Monday, September 29, 2008

Mark-to-Market: A Rant

Found at Ace's Place: (cleaned up a bit...)

They (these distressed assets) have to be shown on the balance sheet and marked down to marked down to market value. This means that suddenly, normally healthy companies have assets that actually have value, but have been artificially and temporarily valued at **** zero **** dollars even if they bought them for several million. Even --and I want the market-valuation absolutists to read this very carefully -- even when those assets are ownership of actual real property that have intrinsic worth. Due to this rule, the credit markets are being affected in a way that is not tied directly to the fact that loans were made to itinerant phrenologists and spastic mimes. Those were the root cause. The problem with valuation of these loan packages including defaulted mortgages is a ****** multiplier.

Let's put it this way - think of the "credit drain" and bad things as a military force. The CRA loans to carnies and strippers with Tourette's Syndrome is like a company of infantry - pretty impressive. The problem with marking down to market prices is like giving each sonofabich a Davey Crockett nuclear howitzer.

This means that through temporary and artificial means, a company that would say own 30,000 houses/shitty mortgages, all with $3K worth of salvagable copper in them that could be torn out and sold- that they bought for $3 million - suddenly don't have jack shit on their books. All of it is valued at zero because no one will buy it. That isn't a rumor - that is actually happening.

Marking down to zero isn't done on a ***** whim. It is documented. People/entities with these assets that have intrinsic value cannot label them on their balance sheets as what they paid for them - they must write that they are worthless.

This makes huge companies suddenly in dire straits. They may not be able to make payroll NEXT WEEK. A number of companies, who might be loaded with these, will fail.

This is because they suddenly have to book a loss - huge paper losses - that have no real relation to the situation over just the next three months.

Let me repeat - healthy companies will be unable to prove they own enough assets to float a loan. Past liabilities will be dishonored. This will spread within 21 to 30 days up and down the food chain. Each 2 weeks will result in larger and larger cycles of shrinkage of asset valuation, sudden outlays for demand notes, inability to meet payroll, layoffs, and cancellations (with penalties) of contracts.

Distribution networks would be among the first hit. I haven't gone further than that in my research. But right there, we're looking at some severe dislocation. Severe as in diabetics having to stock up on insulin.

This does have the possibility of being retardedly bad - think what would happen if 1/3rd of the train and truck traffic ceased. Stopped without notice.

The problem is systemic - not just to the credit market - it is systemic to how we do business between states. It is systemic as in "No Produce Scheduled Until Next Week" type signs in your Safeway.

If it doesn't get fixed in 2 weeks, by January some communities will be isolated due to no diesel for the road crews. In New York.

It's formally called FASB 157, effective for fiscal years ending later than 11/2007. It applies to publicly-held companies.

Aside from making a good case for modifying "mark-to-market" or eliminating it, he sketches the basic problem that banks have if they're sitting on MBSs or CDOs. Same-o as other firms who might have purchased same for investment purposes--for example, a cash-rich company which was after good returns with 5- to 10-year excess funds.

Is it really TEOTWAWKI? Maybe. In the case of banks, it accounts for the sudden drop in interbank/overnight lending (countered by the Fed's massive tripling of available billions today).

In the case of banks, it makes Ryan's insurance plan look a lot better. In that plan, although the Bank would have to pay a premium, the Treasury would guarantee the value of the investment, meaning that the "mark-to-market" could clamber back into the 90++% range.

That's a lot of capital, folks.

1 comment:

Anonymous said...

Yep...mark to market is one of the real bad ideas by FASB.