MARK 2 MARKET

Yes, the title is a double entendre. Let me explain.

I have steadily called for junking the “mark to market” rule for valuing mortgage based assets or securitized debt, the so-called “toxic” assets. These include mortgages bundled and sold as bonds and the infamous credit default swaps, a type of insurance for the bonds. There is no market for these instruments at this time. In the absence of a market those doing the valuations use their various models and Quija boards to determine values. The most prevelent model is to value mortgage based assets to the depressed value of property in the most depressed markets. I have asked that these assets be valued at their long term value, i.e. the mortgages held to maturity, minus the still small foreclosure rate now at 3%.

Those insisting on “mark-to-market” rules base their defense in predicting that if the assets are not valued this way, investors will not buy any. Well investors are not buying them now, so what would be lost?

Well the “mark-to-market” defense has been hit with two big blows. Fed Reserve Chariman Bernanke now calls for “fine-tuning” the “mark-to-market” rule. He does not want to suspend the rule, but rather adjust it to give a more accurate value to the assets. I modestly suggest he use my proposal, mark mortgage based assets to their maturity value, minus actual foreclosures.
At the same time well known Congressman Barney Frank has come out forcefully to change the “mark-to’market” rule and restore the “uptick” rule for selling shares short, i.e. selling shares at today’s price that you will deliver later, when the prices are lower. This is the classic bear market strategy, i.e. it works when stock values are declining steadily. The uptick rule serves to prevent short sales driving stock prices down too fast and too far.

These calls to battle will lead to a quick overhaul of these, and other rules, causing the plummeting stock market, and the economy itself, to fall faster and further than they should. Bernanke also called for major new Federal control over the financial markets.

So now our financial market will operate under revised and new rules which will yield a much changed market that I call, “Market 2.” Clever title, no?

Leo Cecchini
March, 2009
Categorized in Uncategorized