NY TIMES: What do the market traders know that the rest of the world does not?

NY Times second lead article is how are these “Troubled Assets” going to be valued? 97 cents on the dollar (management), 87 cents (S&P at current default rates), 53 cents under “bleaker” (undefined conditions), 38 cents where the trading markets value them, or 0 cents on the “Garfield Continuum Index.” ?

why the disparity? What do the market traders know that the rest of the world does not? ANSWER: The paper is ALL worthless. The gamble is that the government will somehow add value to the mix. The  markets are saying there is one chance in 3 that the government will be successful.
The Fed and US Treasury bought preferred stock so they wouldn’t be exposed to a fraudulent list of mortgages and notes, asset backed securities and pools. Assets that either don’t exist and never existed or never existed in the way they were described to investors. None of the foreclosures are being brought by people who actually own the note.
Why would anyone value them under the current default rate? The answer is really because NONE of the investors are getting paid regardless of the outcome of the foreclosures. ALL of the foreclosing parties are people who never lost a dime and to add insult to injury they are taking the property too. ALL of them made money hand over fist and the game is still going on. Meanwhile the investors continue to get screwed which is why nobody trusts the credit markets (who would?) and the borrowers are getting screwed out of their homes because they believe the system is working properly when it isn’t.
Note CNN piece on Marcy Kaptur, Toledo congresswoman who says stay even if you have been foreclosed. They don’t have the note. The reasons why nobody who actually has authority over the note is involved is if they step forward, under the Uniform Commercial Code, TILA and other laws they are stepping into the shoes of the originating lenders, poolers and securitizers who committed all these criminal and civil frauds.
February 2, 2009

Big Risks for U.S. in Trying to Value Bad Bank Assets

As the Obama administration prepares its strategy to rescue the nation’s banks by buying or guaranteeing troubled assets on their books, it confronts one central problem: How should they be valued?

Not just billions, but hundreds of billions of taxpayer dollars are at stake.

The Treasury secretary, Timothy F. Geithner, is expected to announce details of the new plan within weeks. Administration and Congressional officials say it will give the government flexibility to buy some bad assets and guarantee others in an effort to have a broad impact but still tailor the aid for different institutions.

But getting this right will not be easy. The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid.

While the government is considering several approaches to helping the banks, including more capital injections, buying or insuring toxic assets is likely to be a centerpiece. Determining the right price for these assets is crucial to success. Placing too low a value would force institutions selling and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending.

But inflated values would bail out the companies, their shareholders and executives at the expense of taxpayers, who would swallow the losses if the government could not recoup what it had paid.

Some critics of the plan warn that the government should not buy the assets, because banks will try to get too high a price and leave taxpayers holding the bag.

“To date, the banks have stuck their heads in the sand,” said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, “and demanded that they be paid the price of good apples for bad apples.”

But many believe that, given the depth of the problem and the fact that it keeps getting worse, the government has little choice.

Finance experts from Wall Street and academia are advising the administration on other options. To sidestep the thorny valuation problem, some have suggested that the bad bank acquire only assets that have already been marked down significantly and guarantee other assets, but officials would have just as difficult a task in determining how much to charge for insuring risky assets.

Economists predict that the cost of the program will most likely exceed the $350 billion remaining in the $700 billion Troubled Assets Relief Program that Congress approved in October.

They say the Obama administration may need upwards of $1 trillion in additional aid for banks — on top of the more than $800 billion the administration is seeking in an economic stimulus measure moving through Congress.

Many in Washington question whether the rescue has achieved its goal of stabilizing the financial markets. A report by the General Accountability Office on Friday concluded that whether the bailout program had been effective might never be known.

“While the package helped avoid a financial collapse, many are frustrated by the results — and rightfully so,” President Obama said in his weekly address on Saturday. “Too often taxpayer dollars have been spent without transparency or accountability. Banks have been extended a hand, but homeowners, students, and small businesses that need loans have been left to fend on their own.”

Mr. Obama and many lawmakers have expressed anger that banks that received the first batch of aid money do not appear to have increased their lending significantly, even as some firms have spent billions on bonuses, corporate jets and other perks. In two weeks the House will hold a hearing to ask chief executives of the eight largest banks about their spending controls.

As early as this week, the Treasury Department may impose new limits on the executive pay of companies receiving financial assistance. The Oversight Panel created by Congress to monitor the program is also expected to publish a report this week looking at whether the government paid too much to the large banks that they have provided with assistance.

A frequent refrain in Washington and on Wall Street is that there are no current market prices for toxic securities. But people who buy and sell these investments say that is a simplistic reading of the problem. They say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?

The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.

The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

Michael G. Thompson, a managing director at the S.& P. group, says his computer models can easily calculate what the bond is worth under different situations. “This is not rocket science, this is straight bond math,” he said. But determining what the future holds is much harder. “We are not masters of the universe who can predict the macroeconomic environment,” he added

Some would-be buyers of these assets fear that a deep recession could drive up default rates and push down home prices much further. They also worry that a cataclysm like the failure of a big bank could send prices tumbling again, just as the collapse of Lehman Brothers did in September. Others see no reason to bid up prices because those who need to sell are desperate.

Big banks and other owners of mortgage investments have argued that the low market prices reflect fire sales. Many have classified such securities as level-three assets, for which accounting rules allow them to determine values using computer models rather than the marketplace. Mr. Thompson estimates that at the end of September financial firms had $600 billion in such hard-to-value assets.

But critics like Mr. Turner say that the banks’ accounting for these assets cannot be trusted because they have an incentive to use optimistic assumptions.

In some instances, the government has guaranteed losses on certain assets for big, systemically important companies like Citigroup and Bank of America.

Policy makers have found such arrangements appealing because they do not require upfront payments and they can be customized for each bank, Douglas J. Elliott, a fellow at the Brookings Institution, wrote in a recent paper.

Still, government guarantees need to be based on sound valuations, Mr. Elliott and others say. If the government underestimates the risks of default, taxpayers could eventually lose tens of billions of dollars. The cost of insuring such assets in the private market is often several times greater than the price the government is charging banks.

Whatever approach the Obama administration takes, investors and policy makers say it should provide more and clearer information about the health of banks and the risks that the government is taking.

Many analysts do not trust what they are told about the quality of the securities and loans held by banks and other financial firms. Most banks provide only a very general description of their holdings, because they consider the information privileged.

But the government, using its power as a big investor, could compel the banks to divulge more specific data, without giving away the names of individual bonds or loans, analysts said. The market could then do its own analysis on what the assets are worth.

“At least it would give the government one objective measure of the value of these assets,” said Anthony Lembke, co-head of investments at MKP Capital Management, a hedge fund firm that is a big investor in mortgages. “In the absence of transparency and clarity, investors are going to assume a value that will be conservative and then add a risk premium.”

7 Responses

  1. Dear Mr. Garfield,

    I recently ran across your work and purchased your Study Guide 600page and DVD I just wanted you to know your work is excellent, while attending college I worked as a Real Estate Agent and attended to my parent’s Investment Firm I worked on a number of cases in Las Vegas, Chicago and Milwaukee it was a stress-filled time nonetheless I am returning on the scene based on the number of cases coming into the courts with a number of violations I think it’s imperative to assure this cases don’t go underway and overlooked. To assure I have your blessings there are a few documents I submit in which you provided in your materials. I hope that it ok I use. Nonethless I have no plans to sale or market your works but I do believe the tools purchased will allow me to help save some families from being homeless as the crusade continues. Thanks for publishing such grand works it is amazaing, you.

  2. This is why our founding fathers wanted to keep the government small. Limited government means limited liability. Let the bastards sink. This is also why the corporations should not be allowed to buy eachother out. “Trust Busting” it used to be called, and that’s what we need to do again.

  3. Have read your posts and believe you to be most knowledgeable person out there. Need an expert in court of law. Can you contact me? My case is a “dandy”.


  4. Philip: The fed already gave away the store to middlemen who didn’t lose a dime on those mortgages. They lost money trading securities. The real people who got stiffed were the invetors who put up the money and borrowers who put up their homes believing a false appraisal that wouldn’t stand the test of time.

  5. hey the fed should loan out the money and then increase “adjust” the interest through the roof

  6. If the government acquires the note, becomes the “sevicer/collecter” , who keeps THEM from garnishing the indentured’s wages? Do you see where this is going?

  7. Can a CITIZEN sue the Government to stop them from buying these toxic assets?

    or from paying outrageous prices for crap?

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