Marking to Market, Redux
I innocently opined yesterday that this seemed like a good idea and was promptly straightened out by two well reasoned comments from "CEA", who clearly is up on the subject (all while providing a neat, accurate comparison to real estate pricing in Greenwich). Now someone in the Wall Street Journal says, who knows what will happen - let's try it and find out. So now I'm thoroughly confused. Thoughts, CEA?
1 year ago
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6 comments:
Hey Chris. CEA is my acronym, you know, Current Equity Analyst. I was in the City all day at a meeting, I will review this article tomorrow and get back to you with some thoughts.
Current Equity Analyst (now Current Exhausted Analyst)
CEA, I've just been listenig to Warren Buffett interviewed by Charlie Rose and you and Buffett must have been speaknig - he came out firmly in support of mark to market and reasoning seemed identical to yours (hope that shared genius means you've made out like him, too).
He also grudgingly supports the bailout but I'm still to angry at the pigs feeding at the trough in Washinton to think straight on that matter. I'll sleep on it. Good night.
The reason the credit markets have frozen up is because of non-transparency of assets, which has caused fear over counter-party risk.
By not marking-to-market, we only add to the counter-party risk/fear currently paralyzing the markets.
Worse, if we "hide" the values of bad assets, we continue down the same path the Japanese took (they allowed their banks to keep bad assets on their balance sheets, rather than write them off). The consequence of that approach (which ironically the US criticized the Japanese for) was that the Japan markets/economy have been mired in a slow grinding deflation for over ten years.
Retired IB'er
Chris:
Were I as successful as Warren Buffett, trust me, I would be a "Happily Retired Equity Analyst"!
I think that Holman Jenkins must be kidding, right? "We won't know until we try"?
I believe we HAVE tried. We did "Mark-to-Model" for the past decade. Bankers and traders extrapolated the value of little-to-no-available-market securities from the value of viably-trading-market securities.
The reason there ARE robust markets for some securities and thin markets for others are, duh, that the robust markets have securities THAT PEOPLE WANT TO BUY. Ergo, they should be valued higher. If there is no market, then - this is my hypothesis - there is no value.
It is like being the last buggy whip manufacturer. You could sit around and say "One day, people will want these again" and value them fully. Or you could say "the market has shrunk, so they are worth 20% less". In either case, you ignore the fact that maybe - just maybe - that item you have spent months making/evaluating/selilng/trading HAS NO VALUE.
No one wants to admit this because of its implication on the bankers'/traders' self-esteem much less the implication of his/her employer's balance sheet.
But if there is no market AT ANY PRICE (which is the case here, unlike my Greenwich real estate examples where there might be SOME value at SOME price, maybe it's just $10,000 rather than $2 mil) - even at the $0.15 on the dollar where they've been trying to get people to buy them - then the value of those securities is 0.
You made the SAME POINT on the "I won't let someone steal this house" post above. These bankers could wait 9 months and see if their securities have value. And maybe they will - in 9 months. But just like the house is only worth $2 mil today, not $3 mil like the owners want, doesn't mean you can value that house at $3 mil. If they wanted to sell it, the market clears at $2 mil.
Got it? :)
CEA
CEA - I'm convinced! Look for me on Greenwich Avenue; I'll be the guy wearing a sandwich board proclaiming, "I got religion!" Too bad no one in Washington seems to be listening to people like you.
ah, that is a whole 'nother story.
I was talking with my husband, and neither of us could think of ANYONE in our graduating undergrad/grad classes who went into politics. The "best and the brightest" went into business. I believe there has been a huge brain drain from politics during the 80s and 90s, so we are left with - well, I am sure there are SOME bright people, but from the cringeworthy TV appearances of our elected officials, there don't appear to be many.
It's probably good that Washington does not listen to me. I'd probably tell them that
(a) Lehman should have been forced into a sale instead of into bankruptcy court, which has caused all kinds of trouble http://www.bloomberg.com/apps/news?pid=20601109&sid=adjHB.7sfLDA&refer=home
(b) Mark to market wasn't the CAUSE of your problems, it was merely what caused others to see what the banks already knew (that their complex securities had no value)
(c) You need to go after the guys who issued and valued these securities and sue them for several of the tens of millions they took home. Don't care if the lawsuits get nothing, these guys need to be brought to justice
(d) Ben Bernanke is in way over his head, and Alan Greenspan is not a demi-god
CEA
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