On Sat, 27 Sep 2008, Doug Henwood wrote:
>> It's not that "hold-to-maturity" prices are the "wrong" prices, it's
>> that they're subsidy prices.
>
> Not necessarily. These securities may pay off 85 cents on the dollar if
> held to maturity. But with mark-to-market accounting, they have to
> valued at their present market price - and whatever that is, exactly, it
> might be 20 or 30. But no one's really buying. If the gov sets a floor
> under the price, the m-t-m price will go up - and the gov could make
> money on the deal too.
>
> Not saying that this will happen, but there's a reasonable chance it
> could.
When Bernanke, Bill Gross and you (w/ qualifications -- but when was it otherwise? :) all agree, I have to take it seriously. You all seem to think that these are predominantly securities that are ultimately based on mortgages, and so they can ultimately be valued like any other security, on a discounted cash flow basis. If that's true, this is basically a no-lose proposition, whether or not it works. If we calculate the lifetime cash flow using a reasonable default rate and discount rate, and pay than that number, then the lifetime cash these securities bring in will be more than we paid even if nobody ever buys them from us.
I admit your point made in an earlier post is salutory: the idea that we are subsidizing the banks does rest on a very orthodox economics point that the market is always right, and the market (or fire sale) price is a truth given by nature, and anything above that is a distortion. Whereas under several heterodox understandings, that isn't true -- the market price can be irrational and wrong, and brought about because of systemic abberation with the system near collapse; and when the system is uncollapsed (which is the whole goal of this exercise) than by definition the prices will return to an oscillation around something close to their true value.
My only question is that IIUC, I don't think the main bulk of the toxic securities are like this, i.e., simple MBS with just a couple more steps. My impression is that they are much more complex than that, with derivatives knitted into them, such that their value is truly imponderable, like options were before Scholes-Black. And that this has only gotten worse in the last few weeks, since some of the parts knitted into them depend on agreements with financial companies who longer exist (or who are tied up bankruptcy), and on insurance that is largely fictional, and on the consequences of drastic de-leveraging that has yet to take effect. So the super math-heads who are the only ones who can actually calculate these things aren't simply clouded by panic. Rather they are reporting back the mathematical truth when they say there is no true price -- that their models only worked when certain variables were givens within bands of variation, and now that that's no longer true, there is simply no way to calculate their value. (Or there's a hundred ways to roughly estimate giving a hundred different answers, which is the same thing). Which is why in this case, the market value is the only value, and the difference between that and the discounted cash flow value will only be available empirically in retrospect; it can't be predicted, and it's not mathematically impossible that the market price is right.
Are there any sample contracts in the public domain so we could look at them? Has there been any attempt to sample and survey what kinds of securities are representative toxic waste that are in the public domain?
Michael