Tuesday, February 17, 2009

Atrios says it best... (+ commentary)

Yesterday Atrios wrote:
One point that seems to be largely lost in the discussions about what to do about the banking system is that every week the FDIC is "nationalizing" banks, or more specifically putting them into receivership. This "socialism" is happening regularly. Sometimes the FDIC swoops in and hands off the assets to another bank immediately, sometimes the bank they EATED sits in their belly for awhile. So the question is why, other than the fact that they're very politically connected, the "big" banks like Citi and Bank of AMERICA, are exempt from this standard process.
[emphasis added]
Today he writes:
Can't Make Super Shitpile Work
... There was a time when maybe it was reasonable to think that there were at least some liquidity issues with big shitpile, that the assets were actually worth more than the "market" would recognize. But now it's pretty obvious that the financial institutions aren't willing to sell them at market prices because doing so would force them to acknowledge that they're insolvent.
The implied logic is really quite beautiful:
The U.S. puts insolvent banks into receivership.
If the Big Banks honestly valued their portfolios, they would be insolvent.
Therefore, if the Big Banks honestly valued their portfolios, the U.S. would put them in receivership.
One of the many repeated themes surrounding what Atrios calls "Big Shitpile" is that it just isn't possible to honestly & accurately value all the mortgage-backed securities in the Big Banks' portfolios.

The argument is that it would take years to dig deeply into every one of these securities to truly assess their value.

The very idea of these securities was to distribute risk - the underlying argument being that packaging a bunch of stuff together had the effect of "averaging out" the risks of individual components. It's a good argument, as far as it goes.
BUT - it also has implications for valuing these securities NOW!

Here's my very simple-minded suggestion:
In Apr 2007 the median home price peaked at about $232,000 (2008 dollars).
My back-of-the-envelope calculations suggests a true "bottom" median price of about $158,000 (2008 dollars).
I'm betting the Big Banks are carrying valuations that reflect the peak.
Their "true value" ought to be about 158/232 x that value... about 68 cents on the dollar.
This estimate is rather higher than most I've seen published.
But, you get the idea: If bundling mortgages was appropriate to dilute risk, the same idea ought be appropriate to assess current "true" value.
Maybe my use of median home prices was TOO simple, but it's a start.

What is NOT appropriate is insisting that every individual mortgage be analyzed in detail. That pretty much ignores the foundation of the securities in question as bundles.

Have fun!

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