Poor Dude

U.S. Banks Putting 'Lipstick on a Pig'

I have to agree with Tack on this one. See my reasoning at

seekingalpha.com/artic...

This Chart Can Kill Any Bull

To truly appreciate the "bird's-eye" view, you should post that chart on a linear scale (rather than logarithmic).

Mark-to-Market Marches Towards Extinction

A mortgage is a loan. The home is collateral pledged against that loan, and nothing more. Some loans carry 100 percent collateral, some carry none, and most carry something in between. Whether the value of the collateral goes up or down should have no effect whatsoever on the value of a loan made against that collateral.

The value of that loan is the net present value of the stream of cash flows it generates in the form of payments made on the loan until it is paid off. All that matters is the likelihood of that stream of payments happening as planned. For an individual loan, that is counterparty risk and should be built into the interest rate charged on the loan (higher likelihood of being repaid equals lower interest rate, riskier borrower equals higher interest rate, etc.).

The underlying value of the real estate is meaningless, except as a point-in-time reference used by the lender in deciding how much (if any) they should reasonably lend against the home. My guess is that reference point probably carries far less weight in the decision-making process than the perceived creditworthiness of the borrower. But regardless, it becomes totally moot once a decision is made and the loan paperwork is signed. The value of the collateral works its way into the mortgage process BEFORE the mortgage exists, and is irrelevant thereafter (except in the event of default).


The value of a bundle of loans is simply the sum of the net present values of all the individual loans in the bundle. I don't understand using market prices to value long-term assets. It makes no sense at all. Markets are frequently far too irrational at any given point in time. Sometimes they value things way too highly, and at other times they value things way below their intrinsic (or true) value. But it's the intrinsic value which matters, and that is what companies should use to do their accounting (with full disclosure of their assumptions, of course).


If I run an ad offering to buy a one-year old Rolls Royce for $1.00, and some lady involved in a nasty divorce agrees to sell me one for that (so that her soon-to-be ex-husband can't have the car), does that suddenly mean that all Rolls Royce's lose 100 percent of their value as soon as they're driven off the dealer's lot? And that, in the name of fairness, everyone who owns a Rolls must now mark the value of their car down to $1.00? That'd be insane, obviously. And yet, that's the situation M2M has created with our banks and insurance companies (and others).


And sadly, there are some people around who are trying to take advantage of a temporary market dislocation to transfer the wealth of others into their own pockets - no matter who loses how much, no matter what institutions get destroyed in the process, and no matter the price to our society as a whole. Those are not good people, and we should treat them as the thieves they are.

Nationalizing the U.S. Banking Sector: There's No Choice

Before we do anything drastic, let's consider what someone here suggested on another thread. The banks have already marked these so-called "toxic" assets down by a ton. And then some. And yet, there still seems to be a huge disagreement about what they are worth. No meeting of the minds between potential buyers and sellers. This author seems to believe the potential buyers are right and the potential sellers are simply in denial. Without knowing a whole lot more of the details, I'm in no position to develop my own opinion.


But the homeowner surely has an idea. Perhaps the banks should permit homeowners to buy their mortgages back at whatever value the bank currently has them marked down to, as a first step in reaching a market consensus on what their true value is. That should clear a lot of these toxic assets off the books, and would go a long ways towards solving our problems.


Then, only the mortgages not bought back would need to be marked down a little more, and the offer repeated. And just keep repeating that process until all the old mortgages have been replaced with brand new mortgages based on current market valuations.


An added benefit would be that the new lower-principal mortgages would free up a lot of discretionary income for the homeowners, which would serve to fix yet another problem our economy currently faces.