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the market melt down maybe isn't being caused simply by mortgage defaults.
anybody else been wondering exactly how 10 million$ in mortgage failures ends up costing 10 Billion in asset losses?
here's why:
November 12, 2007 Why FAS 157 strikes dread into bankers Just when we hoped the worst was over . . . William Rees-Mogg
Few non-bankers have heard of FAS 157 and 159, yet these are the regulations that will set the terms on which the banks will value their assets. The trouble with FAS 157 and 159 is that they are perfectly reasonable regulations in themselves which could have disastrous, though unintended, consequences.
What are FAS 157 and 159? They are the new United States (Federal) accounting standards that have been introduced to regulate the valuation of bank assets. These valuations are of crucial importance because they are the basis of all bank lending: no assets, no lending; no lending, no bank. According to an informative article in The Financial Times, the new standards will apply fully from Thursday. Many US banks have adopted them already. All US quoted banks will have to publish asset figures in conformity with FAS 157 by next spring.
Martin Hutchinson has also analysed the assets of Goldman Sachs. The bank has disclosed $72 billion of level-three assets, out of total assets of $900 billion. That seems reasonable enough, but it compares with Goldman Sachs’s capital of $36 billion. Any substantial write off of level-three assets would impact on Goldman Sachs net asset value.
No doubt this is the reform that should have been introduced years ago; that would have saved a great deal of agony and some abuse. But FAS 157 is coming into effect at a most inconvenient time. The sub-prime mortgage defaults have already undermined confidence in mortgage banked securities. These form a significant part – perhaps about a quarter – of all level-three assets. Level three also includes higher-quality mortgages and leveraged bridged loans for buyouts.
there may in fact be much more going on that is not as obvious. or has even been deliberately hidden.
a large portion of the US markets may be able to be legally defined as having been criminal enterprises if they have been using double entry bookkeeping like what i suspect has really been going on.
glassman
posted The Royal Bank of Scotland Group estimates that U.S. banks and brokers, already under massive losses caused by the collapse in the subprime credit market, potentially face hundreds of billions of dollars in write-offs because of what are called Level 3 accounting rules, according to Bloomberg.
Janjuah noted that, for example, Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, Goldman Sachs has 185 percent, Lehman Brothers has 159 percent and Citigroup has 105 percent, according to Bloomberg.
On the other hand, Merrill Lynch has Level 3 assets equal to 38 percent of its equity. As a result, Janjuah believes Merrill ''may well come out of all of this in the best health.''
In the fair value hierarchy, Level 1 is simple mark-to-market, whereby an asset’s value is based on an actual price. Level 2, known as mark-to-model and used when there aren't any quoted prices available, is an estimate based on observable inputs, Bloomberg explains.
Level 3 consists of unobservable inputs, such as those that reflect the reporting entity’s own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort, according to FASB. There is no verification requirement if the assumptions are in line with those of market participants.
Fair value using Level 1, market quoted values, is far more misleading than is generally thought. Ususally, the market setting the price for a security is only a extremely small percentage of the outstanding security. To assume that your holding will trade for that price is wrong. Should you choose to sell, the larger your holding, the more impact that sale will have on the market price. It will still require locating a willing seller, which may not exist for the quantity you hold, and then agreeing upon a price. Hence, if Bill Gates' foundation chooses to liquidate its holdings of Microsoft stock, the value it receives will be significantly less than the current market quote. Also, remember, Fair value does not consider the selling costs.
By the FASB's own admission, the "fair value" is not the realizable value that most people consider to be the fair exchange value.
No, level 3, level 2 and level 1 fair values are all misleading, and only blue sky theoreticians would think otherwise.
Posted by Charles Smith | November 08, 2007 10:05 am
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awesome, there's nothing like great pen and ink art...
'cept maybe some good fiction to (not) read
Propertymanager
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The real reason for the credit crunch is that the government always bails out the big banks - therefore encouraging them to lend recklessly. There are dozens of examples of this, only the latest of which is the current "credit crunch". The big banks have been repeatedly bailed out with our fiat money system (with the government simply printing money from thin air), allowing them to make huge profits at the taxpayer's expense (financed through the invisible tax of inflation). Big banks are not part of the free enterprise system, they are nothing more than a cartel which controls a huge percentage of the world's wealth. They make huge profits with each economic boom and bust cycle (which they create).
glassman
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but not your local ohio banker?
glassman
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seriously PM?
the UNeducated consumer is the real problem. sure the bankers sheer the flock every cycle..
but why do we not teach basic macro-economics and solid micro-economic principles in High School? because it is too complex? no...
it's because the "professionals" have to have an "edge"...
playing in the markets? we TRY to keep up with the latest news and tends to be ahead of the crowd.
last Aug? Rimasco said he beleived the DOW should be 11000, i thought he was being A LITTLE pessimistic. but his prediction is turning out to be correct. we only need to drop a few more points for his prediction to play out, and when it finally does come to 11,000 (or close)? the next bull mkt will probably begin...
he didn't go into an in-depth explanation of how he came to this number, and i expect him to say how eventually, but for now? i am pretty sure i know why it will happen. it's because the US govt borrowed too much money and can't afford to pay high interest rates on it.
inflation be damned, interest rates MUST stay low: the US Govt is in danger of losing it's AAA rating. and if it does? we are in deeeeep Kimcheee...
Propertymanager
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quote:but not your local ohio banker?
No, small banks are not bailed out, they are taken over and absorbed by the big banks. That was one of the stated goals of the Jekyll Island meeting at which the blue print for our current central bank (Federal Reserve) was laid. At that time, small banks were increasing in popularity and number, threatening the big banks. By consistently bailing out the big banks, but not the small ones, the government has effectively eliminated a lot of competition for the big banks. This is a process that is continuing today.
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