First Law of Economics?

[Therapy]

Originally Posted by TaoJones

Wow, not one mention of the infamous Gideon Gono in that entire Beeb report! What does a man have to do to get his name in the news?

TaoJones

PS: Gideon Gono - Wikipedia, the free encyclopedia

From that.

Gono demonetized old bank notes on August 1, 2006 and introduced a new currency. Each new Zimbabwe dollar was worth 1000 old Zimbabwe dollars.[12] The highest denominations for the new currency were 1, 10, and 100 thousand revalued dollars. A year later on August 1, 2007, he authorized a 200 thousand dollar denomination. This marked the start of a series of new denominations issued in rapid succession, including 250, 500, and 750 thousand dollars (December 20, 2007); 1, 5, and 10 million dollars (January 16, 2008); 25 and 50 million dollars (April 4, 2008); 100 and 250 million dollars (May 5, 2008); 500 million and 5, 25, and 50 billion dollars (May 20, 2008); and 100 billion dollars (July 21, 2008). From the time of currency revaluation to the beginning of June 2008 the money supply in the country has increased from $45 billion to more than $900 quadrillion, or a 20,000,000 fold increase

So we have a couple of years yet?

[Tempest245]

Originally Posted by svHyLyte

Tao, et al--

The problem with Mark-to-Market is the fact that it doesn't make sense for certain large asset classes or for classes of holders for whom net realizable asset value to maturity, albeit discounted to present value perhaps, makes more sense. The Mark-to-Market rule is a snap-shot liquidation valuation that can fluctuate--wildly--from day-to-day, week-to-week, etc. and is really only useful in the valuation of a short-term trading entity. When applied to long-term investment entities, the rule is irrelevant unless it is coupled with regulatory capital requirements, in which case it becomes contra-productive if not a formula for complete disaster of the type confronting the US today.


s/v HyLyte

Exactly.


Though, one of the big schemes out there are the "credit default swaps"...used to hedge the "mortgage backed securities". They didn't call it insurance, because that would require regulated reserves to cover the potential losses.

It's a joke that these geniuses don't even know what they own! And then would invest in insurance, that's no insurance at all...

The Fox was guarding the hen house.

[TaoJones]

Originally Posted by svHyLyte

Tao, et al--

The problem with Mark-to-Market is the fact that it doesn't make sense for certain large asset classes or for classes of holders for whom net realizable asset value to maturity, albeit discounted to present value perhaps, makes more sense. The Mark-to-Market rule is a snap-shot liquidation valuation that can fluctuate--wildly--from day-to-day, week-to-week, etc. and is really only useful in the valuation of a short-term trading entity. When applied to long-term investment entities, the rule is irrelevant unless it is coupled with regulatory capital requirements, in which case it becomes contra-productive if not a formula for complete disaster of the type confronting the US today.

s/v HyLyte

Originally Posted by Tempest245

Exactly.


Though, one of the big schemes out there are the "credit default swaps"...used to hedge the "mortgage backed securities". They didn't call it insurance, because that would require regulated reserves to cover the potential losses.

It's a joke that these geniuses don't even know what they own! And then would invest in insurance, that's no insurance at all...

The Fox was guarding the hen house.

Your assertions, HyLyte and Tempest, are incorrect. The Financial Accounting Standards Board members are not without knowledge that different classes of assets require different standards. Nowhere in the linked statement below, a summary of FAS 157, will you find wording that indicates all assets must be marked-to-market at the end of each business day as must be done in the case of Aunt Bea's 37 shares of Coca-Cola, for example. And, in any event, the holder of assets either may, or may not, elect to ascribe valuation to those assets at fair value. Compare FAS 157 (Fair Value Measurements) with FAS 159 (The Fair Value Option).

Here's the link mentioned above:

FASB: Summary of Statement 157

And here's a link to the FAS 159 summary:

FASB: Summary of Statement 159

TaoJones

[Tempest245]

Tao,

How do you value a securitized package of home loans if you don't know the contents?

[Therapy]

Tao,

What do you think about the "fair tax" idea?

[TaoJones]

Originally Posted by Tempest245

Tao,

How do you value a securitized package of home loans if you don't know the contents?

Two thoughts occur to me:

1 - Why do you assume that it is not possible to know the contents of mortgage backed securities (MBS)?

2 - Why would anyone accept that the value of such MBSs (or any other derivative product) is what the creator of the securitized debt obligation reports his/her model is indicating it to be?

Keep in mind that the OTC derivatives "market" is not a market at all - an unlisted derivative is a private treaty between two parties that is completely unregulated. Once interested parties saw these securities as "protection" from loss due to default, they grew like kudzu in July.

Today, there is probably no chance that the vast quantity of these derivative products (with a notional value well over $1.1quadrillion as of last June - that's $1,100,000,000,000,000!) can ever be reconciled. The failure of any party, or counter-party, to fulfill his/her obligations under such a derivative contract could have any number of unpleasant unintended consequences, and by that I mean that the entire worldwide system of finance is in jeopardy.

It is probably worth remembering, as well, that mark-to-model accounting was at the heart of the LTCM and Enron debacles.

There may be occasions where mark-to-model accounting is appropriate - is, in fact, the only possibility for ascribing value to a security - but in an unregulated marketplace it is an invitation to feather one's own nest in the absence of transparency and honest accountability, IMO.

TaoJones

[Tempest245]

[quote=TaoJones;252219]Two thoughts occur to me:

1 - Why do you assume that it is not possible to know the contents of mortgage backed securities (MBS)? TaoJones [/quote


I think this is more than assumption, It's what we've been witnessing over the past year or more, when the housing market collapsed and defaults began to rise; no one could determine where the toxic assets lay.
Mortgage brokers bundled loans, they were securitized and sold all over the world.

The other rub was that servicers were unable by the terms of the security to re-negotate the terms of a single loan within a bundle even when found.

[svHyLyte]

Here Homer nods

[LtBrett]

Mark to market certainly has it's issues. What happens when the market is distressed or very thinly traded? You get the type of downward spiral that defined the last three months. We use mark to market because the alternatives, save for specific cases like endowments using trailing averages, are worse. You'll be comforted to know that the debate rages at all levels. Last week, I moderated a panel discussion that included, among others, a member of FASB and an economist from the NY Fed. I stirred the pot and got a heated debate on this very issue.

Brett

[TaoJones]

Originally Posted by Tempest245

I think this is more than assumption, It's what we've been witnessing over the past year or more, when the housing market collapsed and defaults began to rise; no one could determine where the toxic assets lay.
Mortgage brokers bundled loans, they were securitized and sold all over the world.

The other rub was that servicers were unable by the terms of the security to re-negotate the terms of a single loan within a bundle even when found.

I must respectfully disagree, Tempest. First, mortgage brokers didn't bundle loans. They merely wrote them one at a time for anyone with a pulse, secure in the knowledge that they could easily sell them to the investment banks, hedge funds and Fannie and Freddy, typically, for securitization. It was the math wonks in the labyrinths of Wall Street who perfected the notion that these mortgages could be "securitized."

The various MBSs were, and are, composed of various tranches of mortgage backed debt. There are three profiles of mortgages based on their perceived risk of non-performance: Prime, Alt-A and Sub-prime. The intent was to place all mortgages into securities, and sell them to "investors."

Obviously, it would be relatively easy to place the Prime debt, and even the Alt-A debt, but the Sub-prime was problematic. To get around this issue, it was clear that various amounts of risk could be apportioned to any given concoction of bundled MBSs by adding a greater or lesser amount of the riskier debt.

An investor could select the amount of return he wished to reap, understanding that higher returns were the result of the inclusion of greater percentages of riskier debt. A highly risk averse investor would opt for securitized mortgage debt that included a high percentage of Prime mortgages, some amount of Alt-A and very little Sub-prime. Those chasing the highest yield could opt for securitized debt offering the higher returns, knowing full-well that these bonds contained a higher percentage of Sub-prime and a smaller percentage of Prime.

Of course, the gigantic entities cobbling these things together knew that the notion that real estate only goes up was ludicrous, so to protect the MBS investors from an unacceptably high risk of default, the CDS (credit default swap) was sold to "insure" the investor against loss - just don't call it insurance, as you pointed out, Tempest.

Where did all the money come from to enable the big investment banks and others to acquire all of these mortgages so that they could be bundled into securitized debt? China, the oil-producing nations, Great Britain, Japan and every other potential source of capital on the planet. Without doubt, the system that was created was elegant in its ability to provide just what each of the component parts required.

It was, literally, a money machine - as long as real estate kept going up. Really, what could go wrong?!

So, the bottom line is that it is indeed possible to know each mortgage that went into the creation of each MBS. The problem came when it all collapsed in a short span of time. As the defaults multiplied, those entities that had written and sold the credit default swaps had over-estimated their ability to cover any resultant defaults. Thus, did AIG find itself quickly pushed to the brink of disaster/insolvency.

The last part of your post is correct, Tempest. Loan servicers cannot re-negotiate a mortgage contract when they are not party to that contract.

A couple of additional thoughts occur to me:

1 - If an entity, say Bear Sterns or Fannie Mae, knew exactly what mortgages were included in the bundled investments they were cobbling together (they did) and paid a credit-rating agency, say Moody's or S&P, to give their creations a AAA stamp of approval, are they guilty of committing fraud? If they didn't know what mortgages were included in the bundles they were putting together, are they guilty of gross negligence and stunning incompetence? Whether perpetrators of fraud or merely incompetent, why would anyone trust them with even one dime?

2 - If some other entity elsewhere in the world, say Société Générale or Deutsche Bank, willingly bought these bundled securities from the above in the mistaken belief that the AAA credit ratings were genuine, then persuaded their clients in turn to invest in them, are they guilty of intentionally defrauding their clients if they knew the true quality of the mortgages the securities contained, or merely incompetent for failing to do the necessary due diligence their fiduciary duty demands? Either way, why would anyone trust them?

TaoJones

[TaoJones]

Originally Posted by LtBrett

Mark to market certainly has it's issues. What happens when the market is distressed or very thinly traded? You get the type of downward spiral that defined the last three months. We use mark to market because the alternatives, save for specific cases like endowments using trailing averages, are worse. You'll be comforted to know that the debate rages at all levels. Last week, I moderated a panel discussion that included, among others, a member of FASB and an economist from the NY Fed. I stirred the pot and got a heated debate on this very issue.

Brett

I can well imagine - wish I could have been there.

TaoJones

[TaoJones]

Originally Posted by svHyLyte

Here Homer nods

I was busily composing my response to Tempest, so I only got a quick look at your post that stated something to the effect that I had obviously never sat across the table from an examiner . . . etc. Please, feel free to speak your mind, HyLyte - I have a thick hide and am very comfortable defending my position(s).

Honestly, you can't hurt my feelings, but if you truly believe it's all best left unsaid, so be it.

TaoJones

[Tempest245]

Tao, there's a lot there. I don't know if moodys et al were commiting fraud, totally incompetent or both. Moodys has as much credibilty now as Anderson had after Enron. The underlying conflict of interest of rating the assets of the company that is paying you is ethics reform 101.....there were huge fees involved....

The underlying mortgages/assets tied to the MSB's were not easily known.
in fact, the next round of re-sets haven't even hit yet. They are still being untangled. Hold on tight.
There was fraud and incompetence all around. Buyers lied about income/assets etc.
Mortgage brokers that have no skin in the game don't care if a loan defaults once it's been sold and passed along. Investment houses were under huge pressure to produce the gains on the street that were being realized by their competitors.
It was indeed the Perfect Storm.

There were certainly enough people out there throwing up red flags. The feeding frenzy that surrounded the run-up in real estate values was akin to sharks feeding. The pressures to get into the water were great; though not everyone did. Many of the community banks maintained their lending standards, and have made good loans, yet they are now paying the price of others mistakes in higher insurance premiums to the FDIC.

They may know the assets now, but no one knows how good the underlying loans are. That's one reason why credit is so locked up.
There are plenty of people out there still paying their mortgages, they may even be upside down....until the market clears we won't know the valuations.

[delmarrey]

YouTube - Money - Pink Floyd (Pulse)

Money, get away.
Get a good job with good pay and you're OK.
Money, it's a gas.
Grab that cash with both hands and make a stash.
New car, caviar, four star daydream,
Think I'll buy me a football team.

Money, get back.
I'm all right jack keep your hands off of my stack.
Money, it's a hit.
Don't give me that do goody good ********.
I'm in the high-fidelity first class traveling set
And I think I need a lear jet.

Money, it's a crime.
Share it fairly but don't take a slice of my pie.
Money, so they say
Is the root of all evil today.
But if you ask for a raise it's no surprise that they're
Giving none away.

[muskoka]

Originally Posted by Boracay

I cannot work out where all the money has gone.

As far as I can work out there has to be some first Law of Economics (rather like the First Law of Thermodynamics) that states that it is not possible to "destroy" money. The central banks could call it back and write it off, but unless they have done that the money has to be somewhere. All those loans, scams, executive bonuses, wars and so on can only have transferred it.

So, where has it all gone?

Fractional reserve banking: Basically 1 dollar on deposit can support 12 dollars in loans (credit). Further, when the loan is 'securitized' the bank can do it all again. Investment banks and hedge funds levered up to 30:1 so a 3% market move wipes out the capital base. You have to think of money as money+credit rather than physical dollar bills.

And if that isn't enough to keep you awake, the 'collateral' for a lot of loans is equally precarious - basically the property bubble inferred an inflated value on assets which facilitated equity withdrawals. Of course when one property sells for 25% less than 'market value' all other properties are revalued without any further transactions required. And the 'collateral' is wiped out.

Basically the law of thermodynamics is an invalid analogy. It deals with physical limits. Whereas the large bulk of 'money' is merely electrons residing on someones balance sheet.