Thursday, April 02, 2009

Mark to market? Really?

So... the value of the assets that the banks hold should be marked to market, rather than to their long-term value (which is going to reflect the income that they bring in) because the market valuation is always the correct valuation?

Cool! Webvan really was worth $1.2 billion dollars, despite losing money on every sale! And all those other overpriced dot-com stocks that had no income and no profits and no hope of either? Why, they weren't really overpriced, their market valuation truly did reflect their long-term value, even though they had no income and no profits!

So yessiree, mark to market is just a great idea for estimating the true value of an asset. In some alternative universe where Webvan and did not exist. Somewhere other than this universe, in other words.

There are well-known algorithms for valuing assets such as home mortgages and such, which include a number of factors such as LTV ratios, default rates, and so on and so forth that will tell you what future income and thus what value you can expect from the asset. A $100K mortgage on a $500K home occupied by two professionals each of whom pull in a six-figure salary, vs. a $100K mortgage on an $80K home occupied by a single-parent autoworker who makes $15/hour, are two different animals. The first one, assuming it's got 20 years to go on the mortgage at 5.6% interest, has a future value of around $295K (the value of the principal+interest that you'll get from it), the second one has a future value of about $50K (your profit on selling the house when -- not if -- you repossess it). But right now, the market is so scared that you'd be lucky to get $10K if you tried to sell either mortgage on the open market -- assuming you could find any buyers in the first place. Does this mean that these mortgages are worth $10,000? Only if you're an idiot. Which, apparently, describes the people who want to "mark to market" all these mortgages.

So how do we value these mortgages if we don't allow this magical "the market" which is just oh so accurate (sarcasm intended) do it? Well, same way any reasonable person values any investment -- by looking at the future value of the investment. Unfortunately, this rational "reasonable person" does not seem to exist in any large numbers, because if he did, Webvan would have never been valued at $1.2B...

-- Badtux the Market Penguin


  1. Isn't this just more of the same crap that got us into the fix we're in now?

    I'm no economist, but this whole thing doesn't hold water.

    Word Verification: latin.

    That's what all this is to me.

  2. and for my next trick, I will put a republican out of a sewer

  3. Hey D Cap, that's no fair. That's easy, there's a lot of them down there.


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