some excerpts from the article:
IndyMac Bancorp, one of the largest banks to fail as a result of the subprime mortgage crisis, is close to being sold to a consortium of private equity and hedge fund firms in a complex deal partly financed by the federal government, people involved in the deal said.
…
The team of buyers include the private equity firms J. C. Flowers & Company and Dune Capital Management and the hedge fund Paulson & Company, the people involved in the deal said. It was unclear exactly how much capital the buyers would inject into IndyMac, but they would be shouldering a portion of the losses the bank may have on mortgages and other assets, these people said.
…
Then in September, the Federal Reserve eased regulations to allow private equity firms and hedge funds to acquire larger portions of bank holding companies and gave them more control over the banks, including representation on bank boards.
…
Longtime foes of the private equity industry, like the Service Employees International Union, have raised concerns about allowing banks to be controlled by private investment firms. They argue that private equity firms would saddle banks with dangerous amounts of debt and exercise undue influence over lending practices.
Well, this dude either sees value in the turds or value in being backstopped by taxpayers coupled with the ability to operate with loosened regulations. My bet would be on the latter. Plus, I don’t trust any “federally-financed” deals that occur in the waning weeks of the Bush administration. This just looks like more of the same to me – the gains will go to private parties and the taxpayers will be stuck with the losses.
December 30, 2008 at 2:03 AM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321639TheBreeze
Participant[quote=davelj]
I can’t speak to this individual investment in IndyMac because I don’t know enough details, but John Paulson, the one guy who’s made more money on the real estate/banking decline than anyone else, is buying…
It’s completely anecdotal, but at least one guy that folks have universally deemed to be “smart” on the credit front is now taking the other side of the trade in some manner. Of course it could still blow up on him, but someone out there is seeing value in these turds. Only time will tell.[/quote]
Some excerpts from the article:
IndyMac Bancorp, one of the largest banks to fail as a result of the subprime mortgage crisis, is close to being sold to a consortium of private equity and hedge fund firms in a complex deal partly financed by the federal government, people involved in the deal said.
…
The team of buyers include the private equity firms J. C. Flowers & Company and Dune Capital Management and the hedge fund Paulson & Company, the people involved in the deal said. It was unclear exactly how much capital the buyers would inject into IndyMac, but they would be shouldering a portion of the losses the bank may have on mortgages and other assets, these people said.
…
Then in September, the Federal Reserve eased regulations to allow private equity firms and hedge funds to acquire larger portions of bank holding companies and gave them more control over the banks, including representation on bank boards.
…
Longtime foes of the private equity industry, like the Service Employees International Union, have raised concerns about allowing banks to be controlled by private investment firms. They argue that private equity firms would saddle banks with dangerous amounts of debt and exercise undue influence over lending practices.
Well, this dude either sees value in the turds or value in being backstopped by taxpayers coupled with the ability to operate with loosened regulations. My bet would be on the latter. Plus, I don’t trust any “federally-financed” deals that occur in the waning weeks of the Bush administration. This just looks like more of the same to me – the gains will go to private parties and the taxpayers will be stuck with the losses.
December 30, 2008 at 2:03 AM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321658TheBreeze
Participant[quote=davelj]
I can’t speak to this individual investment in IndyMac because I don’t know enough details, but John Paulson, the one guy who’s made more money on the real estate/banking decline than anyone else, is buying…
It’s completely anecdotal, but at least one guy that folks have universally deemed to be “smart” on the credit front is now taking the other side of the trade in some manner. Of course it could still blow up on him, but someone out there is seeing value in these turds. Only time will tell.[/quote]
Some excerpts from the article:
IndyMac Bancorp, one of the largest banks to fail as a result of the subprime mortgage crisis, is close to being sold to a consortium of private equity and hedge fund firms in a complex deal partly financed by the federal government, people involved in the deal said.
…
The team of buyers include the private equity firms J. C. Flowers & Company and Dune Capital Management and the hedge fund Paulson & Company, the people involved in the deal said. It was unclear exactly how much capital the buyers would inject into IndyMac, but they would be shouldering a portion of the losses the bank may have on mortgages and other assets, these people said.
…
Then in September, the Federal Reserve eased regulations to allow private equity firms and hedge funds to acquire larger portions of bank holding companies and gave them more control over the banks, including representation on bank boards.
…
Longtime foes of the private equity industry, like the Service Employees International Union, have raised concerns about allowing banks to be controlled by private investment firms. They argue that private equity firms would saddle banks with dangerous amounts of debt and exercise undue influence over lending practices.
Well, this dude either sees value in the turds or value in being backstopped by taxpayers coupled with the ability to operate with loosened regulations. My bet would be on the latter. Plus, I don’t trust any “federally-financed” deals that occur in the waning weeks of the Bush administration. This just looks like more of the same to me – the gains will go to private parties and the taxpayers will be stuck with the losses.
December 30, 2008 at 2:03 AM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321736TheBreeze
Participant[quote=davelj]
I can’t speak to this individual investment in IndyMac because I don’t know enough details, but John Paulson, the one guy who’s made more money on the real estate/banking decline than anyone else, is buying…
It’s completely anecdotal, but at least one guy that folks have universally deemed to be “smart” on the credit front is now taking the other side of the trade in some manner. Of course it could still blow up on him, but someone out there is seeing value in these turds. Only time will tell.[/quote]
Some excerpts from the article:
IndyMac Bancorp, one of the largest banks to fail as a result of the subprime mortgage crisis, is close to being sold to a consortium of private equity and hedge fund firms in a complex deal partly financed by the federal government, people involved in the deal said.
…
The team of buyers include the private equity firms J. C. Flowers & Company and Dune Capital Management and the hedge fund Paulson & Company, the people involved in the deal said. It was unclear exactly how much capital the buyers would inject into IndyMac, but they would be shouldering a portion of the losses the bank may have on mortgages and other assets, these people said.
…
Then in September, the Federal Reserve eased regulations to allow private equity firms and hedge funds to acquire larger portions of bank holding companies and gave them more control over the banks, including representation on bank boards.
…
Longtime foes of the private equity industry, like the Service Employees International Union, have raised concerns about allowing banks to be controlled by private investment firms. They argue that private equity firms would saddle banks with dangerous amounts of debt and exercise undue influence over lending practices.
Well, this dude either sees value in the turds or value in being backstopped by taxpayers coupled with the ability to operate with loosened regulations. My bet would be on the latter. Plus, I don’t trust any “federally-financed” deals that occur in the waning weeks of the Bush administration. This just looks like more of the same to me – the gains will go to private parties and the taxpayers will be stuck with the losses.
December 29, 2008 at 2:31 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #320987TheBreeze
Participant[quote=davelj]
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) “The Market is fully functional at the right price.” Factually true and completely useless statement. If forced to, I can sell my condo tomorrow “at the right price.” But if I have a year to sell it, I’m thinking the price will be much better. (2) “There are plenty of funds who will buy hundreds of millions of loans…” Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let’s assume that there’s $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what’s out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there’s plenty of demand out there and the prices are efficient. If you look at the scale of the market, that’s just complete nonsense.
[/quote]I read his argument as something like this: “The smart buyers out there do not yet see value at the prices these things are selling formarked at.” Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can’t soak up all the supply, but they can put a value on these things based on expected future income streams.
[quote=davelj]
I don’t have an opinion on his index idea. Maybe it’s a good idea, maybe not. I just don’t know.
[/quote]Since the banks don’t want this, that makes me think that this index is a very good idea. π
December 29, 2008 at 2:31 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321334TheBreeze
Participant[quote=davelj]
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) “The Market is fully functional at the right price.” Factually true and completely useless statement. If forced to, I can sell my condo tomorrow “at the right price.” But if I have a year to sell it, I’m thinking the price will be much better. (2) “There are plenty of funds who will buy hundreds of millions of loans…” Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let’s assume that there’s $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what’s out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there’s plenty of demand out there and the prices are efficient. If you look at the scale of the market, that’s just complete nonsense.
[/quote]I read his argument as something like this: “The smart buyers out there do not yet see value at the prices these things are selling formarked at.” Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can’t soak up all the supply, but they can put a value on these things based on expected future income streams.
[quote=davelj]
I don’t have an opinion on his index idea. Maybe it’s a good idea, maybe not. I just don’t know.
[/quote]Since the banks don’t want this, that makes me think that this index is a very good idea. π
December 29, 2008 at 2:31 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321389TheBreeze
Participant[quote=davelj]
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) “The Market is fully functional at the right price.” Factually true and completely useless statement. If forced to, I can sell my condo tomorrow “at the right price.” But if I have a year to sell it, I’m thinking the price will be much better. (2) “There are plenty of funds who will buy hundreds of millions of loans…” Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let’s assume that there’s $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what’s out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there’s plenty of demand out there and the prices are efficient. If you look at the scale of the market, that’s just complete nonsense.
[/quote]I read his argument as something like this: “The smart buyers out there do not yet see value at the prices these things are selling formarked at.” Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can’t soak up all the supply, but they can put a value on these things based on expected future income streams.
[quote=davelj]
I don’t have an opinion on his index idea. Maybe it’s a good idea, maybe not. I just don’t know.
[/quote]Since the banks don’t want this, that makes me think that this index is a very good idea. π
December 29, 2008 at 2:31 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321407TheBreeze
Participant[quote=davelj]
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) “The Market is fully functional at the right price.” Factually true and completely useless statement. If forced to, I can sell my condo tomorrow “at the right price.” But if I have a year to sell it, I’m thinking the price will be much better. (2) “There are plenty of funds who will buy hundreds of millions of loans…” Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let’s assume that there’s $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what’s out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there’s plenty of demand out there and the prices are efficient. If you look at the scale of the market, that’s just complete nonsense.
[/quote]I read his argument as something like this: “The smart buyers out there do not yet see value at the prices these things are selling formarked at.” Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can’t soak up all the supply, but they can put a value on these things based on expected future income streams.
[quote=davelj]
I don’t have an opinion on his index idea. Maybe it’s a good idea, maybe not. I just don’t know.
[/quote]Since the banks don’t want this, that makes me think that this index is a very good idea. π
December 29, 2008 at 2:31 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321485TheBreeze
Participant[quote=davelj]
I looked at the Mr. Mortgage piece and agreed with a lot of what he wrote, although two things stuck out: (1) “The Market is fully functional at the right price.” Factually true and completely useless statement. If forced to, I can sell my condo tomorrow “at the right price.” But if I have a year to sell it, I’m thinking the price will be much better. (2) “There are plenty of funds who will buy hundreds of millions of loans…” Again, factually true, but due to the scale of the situation, completely useless. The residential MBS market is in the $trillions. Let’s assume that there’s $50 billion of long-term capital looking to take advantage of some of these purportedly mispriced securities. That $50 billion in demand is a tiny drop in the bucket compared to what’s out there in supply. His argument appears to be that because he anecdotally knows of funds that want to buy this paper, then therefore there’s plenty of demand out there and the prices are efficient. If you look at the scale of the market, that’s just complete nonsense.
[/quote]I read his argument as something like this: “The smart buyers out there do not yet see value at the prices these things are selling formarked at.” Presumably, their valuations are based on the future income streams of the TLAs. So yes, I agree that the funds Mr. Mortgage speaks of can’t soak up all the supply, but they can put a value on these things based on expected future income streams.
[quote=davelj]
I don’t have an opinion on his index idea. Maybe it’s a good idea, maybe not. I just don’t know.
[/quote]Since the banks don’t want this, that makes me think that this index is a very good idea. π
December 29, 2008 at 2:16 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #320982TheBreeze
Participant[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.
[/quote]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.
[/quote]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.
[/quote]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.
Thanks for your responses on this.
December 29, 2008 at 2:16 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321329TheBreeze
Participant[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.
[/quote]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.
[/quote]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.
[/quote]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.
Thanks for your responses on this.
December 29, 2008 at 2:16 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321384TheBreeze
Participant[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.
[/quote]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.
[/quote]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.
[/quote]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.
Thanks for your responses on this.
December 29, 2008 at 2:16 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321402TheBreeze
Participant[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.
[/quote]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.
[/quote]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.
[/quote]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.
Thanks for your responses on this.
December 29, 2008 at 2:16 PM in reply to: On Price, Intrinsic Value, MBS, and Mark-to-Market #321480TheBreeze
Participant[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.
[/quote]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.
[/quote]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.
[/quote]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.
Thanks for your responses on this.
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