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Wells Fargo & Company Message Board

  • sumbankerdude sumbankerdude Feb 25, 2009 12:32 AM Flag

    Mark to Market - In Simple Terms

    I had a little time this evening, so I thought I might take a shot at trying to explain the current situation in my own terms. Terms that are closer to home, so to speak.

    Let’s say you and your spouse bought a house. 20% down, with a monthly payment you both could afford (clearly you aren’t from the People’s Republic of California, but I digress). You have some credit card debt and a couple of auto loans, but it’s manageable. You and your spouse make a good living, and you are quite comfortable. It’s all good so far. Now, for reasons beyond your control, the economy takes a turn for the worse. Several of your neighbors are impacted, and they have to sell their houses immediately so they sell at a price that is 40% less than what you paid for yours. That sucks, you think, but it doesn’t really matter that much to me today since I’m not going to sell my house now. I’m can afford the payments, I like where I live, so I’m not terribly concerned about what my house is worth at this particular moment.

    Ah, but along comes the government. The government takes a look at your assets (your house, at its current “value”, whatever you might have in savings, and your other assets), and determines that your net worth isn’t what it would like for it to be. Because of that, the government decides that it must force you to liquidate. Liquidate, you ask? But why? Our income more than covers the payments we have to make on our house and our other obligations! Why are you going to force us to liquidate? The government, in its infinite wisdom, explains to you that it doesn’t matter what you will earn in the future. All that matters is what your balance sheet looks like today, and at this moment in time it isn’t as strong as they want it to be. They take all you have and sell it to satisfy your creditors. Now you are both homeless (and if they sold your clothes, you’re naked…), and you both lose your jobs.

    This example is clearly oversimplified, but I think it demonstrates the point. Can you see why mark-to-market doesn’t work?

    Go ahead and 1-star the shit out of it. I’ll take it as a compliment.

    Going to bed. Night.

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    • A good point. Mark to market for assets held for sale is one thing....where the ib's got stuck holding the securitized assets,and those securities have to be marked down (under fasb 157) because there are no buyers--in that case i do not agree with fasb that the lack of buyer should determine a markdown price, but a NPV analysis should be utilized.

      In the case of a more normal lender like WFC, i don't believe that m2m applies where mortgages are originated and held in portfolio, and are currently performing. The analysts may be trying to apply m2m to give price targets, but that is obviously not correct either.

      Writing assets down because the securitization markets are not functioning is incorrect in either case, and does not truly value the underlying npv of the asset if that asset is performing.

      Furthermore, all of the different IB's which underwrote subprime for packaging and resale had different underwriting standards, some of the assets are "better" than others. I believe i just read an article that said that the worst of the 12 or so originators was BAC.

      The IB's typically used the maxim "whatever the market will buy we will sell" so you can see there would be a lot of variability among the different originators at different times. A bank who originates to hold in portfolio always has better assets than a "reseller" stuck with what it was trying to unload.--BG

    • A good point. Mark to market for assets held for sale is one thing....where the ib's got stuck holding the securitized assets,and those securities have to be marked down (under fasb 157) because there are no buyers--in that case i do not agree with fasb that the lack of buyer should determine a markdown price, but a NPV analysis should be utilized.

      In the case of a more normal lender like WFC, i don't believe that m2m applies where mortgages are originated and held in portfolio, and are currently performing. The analysts may be trying to apply m2m to give price targets, but that is obviously not correct either.

      Writing assets down because the securitization markets are not functioning is incorrect in either case, and does not truly value the underlying npv of the asset if that asset is performing.

      Furthermore, all of the different IB's which underwrote subprime for packaging and resale had different underwriting standards, some of the assets are "better" than others. I believe i just read an article that said that the worst of the 12 or so originators was BAC.

      The IB's typically used the maxim "whatever the market will buy we will sell" so you can see there would be a lot of variability among the different originators at different times. A bank who originates to hold in portfolio always has better assets than a "reseller" stuck with what it was trying to unload.--BG

    • Nice analogy for all to understand........

      "mark to market" and the "uptick" rule have to be re-thought, not only in my opinion , but the majority of all the talking heads on the financial beat.........

      That said, why haven't they been addressed , one way or the other , by the financial gurus in Washington ?

      I'm sure the markets would like them to make a decision on one or both , thereby, taking another "unknown" out of the equation going forward..............

    • first of all, what's your house has to do anything with the economy. In the other hand, the USG has a huge interest in the banks to establish credits for potential lenders. Banks are financial backbones of the economy. Without them there's basically no economy.
      Your point is well taken, however, your analysis is inappropriate. The majority of these tarp recipients asked for help, in return the usg requires that they must establish a balance sheet. Without proper funds, a bank cannot lend out money. If a bank cannot lend out money, then by the very definition, it cannot be a bank.
      So, there's no point for the gov to come in and liquidate your house in the first place unless you skip your mortgage payments.

    • I thought that was they inferred, what about having the people that failed mortgages , no down payment , underwater ,,etc,,go back and take economics 101 -- Rule 1. 20 % min down -(or Better yet 30 %) Your Family Budget allows for 25 % of weekly/monthly income towards a mortgage payment, 1 credit card per family , 1 car that has a car loan , the 2nd car paid (that includes the 1965 Mustang Gt muscle car) an ELOC for home improvements that is 1/2 of what Banks allow in equity(keeps everyone honest (like that new sport Fisher 32 ft fish/sky boat) or that new diamond ring for wifey no. 2 or 3 )
      what the moral of the story is ,, if your teaching the masses and doing stress tests on Banks how about a stress test on home owners,,,a little economics 101 quizzz,,good night you all ,,just finished a nice lunch here,,,oceans

    • Perfect, I have been trying to explain this to family and friends for the last 6 mos. using basicly the same example. This is the unintended consequence of Enron and our friends in the house of reps. and their oversite / transparency. If I have 30 loans performing in an area, Why should I be forced to devalue those 30 loans for 3 foreclosures? Even when we learned to play Monopoly, we could still charge rent if we lost another property on the other side of the board.

    • Well done. As one in the business, I would say your oversimplified version is spot on!

    • There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant.

 
WFC
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