Mart to Market rule

WTF is significant judgement; these people need to be in jail. The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive. The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more. Well, now that banks are all good in perpetuity (or at least until entire asset pools are remarked from par to zero), there goes the need for the PPIP. Hopefully this at least means that Bill Gross and Larry Fink won’t make billions compliments of U.S. taxpayers. But don’t take my word for it: the head of the world’s largest hedge fund voices these very concerns. In fact, Dalio is so disgusted by the insanity in equity markets, rumor is he has moved out of trading equities entirely. - from bloomberg.com Hey, I have a '90 Chevy with 300k miles and my “significant judgement” thinks it is worth $50k, but the market thinks it is worth $500. Which value do you think I prefer? So, let me write my own ticket, just like the banks always have, always will. What a crock. The very first day the gov’t does not pander to Wall Street is perhaps the day I regain some trust in our system

if there is a market, the market price certainly outweighs the significant judgment in determining the fair value. so your Chevy example is not as adequate. what is your alternative for determining the fair value of something which is not traded and for which no market exists currently?

it’s not so black and white as you think… suppose you have to sell your rental property, that earns $1000/month, and you model that it will be occupied 90% of the time. Forget time value of money , your monthly income average is $900 yearly worth 900*12 = 10,800 / year… suppose you plan on holding this proporty till you retire (mature in 30 years) = 10,800 * 30 = $324,000 worth to you and the property will hold its value as you model. Your rental property has a neighbor, who lost his job, got a divorce, being sued, and the banks cut him off, has to sell his property NOW, not next month or next year but RIGHT NOW. He offers he property (identical to yours) for a deep discount must sell now price of $150,000. No one wants to purchase this property b/c they already own one and don’t want too much exposure in that area. What is the value of your property to you? When you calculate your net worth should you include your neighbors fire sale offer as value of your rental property?

yes, considering that neighbor’s house could be worth 25% of its value now, 10 years from now… its not a fire sale price if the prices keep declining.

Agreed - I think this is a good illustration of the issue ConvertArb Wrote: ------------------------------------------------------- > it’s not so black and white as you think… > > suppose you have to sell your rental property, > that earns $1000/month, and you model that it will > be occupied 90% of the time. Forget time value of > money , your monthly income average is $900 yearly > worth 900*12 = 10,800 / year… suppose you plan > on holding this proporty till you retire (mature > in 30 years) = 10,800 * 30 = $324,000 worth to you > and the property will hold its value as you > model. > > Your rental property has a neighbor, who lost his > job, got a divorce, being sued, and the banks cut > him off, has to sell his property NOW, not next > month or next year but RIGHT NOW. He offers he > property (identical to yours) for a deep discount > must sell now price of $150,000. No one wants to > purchase this property b/c they already own one > and don’t want too much exposure in that area. > > What is the value of your property to you? When > you calculate your net worth should you include > your neighbors fire sale offer as value of your > rental property?

MattLikesAnalysis Wrote: ------------------------------------------------------- > yes, considering that neighbor’s house could be > worth 25% of its value now, 10 years from now… > its not a fire sale price if the prices keep > declining. Yes, but what if it is valued at 100% within 1 year? What if the circumstances involved with his selling the house is completely exogenous from the problem? The more apt comparison is having people drive new cars off the lot and then forcing them to put up more collateral since the car is now “used” only because the “used” market places a lower value. Using Mark to Market on illiquid instruments in a non-functioning market is utterly stupid, especially when a lot of the M2M is based upon CDS assumptions where naked CDS selling can move dramatically from 1 guy laying on a contract.

spierce Wrote: ------------------------------------------------------- > MattLikesAnalysis Wrote: > -------------------------------------------------- > ----- > > yes, considering that neighbor’s house could be > > worth 25% of its value now, 10 years from > now… > > its not a fire sale price if the prices keep > > declining. > > > Yes, but what if it is valued at 100% within 1 > year? What if the circumstances involved with his > selling the house is completely exogenous from the > problem? > > The more apt comparison is having people drive new > cars off the lot and then forcing them to put up > more collateral since the car is now “used” only > because the “used” market places a lower value. > > Using Mark to Market on illiquid instruments in a > non-functioning market is utterly stupid, > especially when a lot of the M2M is based upon CDS > assumptions where naked CDS selling can move > dramatically from 1 guy laying on a contract. i like new car to used analogy… better then mine.

Are you one of the people who believe the market can recover in 1 or 2 years because it will not happen. how many years did it take to recover from the '73 oil shock? over 10 years. how many years did it take to recover from the GD, almost 20 years, and if you adjusted for the transition from normal to war economy, almost 30 years. how long did it take Japan to recover from their deflation? its still ongoing and home prices are down 90% from their 1991 peaks. Japanese house prices would have to appreciate by 1000% to recover from their spin with deflation. Any period with declining home values takes over 10 years to recover in real terms from any experience we’ve had in the past and this “downturn” most resembles the GD no matter what any optimist will say. The values of homes today are not worth their weight. For everything you can buy today, compare it to useful goods. How many years of sustenance should a house be worth? If a standard, middle-class house costs as much as living for 90 years, i’d say its over priced. the same goes for 10 bars of gold. you can buy 10 bars of gold today or you could buy food supplies for your entire life, hmmm, tough choice.

ConvertArb Wrote: ------------------------------------------------------- > it’s not so black and white as you think… > > suppose you have to sell your rental property, > that earns $1000/month, and you model that it will > be occupied 90% of the time. Forget time value of > money , your monthly income average is $900 yearly > worth 900*12 = 10,800 / year… suppose you plan > on holding this proporty till you retire (mature > in 30 years) = 10,800 * 30 = $324,000 worth to you > and the property will hold its value as you > model. > > Your rental property has a neighbor, who lost his > job, got a divorce, being sued, and the banks cut > him off, has to sell his property NOW, not next > month or next year but RIGHT NOW. He offers he > property (identical to yours) for a deep discount > must sell now price of $150,000. No one wants to > purchase this property b/c they already own one > and don’t want too much exposure in that area. > > What is the value of your property to you? When > you calculate your net worth should you include > your neighbors fire sale offer as value of your > rental property? Good illustration.

a more direct attack on your agument would be that if it were not for unconditional government support, the current value of those assets matters. if you have to sell assets to raise cash to meet upcoming obligations, current values matter. your argument only holds true if every company in the world is to be considered a going concern. the government has a breaking point and if it continues to support every bank and every ‘systemic’ risk entity as a going concern, they risk destroying all equity, most wealth and most debt in the world, not just equity on bad bank balance sheets… or at least severely misallocate it which could be the greatest crime in capitalism.

MattLikesAnalysis Wrote: ------------------------------------------------------- > Any period with declining home values takes over > 10 years to recover in real terms from any > experience we’ve had in the past and this > “downturn” most resembles the GD no matter what > any optimist will say. Off topic, I’ve been reading up on the GD and my reading experience was one big deja vu moment (and I’m not talking lap dances). We didn’t learn all that much from the GD it seems. Home values aren’t going to be “back to normal” anytime soon.

MattLikesAnalysis Wrote: ------------------------------------------------------- > Are you one of the people who believe the market > can recover in 1 or 2 years because it will not > happen. how many years did it take to recover from > the '73 oil shock? over 10 years. how many years > did it take to recover from the GD, almost 20 > years, and if you adjusted for the transition from > normal to war economy, almost 30 years. how long > did it take Japan to recover from their deflation? > its still ongoing and home prices are down 90% > from their 1991 peaks. Japanese house prices would > have to appreciate by 1000% to recover from their > spin with deflation. > > Any period with declining home values takes over > 10 years to recover in real terms from any > experience we’ve had in the past and this > “downturn” most resembles the GD no matter what > any optimist will say. The values of homes today > are not worth their weight. For everything you can > buy today, compare it to useful goods. How many > years of sustenance should a house be worth? If a > standard, middle-class house costs as much as > living for 90 years, i’d say its over priced. the > same goes for 10 bars of gold. you can buy 10 bars > of gold today or you could buy food supplies for > your entire life, hmmm, tough choice. So you like analysis, great. However, you’re lending an awful lot of weight to historical movements. Not every situation is the same and history isn’t always a great predictor of the future.

purealpha Wrote: ------------------------------------------------------- > MattLikesAnalysis Wrote: > -------------------------------------------------- > ----- > > Any period with declining home values takes > over > > 10 years to recover in real terms from any > > experience we’ve had in the past and this > > “downturn” most resembles the GD no matter what > > any optimist will say. > > Off topic, I’ve been reading up on the GD and my > reading experience was one big deja vu moment (and > I’m not talking lap dances). We didn’t learn all > that much from the GD it seems. Home values > aren’t going to be “back to normal” anytime soon. Yeah, we didn’t learn all that much from the GD. FDR learned that M2M sucked the life out of the financial system and got rid of it in 1938. For 70 years we didn’t have a problem, then suddenly we felt the need to be stupid again. all because somebody thought absolute transparency for every penny of assets was more important than financial stabilty. I’d love to find out who that idiot was.

Oh geez well that’s easy, if your ever looking for an idiot to blame for issues that accumulated 2001-2009 I’ve got one letter for ya… W.

spierce Wrote: > So you like analysis, great. However, you’re > lending an awful lot of weight to historical > movements. Not every situation is the same and > history isn’t always a great predictor of the > future. yes. and using nothing to justify an opinion is a great methodology as well. not pricing in illiquidity into an asset makes it heed the same value as a similar asset with perfect liquidity. you’re saying they carry the same value. this goes against pricing theory which is the basis of capitalist society. would you say that owning 99% of ABC stock ($1 million notional) is equal to owning 1% of C stock ($1 million notional) if you’re looking to sell both assets tomorrow? no, because you’d have to sell at a major discount to get rid of the ABC shares. the bottom line is that without the government keeping zombie banks alive, they’d be dead and their assets would have to be sold at current prices. to believe in no M2M is to believe that governments should never let a bank fail. if you believe this, you support state ownership of all assets, public and private, b/c thats what banks own, bonds for other companies so that they can produce. if bank bankruptcies are an impossiblity, we are in a socialist society. your stance also assumes that prices will return to a level that is regular. regular being up, which is a matter of opinion. markets being under stress doesn’t mean that they are undervalued.

MattLikesAnalysis Wrote: ------------------------------------------------------- > spierce Wrote: > > So you like analysis, great. However, you’re > > lending an awful lot of weight to historical > > movements. Not every situation is the same and > > history isn’t always a great predictor of the > > future. > > > yes. and using nothing to justify an opinion is a > great methodology as well. > > not pricing in illiquidity into an asset makes it > heed the same value as a similar asset with > perfect liquidity. you’re saying they carry the > same value. this goes against pricing theory which > is the basis of capitalist society. would you say > that owning 99% of ABC stock ($1 million notional) > is equal to owning 1% of C stock ($1 million > notional) if you’re looking to sell both assets > tomorrow? no, because you’d have to sell at a > major discount to get rid of the ABC shares. > > the bottom line is that without the government > keeping zombie banks alive, they’d be dead and > their assets would have to be sold at current > prices. to believe in no M2M is to believe that > governments should never let a bank fail. if you > believe this, you support state ownership of all > assets, public and private, b/c thats what banks > own, bonds for other companies so that they can > produce. if bank bankruptcies are an impossiblity, > we are in a socialist society. > > your stance also assumes that prices will return > to a level that is regular. regular being up, > which is a matter of opinion. markets being under > stress doesn’t mean that they are undervalued. So you’re telling me that if you had two companies where the only difference was that one had a liquid market and another had an illiquid market, otherwise any future cashflows were *identical* the and the ROE would be *identical*, and the illiquidity was a temporary issue, you’d value the illiquid one less and then sell it at that lesser amount? This is the key to the problem, just because you CAN value it at a depressed, irrational, illiquid, and unrealistic, amount, should you? What is your long-term goal? Do you HAVE to sell (thus depressing the price more), or should you even sell? Considering that if you don’t sell, will you get squeezed more as the market locks up further and eventually, when you have to sell, the buyer know’s your f’d, so he demands a higher price (thus causing more price drops and illiquidity)? Let’s take it one step further. What if a nuke hit DC tomorrow and overnight *ALL* asset values, in the entire country, drop 80%. Should we then mark all assets to that market? Well, we must, because when everybody panics and fire-sells everything in some doomsday desire to load up on ammo and guns, we have to stab ourselves in the heart and have our *ENTIRE* system act just as irrationally as every stupid Joe Sixpack out there. Get a friggin grip. It’s ridiculous to create feedback loops and then say that they don’t cause more misery.

this is definitely a step backwards, how can they pressure FASB anyway aren’t we supposed to be moving towards IFRS?

this is definitely a step backwards, how can they pressure FASB anyway aren’t we supposed to be moving towards IFRS?

spierce Wrote: > So you’re telling me that if you had two companies > where the only difference was that one had a > liquid market and another had an illiquid market, > otherwise any future cashflows were *identical* > the and the ROE would be *identical*, and the > illiquidity was a temporary issue, you’d value the > illiquid one less and then sell it at that lesser > amount? > > This is the key to the problem, just because you > CAN value it at a depressed, irrational, illiquid, > and unrealistic, amount, should you? What is your > long-term goal? Do you HAVE to sell (thus > depressing the price more), or should you even > sell? i don’t understand your argument. what assets have a long time-frame and are currently illiquid? i can assume what you’re talking of is mortgage backed securities. in that case, the decline in PV of CFs is realistic unless you’re in the camp who believes gdp will double in the next 20 years, which was the assumption of most individuals pre-crash. or i can assume you’re talking about CDSs protecting LT debt. in that case, it will not experience temporary liquidity, it will be this illiquid for a very long time and they are illiquid in their design.

> Get a friggin grip. It’s ridiculous to create > feedback loops and then say that they don’t cause > more misery. i’ll say the same thing back but with a twist. Get a friggin grip. It’s ridiculous to create POSITIVE feedback loops and then say that they don’t cause more misery.