http://www.bloomberg.com/apps/news?pid=20601109&sid=a2ppBYA0ELaU&refer=home Bloomberg says Wall Street has been writing its liabilities down along with its assets… While it makes sense that bonds issued by the I-banks would trade at higher yields (i.e. lower prices), does it make sense for the banks to mark the liabilities on their balance sheet down thus providing a boost to profits and Equity value?
Just another Wall Street lie/scam in a long line of many
They mark both their assets and liabilities to market.
Why is this so hard to understand? If I sell a bond for $100 then I have a $100 liability. If the market value for the bond falls to $50, do I still owe $100? Accountants might say I do, but I’d be stupid to pay it if I can just go buy the bond for $50!
virginCFAhooker Wrote: ------------------------------------------------------- > Why is this so hard to understand? > > If I sell a bond for $100 then I have a $100 > liability. > > If the market value for the bond falls to $50, do > I still owe $100? > > Accountants might say I do, but I’d be stupid to > pay it if I can just go buy the bond for $50! …not to mention the last part of the article states that many firms are likely to have these ‘gains’ reverse in the upcoming quarter.
>>If the market value for the bond falls to $50, do I still owe $100? Yeah, but the reason it falls is because people are worried about YOUR credit quality. So your poor performance helps you book a gain. That’s what people are complaining about, I think.
>>If the market value for the bond falls to $50, do I still owe $100? and yes, surely you do actually still owe $100, the amount you will have to pay at maturity? (TVM aside)
What VCH means is that if its trading at $50…you can buy it back at this moment at $50 rather than paying the $100 later…
If your bonds are trading at $50 how much spare capital are you likely to have? (to buy back those cheap bonds)
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Loxley … Wrote: ------------------------------------------------------- > If your bonds are trading at $50 how much spare > capital are you likely to have? > (to buy back those cheap bonds) Right if the bond drops to $50 presumably you can’t just go buy it or the bond wouldn’t drop to $50.
The fact is you only owe $50 at this moment in time. That is what matters to the owners of the company (and POTENTIAL owners in an acquisition).
No the fact is that you owe $100 at this moment in time. However, your lenders will settle for 50 cents on the dollar because that’s all they think they’ll be able to beat out of you anyway.
If Gordon Gecco wanted to buy the entire enterprise of some company that’s debt trades at $50… does he pay $100 for the debt?
Joey - am I missing something here? If your debt is 50c in the $ isn’t that likely to be because you are some kind of fallen angel with respect to your credit rating? And if you had the available capital to buy back your distressed debt, then surely your credit rating would be higher? Please correct me if I’m wrong - I haven’t had anything to do with corporate debt in years.
virginCFAhooker Wrote: ------------------------------------------------------- > If Gordon Gecco wanted to buy the entire > enterprise of some company that’s debt trades at > $50… does he pay $100 for the debt? Well, it’s not clear. If the debt trades at $50 and MSFT decides to buy the company the debt trades up. Now if this is a takeover ala Lampert and K-mart, they might be able to get away with buying it at 50. Anyway, suppose that your debt is trading at 50. To refinance that debt you would need to go out and borrow money. If your current debt is trading at 50 cents to the dollar, the cost of doing that would be at least double the amount you are now putting on your books. What seems fair to me is to say that you owe $1. If you can go out and convince someone to take 50 cents and retire the debt and you can do it, then by all means do it and book the gain. In the meantime, you probably don’t have a way of getting out of that debt. The economic reality is that your credit getting smushed is not a gain for your company unless your company is going bust. Suggesting that there is a gain to equity because your bonds are getting killed is just not sensible.
you can’t always just go out and buyback debt where the market trades them… typically there are covenants in place from other debt issues or bank loans that would be breached unless the company is meeting other valuations metrics (ie EBITDA measures, FCF, etc) Additionally, just because the debt trades at 50% of face, that doesn’t mean you can purchase all that debt. some holders will hold to maturity, others (more active traders) will demand more $.
The same holds true for assets, just because the market price for a HTM asset is 50, does not mean the bank will sell them at 50. FAS 157 & 159 were a decent concept in a functioning market. Also, you don’t need excess capital to buy back debt, you can jiggle your borrowings, depending on the type of financial inst, you can borrow from the Fed/FHLB and use that money to buy back debt. Assuming you use $50 in new borrowings to buy back 100 in beaten down debt, you will increase your capital ratios and also book some tangible profits. The same can be done if you are a consumer bank. A 5% 12 month CD will open flood gates for even for the most down trodden banks There is a decent arbitrage opportunity if you have some European debt on your balance sheet. Generally the debt of US banks is trading at a far wider spreads overseas then it is in the US. MFE Wrote: ------------------------------------------------------- \> you can't always just go out and buyback debt \> where the market trades them.. typically there are \> covenants in place from other debt issues or bank \> loans that would be breached unless the company is \> meeting other valuations metrics (ie EBITDA \> measures, FCF, etc) \> \> Additionally, just because the debt trades at 50% \> of face, that doesn't mean you can purchase all \> that debt. some holders will hold to maturity, \> others (more active traders) will demand more .
Can you believe how it feels to be a US taxpayer and read that crap?
Countrywide is offering FDIC insured CDs that yield 5%. Meanwhile, Countrywide bonds…