Post by brosin on Aug 15, 2010 20:30:57 GMT -5
The week after the previous post on 3/1/10, the market had its 4th huge weekly loss in a row (-6.3% on the week) - luckily I saw that enough was enough
“Dirty Jobs”
Sunday 3/8/09 by Brosin
The Bank Index is down 60% in 2009. To be able to say that with a straight face is kind of remarkable, seeing as it is early March and 2008 wasn’t too kind to the industry either. When you also consider that it’s down more than 80% since mid-2007, the magnitude of the crisis is put into perspective. At the core of the problem is the mortgage market, which is completely clogged. Since some mortgage securities had become worth less (in some cases much less) and there was no regulated open exchange of these securities, all the mortgages simply became worth zero as the downward spiral was exacerbated by uncertainty. Add to that the incredible problems this has led to in derivatives (AIG’s hemmoraging of money), and we get to where we are now. Some would argue, though, that the housing bubble would not have collapsed nearly as quickly or as hard (maybe not at all?) if there was an open market for these securities with full information.
Of course, investors did not seem to care much about the information anyways. They were more concerned with the huge returns and decided it wasn’t worth asking questions… but for now, let’s assume that this happens in all types of markets to some extent, which is probably true. It was kind of like musical chairs: When the music’s over (my favorite Doors song), who is the one stuck without a chair – in our case, who was stuck with large amounts of leverage in assets that were now worthless?
But, to continue the analogy – who decided to stop the music? If there was more information provided through better regulation and/or open exchanges, not all the securities would have become worthless such as they are now. Not to mention, everyone holding these certainly shouldn’t have been forced to assume that they will always be worth zero, as is the logic of mark-to-market accounting (M2M). While the rule does make sense in normal market conditions, the current situation has become one where financial institutions have to mark the securities quarterly at much lower than they would ever sell them for in the future, which then causes them to have to raise more capital, which makes their stock price go down and credit default swaps blow out, so that they have no way of raising capital, etc etc etc.
What sense does any of this make? If I’m not planning on selling my house, I don’t give a rat’s a** what the price of it is at any one specific time. M2M is good for comparing companies within industries – it is supposed to help investors gauge what the value of a company is. But we have strayed far from that goal. I have no doubt we should return to M2M in the future – again, for comparative purposes – but we need to stop this irrationality that has developed as fear has fed on itself. “…nothing to fear but fear itself.”
This week, Congress will have a meeting to decide whether or not to call the plumber and have him look at unclogging our pipes. They (and the Fed) have been trying everything they can think of to fix the problem themselves with various unorthodox methods, but they should just stick to the norm. When they decide at the meeting to call the plumber, we may get the water moving again.
By assuming for a minute that the banks would not sell their securities at zero (or 20, 30 cents on the dollar) just because the market doesn’t know what they are worth, why make them hold capital as if they were doing just that? Why not instead try to get to the bottom of what the prices are of these assets and while we’re sorting that mess out, maybe for just awhile say that institutions do not have to have capital to back up a price they wouldn’t take for an asset?
Congress is having a meeting to discuss M2M this Thursday. Despite the fact that this plumber has his work cut out for him since the clog in the pipes caused damage of unequaled proportions to our house (financial system), he can unclog this pipe so we can get our water moving again; then we can begin to repair the damage.
I have heard it argued that lifting M2M will cause more uncertainty as investors would know less about the assets on the books, but these have usually been people who are known as short-sellers. While short-sellers have been right if you want to look at it that way (many do, including myself), it does not give any more merit to their opinion than anyone else trying to sell you on something. If this huge burden was lifted off institutions’ balance sheets, you can bet that some of the massive amounts of money sitting in conservative investments will come pouring in. Just as fear can feed on fear, optimism can feed on optimism this spring. I bought stocks last week for the first time in months, and if nothing else, I think we’re due for a huge global rally. Global markets have pretty much gone down in a straight line in 2009. Just since the 2nd week of February, the DJIA went from 8300 to 6500. Even at my young age I know that kind of thing doesn’t happen often.
“Dirty Jobs”
Sunday 3/8/09 by Brosin
The Bank Index is down 60% in 2009. To be able to say that with a straight face is kind of remarkable, seeing as it is early March and 2008 wasn’t too kind to the industry either. When you also consider that it’s down more than 80% since mid-2007, the magnitude of the crisis is put into perspective. At the core of the problem is the mortgage market, which is completely clogged. Since some mortgage securities had become worth less (in some cases much less) and there was no regulated open exchange of these securities, all the mortgages simply became worth zero as the downward spiral was exacerbated by uncertainty. Add to that the incredible problems this has led to in derivatives (AIG’s hemmoraging of money), and we get to where we are now. Some would argue, though, that the housing bubble would not have collapsed nearly as quickly or as hard (maybe not at all?) if there was an open market for these securities with full information.
Of course, investors did not seem to care much about the information anyways. They were more concerned with the huge returns and decided it wasn’t worth asking questions… but for now, let’s assume that this happens in all types of markets to some extent, which is probably true. It was kind of like musical chairs: When the music’s over (my favorite Doors song), who is the one stuck without a chair – in our case, who was stuck with large amounts of leverage in assets that were now worthless?
But, to continue the analogy – who decided to stop the music? If there was more information provided through better regulation and/or open exchanges, not all the securities would have become worthless such as they are now. Not to mention, everyone holding these certainly shouldn’t have been forced to assume that they will always be worth zero, as is the logic of mark-to-market accounting (M2M). While the rule does make sense in normal market conditions, the current situation has become one where financial institutions have to mark the securities quarterly at much lower than they would ever sell them for in the future, which then causes them to have to raise more capital, which makes their stock price go down and credit default swaps blow out, so that they have no way of raising capital, etc etc etc.
What sense does any of this make? If I’m not planning on selling my house, I don’t give a rat’s a** what the price of it is at any one specific time. M2M is good for comparing companies within industries – it is supposed to help investors gauge what the value of a company is. But we have strayed far from that goal. I have no doubt we should return to M2M in the future – again, for comparative purposes – but we need to stop this irrationality that has developed as fear has fed on itself. “…nothing to fear but fear itself.”
This week, Congress will have a meeting to decide whether or not to call the plumber and have him look at unclogging our pipes. They (and the Fed) have been trying everything they can think of to fix the problem themselves with various unorthodox methods, but they should just stick to the norm. When they decide at the meeting to call the plumber, we may get the water moving again.
By assuming for a minute that the banks would not sell their securities at zero (or 20, 30 cents on the dollar) just because the market doesn’t know what they are worth, why make them hold capital as if they were doing just that? Why not instead try to get to the bottom of what the prices are of these assets and while we’re sorting that mess out, maybe for just awhile say that institutions do not have to have capital to back up a price they wouldn’t take for an asset?
Congress is having a meeting to discuss M2M this Thursday. Despite the fact that this plumber has his work cut out for him since the clog in the pipes caused damage of unequaled proportions to our house (financial system), he can unclog this pipe so we can get our water moving again; then we can begin to repair the damage.
I have heard it argued that lifting M2M will cause more uncertainty as investors would know less about the assets on the books, but these have usually been people who are known as short-sellers. While short-sellers have been right if you want to look at it that way (many do, including myself), it does not give any more merit to their opinion than anyone else trying to sell you on something. If this huge burden was lifted off institutions’ balance sheets, you can bet that some of the massive amounts of money sitting in conservative investments will come pouring in. Just as fear can feed on fear, optimism can feed on optimism this spring. I bought stocks last week for the first time in months, and if nothing else, I think we’re due for a huge global rally. Global markets have pretty much gone down in a straight line in 2009. Just since the 2nd week of February, the DJIA went from 8300 to 6500. Even at my young age I know that kind of thing doesn’t happen often.