retired aviator

New Mark-to-Market Rules: Playing Pretend

MBS holders did take a huge bath in 2008. Too big. The point is that the floor for MBS in a rational world should be considerably higher than the floor for GM's unsecured bonds, since GM is insolvent and bleeding big red ink every quarter. Diversification and solid collateral make a big difference why MBS are more desirable than GM bonds. Also, even today after all the writedowns, an MBS shareholder enjoys significant positive income. Over 90% of mortgages are still being paid, and not delinquent.

The point of mark-to-market being leading to an unreasonable result during 'the great unwinding' is that buying volume could not possibly hope to match the colossal selling volume of unilateral institutional unloading en masse. "Market value" is meaningless in such a scenario. When 'mark to market' was instituted to stop accounting shenanigans, it was not foreseen by the FASB that the market could actually 'cease to function' with such volume imbalances. It was unprecedented on this scale.

My own feeling is that either Congress or the President should have the authority to temporarily suspend 'mark to market' accounting during times of national financial panic when markets are deemed to not be functioning normally.


On Apr 05 07:33 PM Trillion with a T wrote:

> The point of these securities is to NOT collect the collateral.
> In the past the collection of this collateral allowed the holder
> to get some sort of return for their investment. What happens though
> when suddenly you own 100 'valuable pieces of property' that no one
> wants to buy them at the price that is valuable to you (keeps you
> from taking a bath on the transaction).
>
> This is the actual worst case scenario, that we are currently in,
> and much worse then the scenario you have lined out.
>
> So you see in reality MBS and GM bonds are much more comparable then
> they should be...

New Mark-to-Market Rules: Playing Pretend

It's completely unfair to compare mortgage-backed's with GM's bonds. Everybody knows GM is insolvent and likely to default. More importantly, it is a single entity, so it's an all or nothing proposition (nothing, except whatever Chapter 11 might award).

MBS on the other hand are diversified with millions of borrowers and only some percentage of them will ultimately default. It's anybody's guess what that percentage will be, when the economy bottoms. As MBS are diversified baskets of mortgages, they will undoubtedly have substantial value in any scenario.

More importantly is the "MB" of "MBS". In default, creditors then own the homes, and homes are a type of collateral that can't walk away. GM's unsecured bonds bear no resemblance whatsoever to mortgages where the creditor in worst case scenario owns a valuable piece of real estate.

Shadow Banking System: Death from Nowhere

Too bad the name "shadow banking" came into use. It implies a shady activity, when really by your explanation it was simply securitized lending going on in the markets outside the banks, and largely on the up and up. It was made to look bad when real estate came crashing down. The layperson will not understand this though if they hear of "shadow banking".

It sounds like you are saying the lack of shadow banking lending (90 some percent reduction in securitization being originated), is much of the problem slowing down consumer demand. You are not clear on the mechanism though.

Are you saying consumers who have greater need to borrow (as opposed to those with good credit but little need to borrow)are in fact applying for loans but not signing when the rates are much higher now due to greater spreads, or are you saying the supply of funds is inadequate to meet loan demand that actually exists, or are you saying the consumers are simply not applying for the loans?