Mike Razar

Congress: Financial Amateurs at Work

We could always elect honest businessmen to Congress. Just a thought. I have seen no actual evidence that any of the scholars you cited even understand derivative products. That is a harsh judgment, since most derivatives easily understood by a smart undergraduate.

The best paragraph in this good article is the one that starts with "Ultimately this means two things..."

CDS: Toxic Product or Toxic Investors?

If you read my earlier post, you will see that I suggested defining a toxic asset as one whose presence in a portfolio diminishes the value of the rest of the portfolio. That means the toxic asset has negative value. As I said, I do not believe any such things exist. Assets whose value has declined aren't toxic. I'm afraid the whole concept of "toxic asset" is hopelessly flawed. Rich, THAT is why you NEVER see an actual definition...:)


On Apr 21 02:28 PM rich c wrote:

> Your article points to a much larger problem and that is that NO
> ONE seems to be able to (or want to) tell us exactly what a "toxic
> asset" really is???? I've bought and sold 'distressed' financial
> assets for many years and never in my days have I seen more people
> trip and fumble over a term like we have in "toxic." I mean, is it
> securitized? Performing? Delinquent? Non-performing? In forclosure?
> Sub-prime? 'Scratch and dent?' Is it bigger than a bread basket?
> Red? Green? Are these assets on balance sheet or off? What percentage
> of the top firm's $7 TRILLION (!) in CMOs are 'toxic'? Which ones?
> And God forbit, can we actually see an inventory of these assets?
>
>
> Honestly, it is a bit like a helpless Dr with a patient running in
> yelling about sever pain but then won't let the Dr. close enough
> to really analyze the situation.
>
> This also explains in large part why the Treasury's various programs
> will fail b/c NO ONE can define how big the hill is to be climbed
> or what gear may be needed for the climb. If no one can answer WHAT,
> then do not expect the market to answer HOW MUCH.
>
> As a buyer, when you can give me a detailed inventory of WHAT, then
> we have something to discuss. Until then, who gives a flip as anything
> else is just fodder for the likes of Seeking Alpha reading??
>
> P.S. George Soros speaking = agenda (political, financial or both).
>
>
> P.S.S. "Like other derivative contracts, if there's somebody losing
> money on it then there's likely to be somebody making money on the
> other side."
>
> And that differs from any other transactions why??? Stocks007, to
> say that CDSs are just another derivative is either simplistically
> brilliant or disingenuous. I vote disingenuous. And for the record,
> ALL 'derivative' product comes much closer to the 'toxic' camp then
> legitimate commerce. We both agree that more regulation is necessary
> but disagree, it seems, on the degree.
>

CDS Clearing House Will Not Fix Credit Default Swap Mess

It's hard to go against Duffie, but how can he tell without knowing the total net worth of the "members" of the clearing house, whose balance sheets would back all naked CDS writers? I think the real point is that if the system contains liabilities which could exceed its collective assets, then no power on Earth, short of the U.S. printing press.can guarantee the system against falure.

CDS: Toxic Product or Toxic Investors?

A CDS can't be toxic to the buyer; only to the seller (writer). Worst case to the buyer is seller default. That reduces the value of the CDS to zero. Not good, but not contagious either.

If the seller writes a CDS can it be toxic? It can, because it can force the seller to liquidate other positions in order to fulfill the contract. That is typical for variable liabilities, but not for assets. Laws may prevent the selling of other assets if there is a substantial liability present. So the liabilty really does poison the portfolio.

The whole good bank/bad bank paradigm is at best flawed and at worst a nasty scam. Once an asset value declines to zero, no further harm can be done. Eliminating it doesn't affect the other assets. Naturally any asset can fluctuate in value, but by that standard all assets would be toxic. It sucks if a $10,000 investment has a market value of only $1000, but I don't think calling it toxic adds any clarity.

The real reason for the good bank/bad bank scam is to convince the government to overpay for the bad bank. Obviously that helps the original bank, but why do it? If you want to help an insolvent bank, you should not overpay for its bad paper. You should invest equity capital or make a loan. Do the geniuses in Washington who are orchestrating this have any clue? Or will they be compensated someday by the recipients of taxpayer largesse? That's change you can believe in.

The regulation buffs, as usual, miss the point. Any time a bank buys an asset or takes on a liability, there is risk. The only regulation needed beyond anti-fraud and embezzlement laws is an honest Board of Directors and a competent CEO who understands the meaning of "fiduciary". It is laughable to think the Government will ever understand modern finance well enough to outsmart people who stand to make billions.

Mark-to-Market Accounting: Kill It Before It Eats Us Alive

Hey JCC...I'll pay $1B and not a penny more and you have to throw in a year's supply of hot sauce. Have you noticed that the response to your example is to ignore it or deny it without a shred of evidence? One of the best ways to explain it is to challenge the author to make an investment or loan based on the asset's "true fair value" as if such a thing exists. It is fine for OTHER PEOPLE'S MONEY but never for the author's own money. That's why having the govt. involved is so important. All its money is other people's money (aka taxpayers).
It is claimed that only a trader would mark an asset to market. Then why do banks insists on only lending a certain percent of the market value of an asset?
What about mark to discounted cashflow. What discount rate do you suggest? Someone even suggested a 10% alllowance for default. Good idea, unless the probabilities dictate a 30% allowance.
The only relevant standard is what value would someone using his own money assign to the balance sheet.
But underlying this whole topic is the false assumption (hope?) that accounting rules have an impact on the value of a firm. That is only true if the potential investors are ignorant of what they are buying. Fraud has always been a popular way to overvalue assets. You don't need an accounting rule here; what you need are honest transparent descriptions of the assets. The counterparty can then decide if he is a nose cone buyer or a scrap metal buyer.

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

Bill, Would you put up your own money to loan the "historical value or close to it for an asset whose current value seems lower (by whatever criteria you like).? Of course not. The thing about mtm is that, while imperfect, it has the virtue of passing the "your own money" vs. "other people's money" test. (YOM vs. OPM). Why doesn't anyone react to my idea to provide a range of values according to all the various valuation methods available and let the investor choose which to use.?


On Apr 18 02:40 PM William Cowie wrote:

> Like dcb said. that's as far as true market value is concerned.
>
>
> As for accounting, that's a different issue. There is no perfect
> system of asset calculation for accounting purposes. Never has been,
> never will be. Let's just get that out of the way. Hundreds of years
> of accounting policies, tried and true, accepted universally, are
> based on "historical cost" asset valuation. Granted, it's not perfect,
> but its imperfections are well understood by millions and it delivers
> that elusive goal: consistency across industries and year to year.
> Once an asset is on the books, it never changes value. The sole exception
> is where a very unusual and significant event occurs, in which case
> any adjustment is only down, never up.
>
> As I said, it's not perfect; no single accounting system is perfect.
> But historical cost is like the gold standard: everyone understands
> it, and has learned to work around its imperfections, because everyone
> knows where they're starting from. Mark to anything is just too slippery,
> just too inconsistent, too imprecise. Nothing else will ever work
> any better than old faithful, which has served us well for hundreds
> of years, in boom and bust.
>
> There's no dishonor, only wisdom, in bringing back something everyone
> understands (warts and all) and has served so many industries so
> well, in so many countries, and over so many years.

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

dcb, you are basically correct in your cynicism. If shareholders and Boards did their job, none of this could have happened. (www.americanthinker.co...)
If you re- read my first post, I think you will see that I agree that masters of the universe do make mistakes. I learned on Sesame Street that everybody makes mistakes, including me. So let each potential investor decide how much value to give to "ambiguous" assets. Why let FASB or Tim Gethner or Barney Frank decide? They know less than a potential buyer who does his own due diligence. I am a dedicated free-market fanatic. Markets can only fail if there is hidden information or if an outside force imposes unreasonable rules or limitations on who can participate and at what cost. (Think of fixed commissions on exchanges circa 1970.)


On Apr 18 10:36 AM dcb wrote:

> alas, I think it will never be resolved. Opinions on this matter
> will not change that is for sure. I do like how in every "crisis"
> the fault isn't with the people who made the mistakes, it is in some
> rule or almost anything besides their own mistakes. After all the
> masters of the universe don't make mistakes do they. when ever markets
> behave irregularly (which they do on a regular basis) it is the fault
> of the market. Even the idea makes me laugh, and the level of denial
> makes me laugh more.

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

Guess what, children. It makes no difference what accounting rules you use. A balance sheet consists of lots of data. An accounting number (like an assigned asset value) is an arbitrary calculation made by, umm, an accountant. Why not act like capitalists and let the market decide? Clearly MTM is ambiguous in illiquid markets. But it is usually possible to estimate various mtm values. The problem is that ALL valuation models are flawed. They rely on a collection of unverifiable parameters. The oft cited "discounted cash flow" model is a good example of this. You must choose a discount rate. Do you think you know the correct one? Is there even a correct one? At best there is a probability distribution of various discount rate values. Then there is the probability distribution explaining future defaults. Do you know how to calculate those? I sure don't. The way to trade profitably is to disagree with someone else's probabilities and be right, or lucky.

So let a thousand flowers bloom. If you believe in transparency, report a variety of "values" for an assset, each based on a clear set of assumptions. Use a cash flow model, but identify it as such. The same with a mtm value. The same with Barney Frank's opinion of its value. Maybe then we can end this stupid argument once and for all.

Mark-to-Market Accounting: FASB Responsive, But Not Independent

Is this accountiing or religion? At least mtm makes some sense. You want to price by expected (discounted) cash flows? So how do you estimate the probability that a subprime jumbo loan will perform two years from now? What discount rate will you use? It seems like zero now but if inflation strikes it might be double digits. What would a savvy investor pay for such a loan? Would he lend more than that value?
The oft cited problem of "no bids" is about as self-serving as most whines.Why are there no bids? Maybe it's because the smart buyers HAVE estimated the probability of default. Pout, pout! It's not our fault that these securities are illiquid. Not that the pouters themselves are prepared to field a bid. That is for other people's money. Part of the risk of any investment is uncertain liquidity.
It is an iron law of nature that simply reporting one accounting figure or another, does not change the value of an asset. It may well defraud some suckers into over-paying or over-lending, but it has no real impact on value.
The only constructive idea I can think u\p is to set up some kind of exchange or central marketplace where everyone with an asset to sell can advertise an offer and everyone who wants it can post a bid. This would remove that part of illiquidity caused by incomplete market information.
Yes, I volunteer to set one up if the Tarp pirates will fund me with a billiion or two. Chump change!

Blame the Accountants: A Lynch Mob Forms

Contrary to what anybody says, accounting rules have no effect on the true value of a company, unless there are hidden facts (I think that's usually referred to as fraud, but I'm no expert.). Who cares what an accountant says an asset is worth? If I'm thinking of loaning money against that asset, I will use the brand new, innovative method called due diligence. As to regulatory capital, do you want banks to be able to loan money based on regulatory capitsal that no one will loan money against. Ummm,,where will they get the money to loan?I can't believe how many supposed experts have embarrassed themselves over this. Even such famous non-experts like Newt Gingrich and Barney Frank suffer from mtm-phobia. What does that tell you? Maybe the people who pass the laws should understand what they are trying to regulate.