Whitney On Wall Street's Future

[ladelfina]

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]

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]

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]

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]

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]

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]

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]

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]

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.

 

[ladelfina]

the larger issue is containment.. Impossible when the bad loans from Stockton CA end up in China and Norway, and in everyone's "safe" garden-variety brokerage MMFs.

 

[Running_Man]

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

FASB Statement no 115

"Trading securites may include equity and debt securities. Mortgage backed securities held for sale related to mortgage banking securities are included in trading securities....
Trading securities are recorded in the balance sheet under current asset at fair market value.... to determine the fair value of debt securities in which market value price is unavailable, other valuation methods may be used, including present value of future cash flows."

Be happy to provide any other scintillating FASB that are desired...

 

[Helena]

Is this thread ready for the Soap box yet?

My topic is a CNBC video about the financial crisis...
if you want to trash something, trash the troll posts.

 

[REWahoo]

My topic is a CNBC video about the financial crisis...
if you want to trash something, trash the troll posts.

It doesn't matter what your topic was, posts in the thread turned into textbook political Soapbox material like this:

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

Bush gets bashed for Iraq and in the next sentence gets bashed for not doing something to stop Russia from moving into Georgia.

And this:

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.

And this:

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.

As far as bashing troll posts, please identify them so appropriate action can be taken.

 

[2B]

Are we now worried about thread hijacking? That would be a first.

This has been a long running thread and is way off the original topic. I think the original topic has been exhausted. It has turned into one of several "oh no, the markets down" threads.

 

[Gardnr]

I watched the whole thing, and I don't really disagree with what she's saying in general. I just get really annoyed with people who make up their statistics. I got in trouble for that in 7th grade debate club, and the lesson has stuck with me. As my teacher said, "lying to make your point is not a good debate tactic."

She must be really disappointed in today's politics, eh? I know I am.

Unfortunately they've actually made lying an effective tactic because they do it so unashamedly and many people just can't believe they'd really lie like that, so they believe them. It makes me crazy and very disheartened about the whole process.

 

[ChrisC]

FASB Statement no 115

"Trading securites may include equity and debt securities. Mortgage backed securities held for sale related to mortgage banking securities are included in trading securities....
Trading securities are recorded in the balance sheet under current asset at fair market value.... to determine the fair value of debt securities in which market value price is unavailable, other valuation methods may be used, including present value of future cash flows."

Be happy to provide any other scintillating FASB that are desired...

Thanks for the information. But wouldn't most of the mortgage-backed securities held by Fannie or Freddie qualify as investment securities and not those held in a trading account under FASB No. 115? After reading the most recently quarterly report of Fannie, it appears that SFAS 157 might be causing the mark-to-market or fair valuation of securities held by financial institutions. This accountant makes the point here:The Accounting Onion: SFAS 157: 'Fair Value' is Not Fair Measurement for Illiquid Assets