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April 03, 2009



Here's the counterargument. Suppose that Ed's Fish has a truckload of fish purchased for $10,000 which Ed expects to sell for $20,000 in Indiana. On the road, his truck runs out of gas. How much is the fish worth?

A truckload of fish out in the middle of nowhere and going nowhere is worth zero. But if Ed gets some gas, suddenly it's worth $20,000, less the cost of the gas. The role of the market is to estimate how likely it is that Ed will get gas before the fish goes bad.

But realistically, it's not possible for the market to make that judgment. A good Samaritan could stop. Ed might offer to pay a premium for gas. Ed might open a fishstand by the highway.

A similar situation obtains with much of the dubious paper that's out there. 90% of mortgages are paying. There's no reason that simple CMOs should be written down by more than 10%. CDOs get more complicated. Those that were based on interest only are probably worthless. Those that were written on principal only are probably worth near face value. If we could get the secondary mortgage market functioning again, the value would rise... even though nothing happened to change the fish... er, mortgages.

The market is not magical. Marking to market makes sense in normal times, but serves only the speculators in times of market failure.



I don't know about that, because I don't know the actual rules for marking to market. Presumably, the market was in "normal" times in 2007+, when firms started recalculating the value of their mortgage-backed securities.

If these firms had their way, I suspect that they'd use their discretion to use values from bubble days as a basis for valuing their assets.

Also, I'm not sure that the market has actually failed. It seems to me that it's adjusting for the fact that so many firms' assets were falsely (and overly) valued a couple years back.


If the market were functioning, Deb, assets would clear though at a low price. By definition, it is not functioning because prospective sellers believe that assets are worth more than buyers are willing to pay. Mark-to-market would essentially force the seller to accept the buyer's offer.

FAS 157 is at

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