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Old 03-05-2009, 03:53 PM
 
Location: New Jersey
4,184 posts, read 5,072,542 times
Reputation: 4233

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re-reading this thread, it seems that alot of the discussion revovles around "Mark-To-Market" (though it's not referred to outright)...

The application of this rule has been done in a way to prevent second guessing, with some using only the last price paid for an asset, when other factors such as interest rates and risk premiums can also be legitimately considered. The Congressional subcommittee on capital markets has tentatively slated (for next Thursday) a hearing on the rules that require assets be valued at current market prices. This accounting rule has been a major contributor to the debt spiral, some financial institutions contend the rule compels them to mark down assets to artificially low prices.

e.g. You own a house worth $100,000 ...as do others in your neighborhood. The economy gets bad, and nobody sells their house for several years. Finally, somebody sells at $30,000. Your bank calls you up and says that your mortgage is due, because you're "insolvent". Even though you are making your payments, your collateral fails to back your mortgage, using Mark-To-Market. I guess it's a good thing that banks don't impose MTM on our home loans !

Maybe some of you know why we don't have a similar gauge for other assets, such as a house ? Why one person is ready to pay $100K more on the house, compared to the next neighbor who bought the house for $100k less a few weeks back, has to dictate the equity of the home of the neighbor ? This is was the primary reason for the bubble to form !

If you do not have regulation and allow "free market capitalism" to dictate the price, there are crooks at the top who manipulate the market to their needs. Now, all of us are screwed -- people like us who have a 401k, our homes are worth less... but at the top, they will lend us more money and keep us under debt for rest of our lives... that's the massive hole in MTM, it's pure stupidity.

Mark-to-market sounds good in theory, but obviously doesn't work during panics like this one. People are selling assets at any price, to meet margin calls and redemption requests. Thus these panic sellers are setting the price for others who may wish to wait for the panic to subside -- thus causing more panic, more forced selling, more markdowns, etc.

Mark-to-market is a poor model. What if you owned your home, paid in full: $100,000. One day someone tells you it's worth $4,000. What's it worth ? What's it worth to you, the replacement cost, i.e. renting somewhere between $1000-$1400/mo, which roughly equates to $100-140K. The $4,000 is what some vulture will pay for it. The value, both in absolute and replacement terms, is far more. I use the $4,000 figure as being illustrative: $4,000 for a $100,000 house is an absurd amount. For the majority of americans, the bank owns your home. They have the $100,000 house in this scenario. If you own a real asset (as in REAL estate), and someone says it's only worth $4,000 ...do you realistically value it at $4,000 ? The material cost alone is more than that. The land alone is more than that. The replacement cost (i.e. rent, alternative housing arrangments) are more than that. 5 mortgage payments amount to more than $4,000. Do you, or would you, sell into or value an asset by an environment that would offer $4,000 for an asset worth $100,000 ? (This is just the asset price, amortization means this asset will pay back more than just pricipal)

Part of the model banks use, and the reason they charge interest, is that they realize there will be defaults... that's why payments total somewhere at about $140,000-$160,000 on a $100,000 loan -- and that's why we have mortgage insurance as well. The true difference is not between $4,000 and $100,000 but in the instance between $4,000 and $160,000. Banks have been lending money for thousands of years, of which this is not the first period of economic downturn. To offset potential losses, they require people payback more money than they borrow, and take insurance on their borrowings. Financing is a viable model today, it was in yesteryears, and it will be in the future.

To value the asset at "what the market will bear" is, to put it simply, not a correct model. If we were not talking about estates in the real world, then yeah -- whatever subjective price the market would pay might be the only way to determine value. Or you could use a running average, a costs basis, or whatever mechanism you wanted. If someone tells you your house is only worth $4,000 and they want to buy it from you, that the sky is falling, and the second coming is nigh... look at them like they're a little crazy, and maybe chuckle a little bit.
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Old 03-05-2009, 03:59 PM
 
Location: NJ
392 posts, read 842,901 times
Reputation: 191
JG,

How would you value a company?

Give me the theory, not the check the quote online (MTM in this case).

Quote:
Originally Posted by JG183 View Post
re-reading this thread, it seems that alot of the discussion revovles around "Mark-To-Market" (though it's not referred to outright)...

The application of this rule has been done in a way to prevent second guessing, with some using only the last price paid for an asset, when other factors such as interest rates and risk premiums can also be legitimately considered. The Congressional subcommittee on capital markets has tentatively slated (for next Thursday) a hearing on the rules that require assets be valued at current market prices. This accounting rule has been a major contributor to the debt spiral, some financial institutions contend the rule compels them to mark down assets to artificially low prices.

e.g. You own a house worth $100,000 ...as do others in your neighborhood. The economy gets bad, and nobody sells their house for several years. Finally, somebody sells at $30,000. Your bank calls you up and says that your mortgage is due, because you're "insolvent". Even though you are making your payments, your collateral fails to back your mortgage, using Mark-To-Market. I guess it's a good thing that banks don't impose MTM on our home loans !

Maybe some of you know why we don't have a similar gauge for other assets, such as a house ? Why one person is ready to pay $100K more on the house, compared to the next neighbor who bought the house for $100k less a few weeks back, has to dictate the equity of the home of the neighbor ? This is was the primary reason for the bubble to form !

If you do not have regulation and allow "free market capitalism" to dictate the price, there are crooks at the top who manipulate the market to their needs. Now, all of us are screwed -- people like us who have a 401k, our homes are worth less... but at the top, they will lend us more money and keep us under debt for rest of our lives... that's the massive hole in MTM, it's pure stupidity.

Mark-to-market sounds good in theory, but obviously doesn't work during panics like this one. People are selling assets at any price, to meet margin calls and redemption requests. Thus these panic sellers are setting the price for others who may wish to wait for the panic to subside -- thus causing more panic, more forced selling, more markdowns, etc.

Mark-to-market is a poor model. What if you owned your home, paid in full: $100,000. One day someone tells you it's worth $4,000. What's it worth ? What's it worth to you, the replacement cost, i.e. renting somewhere between $1000-$1400/mo, which roughly equates to $100-140K. The $4,000 is what some vulture will pay for it. The value, both in absolute and replacement terms, is far more. I use the $4,000 figure as being illustrative: $4,000 for a $100,000 house is an absurd amount. For the majority of americans, the bank owns your home. They have the $100,000 house in this scenario. If you own a real asset (as in REAL estate), and someone says it's only worth $4,000 ...do you realistically value it at $4,000 ? The material cost alone is more than that. The land alone is more than that. The replacement cost (i.e. rent, alternative housing arrangments) are more than that. 5 mortgage payments amount to more than $4,000. Do you, or would you, sell into or value an asset by an environment that would offer $4,000 for an asset worth $100,000 ? (This is just the asset price, amortization means this asset will pay back more than just pricipal)

Part of the model banks use, and the reason they charge interest, is that they realize there will be defaults... that's why payments total somewhere at about $140,000-$160,000 on a $100,000 loan -- and that's why we have mortgage insurance as well. The true difference is not between $4,000 and $100,000 but in the instance between $4,000 and $160,000. Banks have been lending money for thousands of years, of which this is not the first period of economic downturn. To offset potential losses, they require people payback more money than they borrow, and take insurance on their borrowings. Financing is a viable model today, it was in yesteryears, and it will be in the future.

To value the asset at "what the market will bear" is, to put it simply, not a correct model. If we were not talking about estates in the real world, then yeah -- whatever subjective price the market would pay might be the only way to determine value. Or you could use a running average, a costs basis, or whatever mechanism you wanted. If someone tells you your house is only worth $4,000 and they want to buy it from you, that the sky is falling, and the second coming is nigh... look at them like they're a little crazy, and maybe chuckle a little bit.
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Old 03-05-2009, 04:58 PM
 
Location: New Jersey
4,184 posts, read 5,072,542 times
Reputation: 4233
Quote:
Originally Posted by xmonger View Post
JG,

How would you value a company?

Give me the theory, not the check the quote online (MTM in this case).
what's your point ?

long story short -- to me, shares of a company are not a "real" asset...
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Old 03-05-2009, 05:09 PM
 
Location: Desert
8 posts, read 46,357 times
Reputation: 14
Thumbs up housing nationwide

I have been reading thehousingbubbleblogDOTcom for over two yrs and along with this site, it offers people from all around and accurate up to the date information on segments of the US. If it wasn't for reading this site, I would have felt depressed about being a renter, but I truly believe prices are still going down. I have been and seen the Illinois big city prices, the CA prices etc. and I would suggest, Hang on. Don't be a knifecatcher.
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Old 03-05-2009, 05:47 PM
 
612 posts, read 1,011,753 times
Reputation: 406
blaming mark to market is like blaming your flu on the thermometer.
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Old 03-05-2009, 09:17 PM
 
1,552 posts, read 4,637,277 times
Reputation: 509
Quote:
Originally Posted by theoakman View Post
blaming mark to market is like blaming your flu on the thermometer.
LOL good analogy.
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Old 03-06-2009, 09:33 AM
 
263 posts, read 524,444 times
Reputation: 34
"If per-capita incomes were to revert to twice the national average (versus more recent measures of three times the national average), condo prices would need to fall by 58 percent to match the price-to-income ratios of the late 1990s, before the run-up in the real estate market, according to the analysis."

http://www.nytimes.com/2009/03/08/re...e/08condo.html
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