注册 登录
九号胡同 返回首页

发财小胖的个人空间 http://www.hutong9.net/?4437 [收藏] [复制] [分享] [RSS]

日志

More on "Mark To Market" (ZZ)

已有 567 次阅读2009-3-10 06:43 PM |个人分类:小胖转贴|

There was a newsflash this morning on Reuters that "Mark to Market is NOT going to be suspended", allegedly sourced from someone at the SEC.

MTM was put into place after ENRON due to the amazing abuses on their balance sheet with asset "valuations" in an attempt to prevent re-runs of that debacle.  It has been circumvented to a large part by "Level 3" assets, which are in fact marked to model (same thing as non-MTM eh?)

So why the furor?

Let's say you are a bank and have $1 billion of some bond issue that was stuffed to the gills with crap subprime and liar loans.  It is, thus far, cash-flowing fine, but everyone knows that these liar loans and subprime garbage is likely a 50 cent recovery deal eventually, if you're lucky.

So long as this paper is cash-flowing if you're intending to hold it to maturity then you can value it at "par" under your model, because well, today, it is making coupon payments.  That is, your bucket might be different than other people's bucket.

So you hold this thing in "Level 3" and call it par.  All is good, right?

No.

See, the next city over is a Hedge Fund.  He bought a bunch of this paper too.  But he's getting nervous - his investors are demanding redemptions, and his lockup period is expiring.

So he starts circulating a bid list, and on that list is the same bond issue you're holding.  He gets a bid back for 40 cents on that bond; the people looking at it know what's in there, that those liar loans in California are a good 30% underwater and the subprimes are in trouble too.  That buyer figures that the bond will eventually default and recovery is likely to be 50 cents at best.

Sir Hedgie knows the buyer's right, of course - that bond, held long enough, is likely to hurt him.  Worse, he really needs the money, and the best bid he got is 40 cents.  So he sells it, even though if a reasonable estimate of recovery is 50 and its cash-flowing today "fair value" in the market might be closer to 55 than 40.

That event causes the bank holding the same thing to have an immediate problem - they are now required to mark that bond, because the entire claim on Level 3 is that there are "no observable prices."  Well, you just got an observed price, and its way the hell off your mark!

The consequence of this is an immediate $600 million accounting charge to the bank.  Its not a cash charge, as the bond is (at this point) cash-flowing, but it hits the asset side of the balance sheet.

Suspending MTM would get rid of this, which is why some people want it - badly.

But suspending MTM alone would bring about the potential for the same sort of game-playing that was exploited by ENRON and others during that time - the intentional hiding of losses through the claim that the bonds "will be fine" if held to maturity where the holder has full knowledge that it is rather unlikely this will remain true.

So how do we resolve this problem?

I would propose the following:

  • Suspend MTM for six months.  Why a short period?  Because we've still got a deleveraging problem, and we both want to drive that to completion and give people cover during that time (and only during that time.)
  • In six months, the suspension expires and so does Level 3 pricing.  That is, the "no observable input" game has to stop.

How do we get a price on something that has no observable input?

Simple - you have to sell 10% of whatever you're holding if you can't get a market price, and that's the price.

This will result in a market being developed over these next six months, if for no other reason than necessity - these instruments will trade by necessity as market participants will have to obtain market prices in order to continue to hold them.  By getting rid of the "Level 3" bucket we will solve two problems at once, while at the same time we recognize that we can't throw this at people with an instant implementation and we have a "fire sale" problem with these bid lists that has been hitting the asset side of balance sheets, perhaps unfairly so.

Is this a perfect solution?  No.

But it's a solution that will work, it can be implemented, and it prevents the game-playing with asset prices that has been so rampant over the last few years going forward, forcing a market to develop for those so-called "illiquid" assets so we can get an actual market price.

3

路过

鸡蛋

鲜花

握手

雷人

发表评论 评论 (2 个评论)

回复 小咪 2009-3-10 08:38 PM
谢小胖
回复 waterwater 2009-3-11 08:16 AM

facelist doodle 涂鸦板

您需要登录后才可以评论 登录 | 注册

手机版|www.hutong9.net

GMT-5, 2020-9-21 02:31 AM , Processed in 0.051378 second(s), 17 queries .

Powered by Discuz! X2.5

© 2001-2012 Comsenz Inc.

回顶部