imnotadoofus

New Mark-to-Market Rules: Playing Pretend

There is nothing inherently wrong with MTM accounting adjustments. What the modifications recently adopted do is return to the rules that existed before January 1, 2008. I spoke to a lender who had to write down his assets by over 20% due to the new rules when his default rate was only 57 basis points. Hence, capital was eroded needlessly and put the entire company at risk. Another told me that if only one or two mortgages were delinquent although 95% were paying on time, the entire portfolio had to be written down by 50% late last year. Repayments ultimately allowed a recovery in subsequent quarters although the entire portfolio is still valued at less than 50% of par value. These mortgages are not agency backed mortgages and hence are considered illiquid so must be still marked to market under the third category of the new rules. Go figure. Bears are too pessimistic regarding these rule changes; they are not fraudulent attempts to put rose colored glasses on toxic assets.

The Diminishing Impact of Debt on U.S. Economic Growth

A LOT HAS BEEN SAID THAT WE ARE EMBRACING KEYNESIAN SOLUTIONS; THAT IS MASSIVE DEBT INCREASES TO FOSTER MORE CONSUMPTION. BUT VON MISES AND ROEPKE ALSO POINTED OUT THAT GOVERNMENT OWNERSHIP AND CONTROL THROUGH HEAVY REGULATION ACTUALLY IS MORE AKIN TO THE FASCIST ECONOMICS OF GERMANY, ITALY and SPAIN DURING THE 30s. THE CONTROL OF CAPITAL, NOT THE OWNERSHIP IN THE MAIN, WAS THE ESSENCE OF THAT STRATEGY. FOLKS TEND TO FORGET THAT HITLER HAD THE BANKS AND MAJOR INDUSTRIES UNDER HIS CONTROL OR IN HIS CAMP DURING HIS CHANCELLORSHIP BEFORE WWII. LITTLE DID THEY REALIZE HOW THEY WOULD BECOME PRISONERS OF HIS MADNESS AS WELL.

Why Silicon Valley Should Take Over the Auto Industry

Buick, GMC and Chev will be the smaller, meaner and more efficient GM.

Mark-to-Market vs. Mark-to-Model: What Ever Happened to Real Value?

M2M is based on the efficient market hypothesis. That theory is no longer assumed to be valid, especially so after the past few years. Behavioral Finance would suggest that emotional reactions may have more impact on valuations than a discounted cash flow model. So modification of M2M is a realistic adjustment and will not result in erroneous wasting of capital. Remember, there are three levels, and level I and II will not be affected by phoney assumptions as there are market transactions that confirm value. It is the level III that must be adjusted and not be confined to ABX or CMBX derivative indices.

What Consequence Will FASB's Expected Approval Have on Mark-to-Market Accounting?

Further, adopting a more realistic model, or in effect going back to the method--FAS 115--that existed before January 1, 2008 would have helped offset the irrational pricing of assets at values less than their value after provisions for credit losses. Also, OTTI modification helps in these circumstances as well. Historically, banks that did not intend to use securitization for these assets kept them on the balance sheet at book value and used provisions when losses were expected. In 1986 changes in how banks make provisions did not allow them to anticipate losses more liberally and as a result can only make provisions when losses were obvious. This led to lower provisions that critics now say are understated in the allowances on the balance sheet; hence the mark-to-market model corrects for this understatement. Both are guesstimates and not realistic.

What Consequence Will FASB's Expected Approval Have on Mark-to-Market Accounting?

Benchmarks such as ABX and CMBX in all circumstances, especially in a panic situations and irrational times such as these, give a false impression of the value of assets when there is overall fear and loathing. Example: a portfolio of $50 mm other MBS securities that are not agency backed mortgages that are valued at 20% of par when the FICO score of the whole is 728 and there is only a few defaults in the portfolio should only have to record a provision for the losses, not mark down the whole portfolio to 20% of par. Adjusting for this insanity will increase the capital of banks and insurance companies and allow them to then further raise additional capital in the private market instead of paying 5-8% to the Fed for the preferred shares it invests.

Marc Faber: 'It Will All End in Disaster'

Keynesian economics did not pull us out of the Depression as by 1939 the unemployment rate was still 25%. It was WWII and massive restrictions on spending via coupons, etc., resulting in forced savings, that were part of the answer. And the result was a massive increase in investment in the War Machine rather than massive transfer payments that Obama proposes. The balance was monetary policy during the war years.

Robbing Peter to Pay Paul is not the answer and can hardly be considered morally edifying even if the President suggests that it is. And converting the Fed Government into a massive money machine when no one knows whether they have won or lost in the game just encourages corruption on a similar scale. And all the masses know is that they did not get their "fair share" and that someone else has to be tapped for that as well. The end result, as a recent member of the EU said, is the "road to hell."


On Mar 25 03:38 PM Just Say Whoa! wrote:

> >These Austrian Economists have been shown to be right, but the Keynesians
> are still in control of policy.
>
> Yeah!
>
> The Hoover administration practiced Austrian economics ("laissez
> faire approach to the economy").
>
> That was fabuously successful! Why it led to something called "The
> Great Depression".
>
> The Great Depression was loads of fun for Americans and Europeans,
> too!
>
> 25% of young American boys were too malnourshed to be accepted by
> the military in WWII. What a stroke of genius these Austrian economists
> are, huh?
>
> And who ended the Depression? Austrian economists?
>
> Yeah, it's not like the massive Keynesian spending on military equipment
> that the US did in it's buildup to WWII pulled us out of the Depression?
>
>
> What? It did?
>
> But this guy says that Keynesian spending don't work!

Deutsche Bank's Surprise Move Rattles Bond Market

NOT CALLING BONDS TRADING BELOW PAR MAKES SENSE, AND THE OPPORTUNISTIC INVESTOR WILL BUY THEM AT A DISCOUNT SINCE IT IS LIKELY THAT WHEN CONDITIONS IMPROVE THEY WILL BE REFINANCED. THE BANK MADE THE IMPORTANT AND APPROPRIATE DECISION, WHETHER ANALYSTS LIKE IT OR NOT

Obama to the Rescue?

I keep getting irritated when journalist keep insisting that the $700 billion "bail-out" was to rescue Wall Street. Does the writer mean Bear Stearns, Lehman, Wachovia, etc. They are gone and the survivors have been decimated and thier principals' economic benefits destroyed in the process. The process is to buy mortgages from community banks and other regional banking entities--as well as insurance companies and foreign banks--that hold these mortgages at the insistence of the Democratic supporters in Congress who insisted that Fannie and Freddie support the origination of these "toxic loans." Wall Street was also urged to securitize them by these GSE institutions. So how the $700 billion is really a bail-out of those who bought these loans, not the originators of the SIVs, CDOs, etc. Wall Street was an only the producer of these vehicles. And now they have suffered as a result and are blamed for the crisis, which is nonsense.

Hedge Funds: What Happens When the Chickens Come Home to Roost?

capitulation is occuring as we write and conjure up awful scenarios. But many financials have already had double bottoms and in some cases three bottoms--March, July-August, and September. Each time volume tried up and the benchmarks, or ETFs in the sector, rallied.

Hedge Funds: What Happens When the Chickens Come Home to Roost?

A lot of the commentary is based on guesswork and not any real fundamental analysis. I agree that hedge funds are about to be an asset class that is diminished in the eyes of consultants and pension plans, and thus money will continue to exit throughout the end of the year for some, but there will also be exodus after January 1, given that funds have 45 days after the end of their fiscal year to meet redemptions, and as many have November 30 as the fiscal year end.

The Ultimate Value Trap

In my life I have only bought one foreign vehicle, a Volvo, which was ultimately bought by Ford. Its periodic repair bills were expensive in the extreme, which I attributed to the fact that the dealer felt that his franchise was superior. Other than that one time (although I inherited my father in law's 1961 VW) I have stuck with GM, from a 1957 to a1966 and a 1972 Impala which I still own. Currently I own an '05 Buick SUV and a '90 Sierra pickup. Both have had excellent repair records and except for minor problems, such as lights going out, I go to the dealer for oil changes and periodic maintenance requirements.

A happy GM car enthusiasts.

Amity Shlaes: Paulson Plan Bring On Accounting Deja Vu

As a professional investor I have argued with colleagues that the mark to market imposition imposed by FAS 157 and 159 beginning late in 2007 would have consequences. A CEO of a mortgage REIT told me that he was concerned about Bear Stearns. I asked why and he said that with $300 billion in assets it only required a 5% haircut to eliminate its capital, which was $15 billion. I thought he was too pessimistic since the Bear was a venerable Wall Street institution, but he suggested that FAS 157, the "fair value" accounting rule, would wipe out its capital.

So much for the Bear. Now it--FAS 157--has further eroded capital across the financial sector and has been instrumental in the demise of WaMu and probably the cause of the impromptu marriage of Wells and Wachovia. But it also was partly responsible--in my opinion--for the many other disasters that have these past few months. As capital is eroded by the irrational mark downs, investors and wholesale funding agencies pull their lines and/or withdraw funds. And the rating agencies also contribute to the downward spiral by calling into question the ability of institutions to survive its downgrades. All this because of a foolish mark-to-market rule that bears little resemblance to the actual value of the assets in question. ABX and CMBX are the arbiters, not the discounted cash value of the asset in question, whether pooled real estate mortgages or other assets similarly packaged and sold world wide. So goes the conflagration!!!!!