Comments on: The Credit Crisis: What It Means and What You Can Do About It

By: Frances Merritt

Frances Merritt — Tue, 14 Apr 2009 21:34:18 +0000

Yes, it is a difficult question and we shall see how replacing market price with cash flow works, I guess it will all take time to work out. I wish they would value the loans in the securities the same way – resulting in the banks not having to lower their assets as much.

By: Kitty O'Keefe

Kitty O'Keefe — Tue, 14 Apr 2009 17:03:42 +0000

Great question, Frances. Theoretically, any policy that makes a financial transaction more transparent is a good idea. The problem with mark-to-market is this. What if there is no market? If one cannot attract a buyer, the price must be lowered to the point where buyers are willing to take the risk. But, what if risk aversion in a difficult economic environment is such that there are no buyers at a reasonable price?
In that event, marking to market may cripple a company to the point of driving it to bankruptcy.
A difficult situation, to be sure, and one that FASB addressed adequately with replacing market price with cash flow. With respect to these packaged securities, cash flow, or the amount of payments actually being make on the underlying loans, seems a much more reasonable way of valuing these securities.

By: Frances Merritt

Frances Merritt — Fri, 10 Apr 2009 07:08:48 +0000

Kitty O’Keefe, you have done it again, made the complicated understandable – I think you should write a book, your knowledge and your wonderful sense of humor are a slam dunk. Now if you could help me rustle up a couple of those Quants and a few Standard and Poors so I can line them up and slap them a couple of times it would really help me in starting to believe.

On another issue, I am confused about mark to market. Some economists are against changing the practice for banks, while others think it will make banks assets more in tune with what is true. Wasn’t mark to market initiated so banks couldn’t cook the books about their assets? Okay, good idea – let’s keep the banks truthful. On the other hand, as you said, many of the mortgages are good, and people continue to pay them down etc, but since there are many that are bad the bank then has to lower the value on the mortgages even if the homeowner continues their regular payment. So say the loan is $300,000 – the homeowner keeps paying, is not moving, has a steady job but comparable houses have fallen to $250,000 so the bank is then required to lower it’s assets by $50,000 on that one mortgage, even if it is a good loan. The market always goes back up eventually so, let’s assume eventually the house regains it’s value. So I am puzzled as to what is the best answer. Can we trust the banks not to cook the books and remove restrictions of mark to market? Hmmm?

By: Kitty OKeefe

Kitty OKeefe — Tue, 07 Apr 2009 21:20:26 +0000

Just call me a bleeding heart liberal.
You may use that descriptive term liberally, as it applies to me.

By: Brian Belefant

Brian Belefant — Tue, 07 Apr 2009 19:40:09 +0000

There you go again with the widows and orphans.