My CRT TV is worth about $1 million, my laptop is worth at lest $3 million, my Honda has to be worth nearly a quintillion dollars and my cats, well, you couldn't afford them.
That may sound insane, as who in their right mind would pay a million dollars for a ten-year old television set. And it probably is.
But that is just what the Financial Accounting Standards Board is on the verge of letting the banks do: Price their "toxic assets" at whatever they think they might be able to get for them in a hypothetical future.
That is just insanity. Things are worth what someone would pay for them in an arm's-length transaction right the fuck now, not at some future time when the seller may pray that the market improves. This change means that when a bank (or a large company) says its assets are worth a certain value, that number has been generated by the Rectal Extraction Method.
"Mark to market" may be imperfect, but any other method of valuing assets is far worse.
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6 comments:
Actually, there are multiple ways of valuing things. For example, a mortgage loan: Should we mark to market? Or should we mark to the income it will generate for us in the future? The real value, over time, will be the second -- the market value will waver all over the place due to "investor confidence" and similar bullshit, but over the long term will approach the value that happens when we mark to future income value. So should we sell low now, when it'll be worth more later once the market quits going berzerk? That's just bad business.
For another exaple, I know I certainly wouldn't sell stock in financially secure companies right now, because it's way underpriced by the market compared to the actual value of the company. Instead, I'd wait until the market quit freaking out, and sell that stock at a value that more closely reflected the actual value predicted by the cash flow and assets of the company. "Mark to market" was not a viable way to value things back when dot-coms with no product were going public for multi-billion-dollar valuations back in 1999, and is no more viable when the opposite (the market woefully under-valuing as vs. over-valuing) is true either.
- Badtux the Finance Penguin
Cats? Hell, I can't even afford your CRT TV.
It depends. Back in the old days, when mortgages were held by the originating banks, it made sense to value them based on the projected return. But now that they have been "securitized" and get traded around almost as frequently as the contents of an oil tanker, mark-to-market is the only way to value them.
The banks brought this on themselves, so fuck them.
By that standard, the value of webvan.com -- a company which had no profits, had no hope of ever making a profit, and which anybody could see was doomed and hopeless -- was worth $1.2B. Because that is what the market said it was worth.
Unlike you, I don't have any faith in the invisible hand of the market when valuing these things. The thing about invisible hands is that they're *imaginary*.
As for the bundling / securitization / etc., did you read Krugman's rant about that? I think the only way to get a real true value of what's what is to unwind all these securitization transactions all the way back to the naked mortgages. Until then, nobody -- market, bank, nobody -- knows WTF they're holding, and what kind of conceivable value it might have.
Your apparent belief in the wisdom of the market at valuing stuff is what got us pets.com. 'Nuff said.
- Badtux the "Ain't no fan of imaginary things" Penguin
But they aren't going to unwind those bogus securities, regardless of what Krugman has to say. So it is either let the banks value them at some fictional amount or value them at what a willing buyer would pay for the crap.
Clearly, Enron-style accounting is the answer to our woes! Well, the institutions' woes...
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