Next leg of banking collapse underway

Thrugelmir

Woby_Tide wrote: »

Yet in the bankruptcy hearing the other day the Lehman administrators said it could be wrapped up in 18-24months.

The administration of Lehman's as a business could be. The CDO's issued will take longer to unwind.

Laughing_man

Really2 wrote: »

? I was just explaing what a writedown was.
It's not an easy job to know which debts will go bad and not all of them will that is a fact. (So a write down is a provision for bad debt)
Also some debts will not be including with writedowns will go bad so I can't see where at all I said anything about"fictional losses"
the only thing fictional is what you think I said.:rolleyes:

what you said:

People do not realise a write down is for "potential" bad debt.
So banks are putting billions aside "just in case" these debts go bad.

modeling future potential future losses amounts to telling a story- or creating a fiction (hence mark to make believe)- about what may or may not happen and the overall tone I got from your post was that it would probably not be as bad as all that.

This is just wrong anyway they are supposed to be marking to market, securitised debt is a tradable instrument and falls under FSA157 accounting rules.

taken from the wiki:

The debate arises because this accounting rule requires companies to adjust the value of marketable securities (such as the mortgage-backed securities (MBS) at the center of the crisis) to their market value. The intent of the standard is to help investors understand the value of these assets at a point in time, rather than just their historical purchase price. Because the market for these assets is distressed, it is difficult to sell many MBS at other than fire-sale prices, which may be below the actual value that the mortgage cash flow related to the MBS would merit. As initially interpreted by companies and their auditors, the typically lower sale value was used as the market value rather than the cash flow value. Many large financial institutions recognized significant losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value.

In other words they are only worth what someone is prepared to pay for them now and they have to be shown on the balance sheet at that value, i.e the loss is real, right now, and doesn't have a great deal to do with future cash flow.

What you're getting at in a muddled way is mark to model or level 3 assets:

http://www.wikinvest.com/wiki/Level_1,_Level_2,_Level_3_Assets

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage related assets (including loans, securities and derivatives), and long-dated or complex derivatives including certain foreign stock exchanges, foreign options and long dated options on gas and power). Level 3 assets trade infrequently, as a result there are not many reliable market prices for them. Valuations of these assets are typically based on management assumptions or expectations.

The problem with level 3 assets is that investors don't have access to the model used to value the assets and the models themselves tend to overly optimistic. This results in the ridiculous situation we have seen where a bank that is supposedly rock solid one day is getting bailed out the next, because they are avoiding marking to market by hiding the toxic debt under thier level three assets. This is the primary reason why the bailouts have all failed so far, no one trusts the models and thus cannot trust the banks to honour thier debts, so no-one lends to each other and the crunch continues, although this is opinion rather than fact. All this was on Ticker forum months ago BTW.

When Brown talks about making the banks come clean he means taking all the crap off level three and marking it to market like it should be. The point has recently been made by RBS that if they were to do this the banks would become technically insolvent, because of the writedowns that would result from the difference between model price and market price. Maybe the 'bad bank' solution where the .gov underwrites all of it will do the trick. I certainly hope so.

http://www.investopedia.com/terms/w/writedown.asp

What Does Write-Down Mean?
Reducing the book value of an asset because it is overvalued compared to the market value

Ben Bernanke believes the current market price for these instruments is too low, and will increase significantly in the future.

Maybe this is so, however, if they were really such a good buy why would investors be accepting record low yields on long term treasury debt when there was such an excellent return to be had on MBS trading at 20c on the dollar? Are they stupid? Do you know something they don't?

Personally I'm not sold on this but then I don't have an objective model for valueing this stuff right now and can only look at what the people in the know are doing. I do know the resets graph posted earlier predicts alot more of the same coming from the Alt-A and pay-option ARM mortgage books over the next couple of years, which is probably what has got the big money so spooked- they want safety, not return, for the forseeable; since the final default rate and residual value of repossesed housing is not yet known.

It's easy to say "go back to HPC, loony" rather than respond directly to a point that contradicts your own, but I don't really see the difference between one blinkered group of idiots stating whatever comes off the top of thier heads as fact and slating anyone who disagrees ad-hominem- and another doing basically the same thing from the other side. Which is essentially what alot of regular posters do on both sites, or any forum for that matter.

I'm interested in this subject and read both sites when I'm bored- like now since I stayed in for UFC 93- to get a balanced view. The news blog is definately better at HPC, and there is quite a bit of good analysis on both sites. Both are trumped by Ticker forum though, imo. MSE is great for debt management and such but is not the fount of knowledge on the credit crunch, deal with it. Mewbie, Really, get over yourselves.

Generali

Well pricing CDOs, RMBSs etc is tricky. The biggest problem is do you price them using mark to market or a discounted cash flow model?

I suppose it depends on what you intend to do with it. If you aren't selling and want to hold to maturity then you make certain assumptions about default and early repayment rates and plug them in to a computer model.

If you want to sell then you mark to market.

I suspect that there is a very big difference between the market price (low) and the likely discounted cash flow of CDOs/RMBSs/CDO^n.

My belief that using a discounted cash flow model is the best way for a bank to value debt. Auditors prefer a mark to market but I believe that is for CYA reasons. I suspect that advice is likely to be given in the near future that banks should used a discounted cash flow model as this will take some pressure off their balance sheets.

PS Nationwise sold on about 2/3rds for their mortages using RMBSs. I don't think they were buyers of them though.

dopester

!!!!!!? wrote: »

Anglo Irish Bank nationalised in Ireland:

http://news.bbc.co.uk/1/hi/business/7832203.stm

The Irish government has said it is to nationalise the Anglo Irish Bank after deciding pumping money into the lender was not enough to secure its future.


The state had planned on injecting 1.5bn euros (£1.4bn) into the bank, but said its weak funding and damage to its reputation prompted a change of tack.

Warning that house prices may fall by 80%

LAURA SLATTERY

HOUSING MARKET: IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.

In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms.

Full story:
http://www.irishtimes.com/newspaper/finance/2009/0113/1231738220759.html

And of course, for the hardliners here who refuse to accept there will be wide-spread pay-cuts in a deflationary environment, even though we are seeing more and more evidence for that direction every month now....

Wages need to fall drastically, say economists

Irish wage rates across the private and public sectors will need to fall drastically to prevent a return of mass unemployment, a conference of economic experts will hear tomorrow.

Economists believe the 1,900 jobs manufacturing jobs at Dell could not have been saved because the minimum wage rates that Dell pays at its rival Lodz plant in Poland were up to 25% lower. But jobs may be saved elsewhere this year if wages are cut.

"Through the whole economy, wage rates will have to fall," said Philip Lane, professor of international macro-economics at Trinity College Dublin.Lane will tell the conference, called Responding to the Crisis, organised by University College Dublin and the Dublin Economics Workshop,that the big mistake of the 1980s was to protect wages at the cost of saving jobs.

Colm McCarthy of UCD, the new head of the Public Sector Expenditure Control and Fiscal Consolidation, or An Bord Snip Nua, who will also speak at the conference, said that private employers were already cutting wages across the country. "The general level of wages is too high," he said.

http://www.tribune.ie/business/news/article/2009/jan/11/wages-need-to-fall-drastically-say-economists/

Really2

Laughing_man wrote: »

what you said:



modeling future potential future losses amounts to telling a story- or creating a fiction (hence mark to make believe)- about what may or may not happen and the overall tone I got from your post was that it would probably not be as bad as all that.

This is just wrong anyway they are supposed to be marking to market, securitised debt is a tradable instrument and falls under FSA157 accounting rules.

taken from the wiki:



In other words they are only worth what someone is prepared to pay for them now and they have to be shown on the balance sheet at that value, i.e the loss is real, right now, and doesn't have a great deal to do with future cash flow.

What you're getting at in a muddled way is mark to model or level 3 assets:

http://www.wikinvest.com/wiki/Level_1,_Level_2,_Level_3_Assets



The problem with level 3 assets is that investors don't have access to the model used to value the assets and the models themselves tend to overly optimistic. This results in the ridiculous situation we have seen where a bank that is supposedly rock solid one day is getting bailed out the next, because they are avoiding marking to market by hiding the toxic debt under thier level three assets. This is the primary reason why the bailouts have all failed so far, no one trusts the models and thus cannot trust the banks to honour thier debts, so no-one lends to each other and the crunch continues, although this is opinion rather than fact. All this was on Ticker forum months ago BTW.

When Brown talks about making the banks come clean he means taking all the crap off level three and marking it to market like it should be. The point has recently been made by RBS that if they were to do this the banks would become technically insolvent, because of the writedowns that would result from the difference between model price and market price. Maybe the 'bad bank' solution where the .gov underwrites all of it will do the trick. I certainly hope so.

http://www.investopedia.com/terms/w/writedown.asp


Ben Bernanke believes the current market price for these instruments is too low, and will increase significantly in the future.

Maybe this is so, however, if they were really such a good buy why would investors be accepting record low yields on long term treasury debt when there was such an excellent return to be had on MBS trading at 20c on the dollar? Are they stupid? Do you know something they don't?

Personally I'm not sold on this but then I don't have an objective model for valueing this stuff right now and can only look at what the people in the know are doing. I do know the resets graph posted earlier predicts alot more of the same coming from the Alt-A and pay-option ARM mortgage books over the next couple of years, which is probably what has got the big money so spooked- they want safety, not return, for the forseeable; since the final default rate and residual value of repossesed housing is not yet known.

It's easy to say "go back to HPC, loony" rather than respond directly to a point that contradicts your own, but I don't really see the difference between one blinkered group of idiots stating whatever comes off the top of thier heads as fact and slating anyone who disagrees ad-hominem- and another doing basically the same thing from the other side. Which is essentially what alot of regular posters do on both sites, or any forum for that matter.

I'm interested in this subject and read both sites when I'm bored- like now since I stayed in for UFC 93- to get a balanced view. The news blog is definately better at HPC, and there is quite a bit of good analysis on both sites. Both are trumped by Ticker forum though, imo. MSE is great for debt management and such but is not the fount of knowledge on the credit crunch, deal with it. Mewbie, Really, get over yourselves.

Writedown= Down valuing an asset.

Given this is banks and the assets are loans. They down grade the value of these assets "loans"as the potential for bad debt gets higher.

To say thes are already bad is a compleat lie and like I said not all of these writedowns will all go bad.

I am not going through anything in a muddled way just saying what a write down is (do you debate that is what a writedown is)

In your opinion what is a writedown then?
You seem to be muddling what is a writedown with why the writedowns are happening.

PS as for the bit in bold I take it you see all companies as story tellers and fiction creators as they all make provision for bad debt?
Just in other business you down value an asset EG goods, but in banking the asset is a loan (debt). So the only way do not get the asset value back is if it is not paid (bad debt)
It's nice to have all the links but is also good to grasp the idea of why these are used in every business.

WTF?_2

dopester wrote: »

And of course, for the hardliners here who refuse to accept there will be wide-spread pay-cuts in a deflationary environment, even though we are seeing more and more evidence for that direction every month now....

Wages need to fall drastically, say economists

http://www.tribune.ie/business/news/article/2009/jan/11/wages-need-to-fall-drastically-say-economists/

The problem that Ireland has is that the Euro is too strong and they have no way to devalue to make their wages more competitive.

Therefore the only way out is either massive Euro devaluation - could happen anyway but completely out of the control of the Irish government - or cut wages to make the jobs more competitive, which is something the government can influence.

One of the effects of the fall of Sterling has to be to make 'real' salaries and asset prices more sensible. If you make something to export and your currency (with which you pay for your labour) falls 25% against the market you are exporting to then your business has just had the same benefit as a 25% salary cut. Anyone abroad thinking of buying Sterling denominated assets (e.g. property) has just seen them get much more sensibly priced in a matter of a quarter of a year.

The problem for the UK is that the economy has grown to be dominated by financial services (doomed and no benefit from devaluation) and retail (disadvantaged by devaluation).

Yes, manufacturing/exporting will benefit from the effective lower labour cost but there will be a lot of pain from it too. And in the midst of a growing global recession, even the benefits for exporting will be blunted quite a bit.

setmefree2

!!!!!!? wrote: »

One of the effects of the fall of Sterling has to be to make 'real' salaries and asset prices more sensible.

How true. I work for an American company but I'm paid in sterling, so I'm now significantly cheaper - so I hope I get to keep my job as I'm now a bargain, LOL.

tuggy12

Don't understand any of this??

This tells us how we got where we are:

http://uk.youtube.com/watch?v=mzJmTCYmo9g

tirano

Anglo Irish Bank looks a mess, having to restrict large withdrawals
http://uk.reuters.com/article/UK_SMALLCAPSRPT/idUKLI28885020090118?pageNumber=1&virtualBrandChannel=0

Laughing_man

Generali wrote: »

Well pricing CDOs, RMBSs etc is tricky. The biggest problem is do you price them using mark to market or a discounted cash flow model?

I suppose it depends on what you intend to do with it. If you aren't selling and want to hold to maturity then you make certain assumptions about default and early repayment rates and plug them in to a computer model.

If you want to sell then you mark to market.

I suspect that there is a very big difference between the market price (low) and the likely discounted cash flow of CDOs/RMBSs/CDO^n.

My belief that using a discounted cash flow model is the best way for a bank to value debt. Auditors prefer a mark to market but I believe that is for CYA reasons. I suspect that advice is likely to be given in the near future that banks should used a discounted cash flow model as this will take some pressure off their balance sheets.

PS Nationwise sold on about 2/3rds for their mortages using RMBSs. I don't think they were buyers of them though.

I don't know what a CYA reason is to be frank, can you fill me in? Of course you're right using discounted cash flow would be preferable for a bank because the sale price and book value would probably be higher. There has to be transparancy in the model used, or a standard valuation model that works for everyone needs to be created- keeping everything on level 3 just isn't going to work. The lack of trust between banks, as I far as I can tell, is because thier balance sheets are deliberately opaque and as we have seen no amount of liquidity can make up for it.

The point of many of the bailouts, the TAF, the TSLF, the TARP and the half trillion super bailout is to buy MBS's etc. up or trade them for cash for a while. So if they want shot of them, which apparrently they do so they can make new and presumably better loans and end the crunch, they fall under mark to market accounting rules. Part of the problem is that these rules weren't really designed with this sort of stress test in mind and will have to changed.

Holding on to the loans creates an additional problem for the American banks- where mortgages are non-recourse- of sitting on a huge stock of repossesed properties which in places like California and Nevada- where default and foreclosure is still on the up according to MrMortgage: http://mrmortgage.ml-implode.com/ - are now worth much less than the mortgage balances and each distressed sale devalues similar properties in the same area. This creates more negative equity and more default and foreclosure and so on. This problem will not be easily fixed by changing the accounting rules.

Really2

Writedown= Down valuing an asset.

Given this is banks and the assets are loans. They down grade the value of these assets "loans"as the potential for bad debt gets higher.

No.

What Does Write-Down Mean?
Reducing the book value of an asset because it is overvalued compared to the market value

This is what write-down means, o.k?

The problem is securitisation, just like they're saying in the documentaries. Once a mortgage on a house has been securitised it stops behaving like a mortgage and becomes more like a house. It's traded at a price on a market, the person buying it may use a discounted cash flow model to work out fair value, but the person selling it is required under current accounting rules to mark its price on thier balance sheet at the last price a similar asset sold for.

A good analogy is estate agent valuation, if you had your place valued at 200k, giving you 100k in equity, in 2007 and you got the same bloke in again today and he valued it at 150K you would be forced to writedown your housing equity by 50k on your personal balance sheet- you could pretend it was still worth 200k- by sticking it on level 3- but you couldn't actually sell it for that price. The banks are going through exactly the same thing only with bundles of mortgages not individual houses.