Whitney On Wall Street's Future

[ziggy29]

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Originally Posted by FIRE'd@51 IMO, the "main street" equivalent of 2B's point is like owning a home in a stable neighborhood (with no recent real estate sales) and making your mortgage payments on time. Then your neighbor loses his job and is forced to sell his house at a below-market price. Do you think your creditors should then move in on you, revalue your home downward, claim your balance sheet has been weakened, and make you pay a higher interest rate on your debt, thus weakening your financial situation.

A classic example of the doom caused by mark-to-market on performing assets came from the Schwab "Yield Plus" Fund. This is an ultrashort bond fund that was sold as a higher-yield alternative to money market funds. Many of the securities were mortgage-backed securities with investment-grade ratings, and all of the assets were performing. However, because the securities were marked to market and the market was panicking about pretty much any MBS, the NAV of the fund plummeted despite having no defaults on the underlying securities. As a result the fund has lost about 30% of its value year to date -- in a fund touted as being nearly as "safe" as cash.

[utrecht]

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Originally Posted by 2B There is a large contingent of people that live their lives to "hate Bush." He is the devil incarnate to them even though they seldom believe in God. I personally think he's done a poor job but I don't live my life around that. I did vote for him 4 times (2 for gov and 2 for pres) only because the dems found even less desireable candidates to run against him. It's an unfortunate fact that elections don't have a "none of the above" option. Failing to vote doesn't achieve that.

I agree with you. I started out liking Bush but at this point I think hes failed on several levels, but at the same time hes nowhere near as bad as alot of people make him out to be.

Personally I think its ridiculous to think that the President himself has anywhere near as much control over every aspect of our lives as most people seem to think.

People have been complaining about healthcare, immigration, the economy, pharmacutical companies, energy...ect for as long as I can remember and they will still be complaining about that stuff years from now no matter who gets elected. McCain is not going to fix the healthecare problem and neither is Obama and to elect one of them based on the belief that they will is foolish.

[REWahoo]

Is this thread ready for the Soap box yet?

[2B]

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Originally Posted by REWahoo Is this thread ready for the Soap box yet?

It's been ready for the last 4 pages.

[armor99]

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Originally Posted by ladelfina It would not be a major disaster if people had some level of savings and little debt. Your solution is to ignore the free market completely? Allow firms to set fantasy prices? People GOT INTO this situation by overlooking the fact that a 900 s.f. pre-war box in CA was not really "worth" $1mm. That a crack house in MI was not really "worth" $200k. Now the solution is to continue the fantasy that they are.. and that someone is going to keep paying the notes on them Good luck with that, as they say. It's not up to the taxpayers or the government to make sure these credit bundles are worth something.. it's up to the companies that sell them to prove to us they are. They've shown they are incapable of that. I'm just stunned at the response of supposed "capitalists" to this crisis.. they should be rooting for the 'creative destruction' of such malinvestment.

Hmmm.... I have always believed... and still do... that objects are only worth what people are willing to pay for them. If someone is willing to pay 1 million for a "900 s.f. pre-war box in CA " as you state it... then it IS in fact "worth" that much. How exactly do you "prove" how much something is worth? I can go to the local supermarket and buy a gallon of water for less than $1. But I would think if there was almost no water to be had, then that same gallon might be a lot more expensive.
Objects such as cars, homes, etc, do not have any inherant value. Their only value is in what people are willing to pay for them.
I personally believe the "true" reason behind the mortgage crisis that is tanking the markets right now, is that banks believed (and more often than not they are right), that the fed would always step in to protect them if things got out of control (like they are now... and the govt has). If the banks beleived there was no such protection, or at best just a tiny amount, then they would have been much less likely to do the risky business dealings that they did. Once again... it was business backed by the govt that started the problem... Sort of like adult children that still live at home, and are funded in part by their folks. They tend not to live a life of financial responsibility, because they do not have to.

[cute fuzzy bunny]

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Originally Posted by utrecht How did I know that this guy lives in California? (read: hes an overly liberal democrat)?

Weird, I live in california and I'm neither a liberal or a democrat. How strange.

How did the soapbox leak out here?

[haha]

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Originally Posted by FIRE'd@51 2B has raised a very good issue about these marks-to-the-market, a point BTW that has been raised by several prominent financial professionals. He clearly indicates in his post that he is talking about performing assets.

Most financial institutions borrow short and lend long. It is their only real reason for existing.

The recently imposed mark-to-market requirements are counterproductive and IMO have a lot to do with the stress we are experiencing right now.

Ha

[FinanceDude]

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Originally Posted by Michael Dirubio All- I believe this will be my last post to this forum. There just doesn't seem to be an atmosphere here to allow honest discussion of idea's and thoughts. It appears to me that any one trying to sound some warning bells gets attacked. I'm not saying we are going into a depression, but anyone who believes that we are not in a recession is delueding themselves. Yes- I am aware that the current economy doesn't meet the technical definition of a recession. That is part of the problem: I honestly believe the government has changed the statistical formulas so that we can't have GDP contraction. Same with unemployement. Every time the government changes the formula, the unemployement rate goes down. I think that makes any comparison of unemployement rates meaningless. The incompetance of this administation cannot be overstated. The incompetance runs to every aspect: The CIA claims WMD are a slam dunk. Oops. None there. Lets give Tenet the Medal of Freedom rather than admit the mistake. And it just goes on: How did the CIA not see 30,000 Russin troops massing on the Georgian border? That was a complete surprise to the President? If it wasn't a surprise, why was he in Bejing instead of the situation room? What did we learn in Katrina and Ike? The government cannot respond to help citizens in a crises. As a californian, I have no illusions about the response for an earthquake: I am on my own. I'm ready for it. How can I not be aware of the problems with the economy and the governments total lack of response. This was a posted point on this thread: "Pretty much my point. So in 1993-1996 and from 2004-2006 when unemployment was higher than that, did you feel that unemployment was a major factor in our economy and our economic future? Does anyone even remember unemployment as an issue during those time periods?" Yes I do. I remember article after article on the "Jobless Recovery", and how that was going to hurt us in the long run. Jobs going overseas doesn't mean good news for us. People didn't have good paying jobs and used thier houses as ATM's. Now the HELOC's are gone and 401K's are being depleted. The 25% drop in the market means that the 401K's are now almost gone. Where do we turn next? A drastic drop in the standard of living in this country. Do I want this to happen? No. Am I preparing for it? Yes. Statistics are tough things. Someone on this thread said this: the employees that lost thier pensions are only .15% of the population and thats not significant. That is a statistically fallacious argument. Yes .15% of the total population, but how much of the working population? And more important: what percentage of the PBGC's remaining assets? What I mean is this: The Leman Brothers employees will take a significant portion of the remaining PBGC assets. The PBGC is broke. I know because DW gets a statement cataloging 15 years worth of hard work for UAL for pennies on the dollar. Where is the PBGC going to get more money? Taxpayers. Maybe. We can make the same argument on the FDIC. The total number of banks failing is small. It only takes afew to deplete the FDIC. Once the FDIC is gone, there will be a run on banks. I saw an artical on the web to that effect. People need to keep an eye on deposited money. Is that panic? Is that likely? Each person needs to decide. I am arming myself both literally and figuratively. I like the Warren Zevon insurance policy: Lawyers, guns and money. Since I will not be around to reply to all the "conspiracy nut" posts: I'm really not. I don't believe in black helicopters and bugged phones, the NSA eavesdropping program aside. I just believe that the foxes are running the henhouse and we need to hold them to account and be ready for the consequences of our laxness. Here's hoping the market recovers. While I'm at it: here's hoping that the government balances the budget, people start saving more money, someone invents a better solar cell (or cold fusion), and honest people start running the government. Oh well, a man can dream.

You're pretty darn cynical considering you've been on here for a month and have only 6 posts. While I disagree with CFB at times and others too, the bottom line is this is a forum containing a diverse group of highly intelligent people. Also, you WILL be called out if you can't defend your posts with facts. Must be all the enginners on here........

[cute fuzzy bunny]

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Originally Posted by FinanceDude While I disagree with CFB at times and others too

Thats just because we're not paying you a 1.5% surcharge.

[2B]

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Originally Posted by cute fuzzy bunny Thats just because we're not paying you a 1.5% surcharge.

I'll do it for 1.75% -- If I charge more I must be worth it. Right?

[ladelfina]

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Originally Posted by armor99 Hmmm.... I have always believed... and still do... that objects are only worth what people are willing to pay for them. If someone is willing to pay 1 million for a "900 s.f. pre-war box in CA " as you state it... then it IS in fact "worth" that much. How exactly do you "prove" how much something is worth? I can go to the local supermarket and buy a gallon of water for less than $1. But I would think if there was almost no water to be had, then that same gallon might be a lot more expensive. Objects such as cars, homes, etc, do not have any inherant value. Their only value is in what people are willing to pay for them. I personally believe the "true" reason behind the mortgage crisis that is tanking the markets right now, is that banks believed (and more often than not they are right), that the fed would always step in to protect them if things got out of control (like they are now... and the govt has). If the banks beleived there was no such protection, or at best just a tiny amount, then they would have been much less likely to do the risky business dealings that they did. Once again... it was business backed by the govt that started the problem... Sort of like adult children that still live at home, and are funded in part by their folks. They tend not to live a life of financial responsibility, because they do not have to.

I disagree with the part about a car or home having no inherent value but understand the rest..

To me, though, I don't see how a person can argue both sides simultaneously (not saying you are doing this, armor99... just a general observation):

A.) Houses should be worth whatever someone is willing to pay, yet
B.) complex financial derivatives should NOT be worth whatever someone is willing to pay.

A.) Financial models and the seller's opinion are unimportant in defining underlying 'true' house value, yet
B.) financial models and the seller's opinion are important in defining the underlying true value of an elaborately securitized loan package.

A.) The inherent value of a physical asset is not possible to define, yet
B.) the inherent value of a future income stream that requires assumptions about other economic variables like the very same underlying asset value (above) and continued employment or other pressures, is possible to define.

That's the part I don't get.

[FinanceDude]

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Originally Posted by cute fuzzy bunny Thats just because we're not paying you a 1.5% surcharge.

The highest we charge is 1.00%, most of our clients are much less than that.......sorry to disappoint you.........

[2B]

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Originally Posted by ladelfina A.) Houses should be worth whatever someone is willing to pay, yet B.) complex financial derivatives should NOT be worth whatever someone is willing to pay. A.) Financial models and the seller's opinion are unimportant in defining underlying 'true' house value, yet B.) financial models and the seller's opinion are important in defining the underlying true value of an elaborately securitized loan package. A.) The inherent value of a physical asset is not possible to define, yet B.) the inherent value of a future income stream that requires assumptions about other economic variables like the very same underlying asset value (above) and continued employment or other pressures, is possible to define. That's the part I don't get.

Ultimately, everything is "worth" what you can sell it for. Home appraisals for property taxes has a "willing buyer/willing seller" clause but they don't include repos in the list of allowable comparable sales.

The issue comes down to the concept of "mark to market." As we have had the panic of subprime, all mortgage backed securities are toxic. Most still are performing. The payments are coming in every month and the house is actually worth more than the mortgage. Because of the "mark to market" of the failed firms' liquidation of similar securities necessitates an immediate write down which lowers the capital ratio of the financial firm even though nothing has changed unless they needed to sell that instant.

My only analogy is to think how much you could sell your house for right now (I mean within the hour) and get paid immediately in cash. You would be hardpressed to get what the house would be "worth" in an orderly sale. That's what we're doing to the financial firms.

"Mark to market" was introduced within the last 2 years and it seems to make perfect sense until there's a run on the banks. Everyone is in panic mode. We've got blood in the streets and this just feeds the flow.

[FinanceDude]

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Originally Posted by ladelfina I disagree with the part about a car or home having no inherent value but understand the rest.. To me, though, I don't see how a person can argue both sides simultaneously (not saying you are doing this, armor99... just a general observation): A.) Houses should be worth whatever someone is willing to pay, yet B.) complex financial derivatives should NOT be worth whatever someone is willing to pay. A.) Financial models and the seller's opinion are unimportant in defining underlying 'true' house value, yet B.) financial models and the seller's opinion are important in defining the underlying true value of an elaborately securitized loan package. A.) The inherent value of a physical asset is not possible to define, yet B.) the inherent value of a future income stream that requires assumptions about other economic variables like the very same underlying asset value (above) and continued employment or other pressures, is possible to define. That's the part I don't get.

The inherent value os a physical asset is what a buyer will PAY for it.

The inherent value of a future income stream that requires assumptions is subjective, much like a weather forecast.......

[ChrisC]

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Originally Posted by armor99 I personally believe the "true" reason behind the mortgage crisis that is tanking the markets right now, is that banks believed (and more often than not they are right), that the fed would always step in to protect them if things got out of control (like they are now... and the govt has). If the banks beleived there was no such protection, or at best just a tiny amount, then they would have been much less likely to do the risky business dealings that they did. Once again... it was business backed by the govt that started the problem... Sort of like adult children that still live at home, and are funded in part by their folks. They tend not to live a life of financial responsibility, because they do not have to.

Let's sort out the facts a little bit better. There might be a few commercial banks or thrifts that have been sucked into the subprime mess, although some would point out that IndyMac, the regulated thrift, might still be operating were it not for the run on its branches started by the purportedly intemperate remarks of a U.S. Senator.

So, it's really been the unregulated crowd -- mortgage brokers, mortgage subsidiaries, investment banks, credit rating agencies, credit support providers, mortgage-backed securities issuers, and Freddie and Fannie (who were lightly and ineffectively regulated) that have caused this mess. Now, other than Freddie and Fannie, GSEs that had the implicit backing of the Treasury before they got taken out by conservatorship, which one of these in the unregulated crowd has the backing of the gummint? This is the private sector, right, with no guarantees from the gummint causing this problem? A few months ago -- no investment banking house would have thought it could go to the Fed discount window for liquidty -- so where do you get this idea that these houses thought they had a credit facility at the Fed or Treasury?

This whole fiasco was like that a giant Ponzi scheme where risk was leveraged and passed on to the next guy, with Freddie and Fannie at the end of the scheme, until finally someone said that the emperors of credit had no clothes and the underlining credits were bad.

Of course, there will be some that will say the Gummint started the entire mess by encouraging home ownership, but I think it's fair to say that the Gummint didn't encourage lenders to lend to people who couldn't afford to repay the loans.

I knew you couldn't resist treating this entire fiasco as symptomatic of some Gummint meddling into the free market. But FHA, VA and Ginnie, true instruments of direct Government mortgage lending, don't seem to have the problems that the private sector seems to have here. I'm not saying that Gummint should supplant the private sector in anything that the private sector does well, but the "moral hazard" with subprime lending in this fiasco has little to do with the Government subsidizing risk (or private sector players passing on that risk to the Government -- though it will end that way with AIG and Bear Stearns) -- it has a lot more to do with the private sector taking out-of-whack leveraged risk unsupported by each player's own capital and liquidity structure.

[ChrisC]

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Originally Posted by 2B Ultimately, everything is "worth" what you can sell it for. Home appraisals for property taxes has a "willing buyer/willing seller" clause but they don't include repos in the list of allowable comparable sales. The issue comes down to the concept of "mark to market." As we have had the panic of subprime, all mortgage backed securities are toxic. Most still are performing. The payments are coming in every month and the house is actually worth more than the mortgage. Because of the "mark to market" of the failed firms' liquidation of similar securities necessitates an immediate write down which lowers the capital ratio of the financial firm even though nothing has changed unless they needed to sell that instant. My only analogy is to think how much you could sell your house for right now (I mean within the hour) and get paid immediately in cash. You would be hardpressed to get what the house would be "worth" in an orderly sale. That's what we're doing to the financial firms. "Mark to market" was introduced within the last 2 years and it seems to make perfect sense until there's a run on the banks. Everyone is in panic mode. We've got blood in the streets and this just feeds the flow.

Can you provide the FASB rule that requires the mark on performing assets?

[2B]

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Originally Posted by ChrisC Can you provide the FASB rule that requires the mark on performing assets?

No

I'm not an accountant nor access (that I know of) to the official acccounting standards. I'm going off the financial press which I realize is risky.

[ladelfina]

ChrisC, in your post #55 you are describing the debt vortex that I have been trying to convince people of. The private and public need for ever-growing debt creates a "pull" for loans of every kind no matter how motley, not so much a "push" (though that was a minor factor).

FD, the fact still remains that I have more faith in the inherent value of my house being >$0 than in the inherent value of a weather forecast being >$0. Whatever the value of my house, it is necessarily less volatile than a forecast of anything.

2B, I appreciate your description, but all kinds of public firms go up and down in "value" every day, despite no particular underlying changes. I find little sympathy for companies who held these things "off balance sheet" when it was convenient/permitted and they could claim any fantasy value they liked. What do you think is a reasonable compromise? How do you think they should be valued and who should oversee that they are assessed "fairly", if it's not to be the markets?

The only solution I can see is to outlaw loan repackaging altogether, and force the lender and the lendee to have to live with each other, creating some degree of voluntary internal enforcement. Perhaps that is too naive a view.

[haha]

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Originally Posted by ladelfina The only solution I can see is to outlaw loan repackaging altogether, and force the lender and the lendee to have to live with each other, creating some degree of voluntary internal enforcement. Perhaps that is too naive a view.

That would work. It isn't done because almost the entire economy is hitched to home values. And whenever financing gets more expensive or more difficult, the price of the thing being financed tends to fall.

Ha

[FIRE'd@51]

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Originally Posted by ladelfina The only solution I can see is to outlaw loan repackaging altogether, and force the lender and the lendee to have to live with each other, creating some degree of voluntary internal enforcement. Perhaps that is too naive a view.

That was the Golden West (now part of Wachovia) model, and even it has broken down with the fall of housing prices. When the collateral begins to go, lenders are in trouble, whether the loans are packaged into securities, or not. It does, however, make it easier to work out non-performing loans.