Your house is burning. It is causing destruction of value. Because of your burning house, neighbourhood houses are also burning. There is a lot of destruction of public property - telephone wires, electric poles, roads, water pipelines etc. etc. The local municipal fire tender is fighting the blaze, but is losing the battle. Then, in one fell swoop, the mayor of your town manages to solve the problem of value destruction. How? She mandates - the burning of a few buildings is no longer is classified as fire. No fire, no destruction of value. Simple!
This is of course an exaggerated example, but to me it seems fairly analogous to what the US Congress is trying to do by forcing the Securities Commission and the Accounting Board to change conservative rules for carrying the value of assets on the balance sheet. Agreed, mark-to-market accounting rules are causing banks to take massive write downs, therefore requiring equity infusions. But changing the rule just because it is no longer convenient seems to me to be a travesty of facts. As an investor, I would want to know exactly what value my assets currently have, if they were to be liquidated today. I should not be able to hide behind illiquid or opaque markets. Because if this loophole is created, there is no way of knowing where it will end. Who is to say that a few more Enrons / Satyams / Hexawares would not continue thriving? Today these rules are causing taxpayer funding of tottering institutions. But the absense of these very rules may not even allow the rot to show any symptoms. In the absense of symptoms, the patient (or the institution) could just roll over and die suddenly, with little warning.
The truth, however bitter, is infinitely more palatable than falsehood! I hope sense prevails all around and politicians do not create a bigger mess of the already humongous mess that is the credit crisis.
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7 comments:
LOL... true.. but that is the way life is.. nobody likes the bitter pill ..least of all legislators.. acknowledging the existence of the pill is equivalent to acknowledging their ineptitude and imbecility... that now is not on the table :) better to be a live ostrich than a dead tiger ...
Ok, Now you decide to value your assets. How are you going to put a value on the toxic assets? Doesn't this determine how much cash/equity infusion you need?
dear anon,
i would value them at whatever the i can get if i had to sell them today. the market today says zero(even you seem to agree - you say 'toxic' assets).
At the cost of sounding optimistic and simplistic, the government can buy and hold the assets to maturity while, under current circumstances, the banks can’t. Essentially they are largely immune to mtm pressures
Sweden ended up with a profit doing this!(Scandinavian solution). I'm sure the US has thought this through, but wholsale nationalization of toxic assets by either insuring or purchasing them under a publicly owned bank is an option.
And my house is definitely not worth zero; even if I am underwater I'm diligently paying the mortgage :)
A lot of homeowners whose mortgages back these securities are still making their monthly payments.
agree with you - governments can do it (and probably should), but banks should not be able to do it, since they are owned by shareholders, who have put in their capital in the business.
also, you may be paying your mortgage fine (in fact default rates are only 9-10%), but the specific tranche of the CDO that the banks hold (usually the lowest or 'equity' tranche) is worthless typically when default rates go beyond 'historical' averages (3-4%)
Why haven't you blogged in such a loong time???
Funny you mention CDO's. Here is a very interesting article about it:
http://www.time.com/time/magazine/article/0,9171,1881974,00.html
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