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It's easier to talk about housing. It's one subject that has a lot of press right now.
I'm starting to hear more and more about medical bills. Only time will tell if that trend continues.
"You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer
by bonddad on Tue Dec 04, 2007 at 04:29:35 AM PDT
[ Parent ]
my little brother had go to collection. He went to the ED with stomach pains a few years ago and left with over $1000 debt. Minimum wage job, and no social worker asked him if he needed financial assistance. Now their out to further damage his (admittedly already terrible) credit scores. Ridiculous.
SUPPORT CrashingtheStates!
by RNinNC on Tue Dec 04, 2007 at 04:36:26 AM PDT
Financial Times yet? I was reading it early this morning about the sub-prime mess and how it has spread all over the world. Citibank is expected to write down billions more soon. There had been estimates by the US "experts" that it would probably reach $150 billion, but now in the FT they're saying it looks more like $500 billion. Yikes! I think if that is the case some of our financial institutions might go belly up.
If the people lead, the leaders will follow.
by Mz Kleen on Tue Dec 04, 2007 at 04:37:30 AM PDT
I'm sorry, I made it look like Citibank was losing $500 billion. I meant to say that overall, the mess's cost will reach $500 billion.
by Mz Kleen on Tue Dec 04, 2007 at 04:38:55 AM PDT
would it take the US to even PRINT enough money to pay off this stuff? My math may be off, but in 2007 it looks like Treasury please check my mathprinted some 8.6 billion $$ (10 to the ninth?). And, oddly enough, the only note currency increasing in production is the $100.
Americans, while occasionally willing to be serfs, have always been obstinate about being peasantry. F. Scott Fitzgerald, the Great Gatsby
by riverlover on Tue Dec 04, 2007 at 12:19:11 PM PDT
on paper. The assets behind them are still producing cash flow, the problem is there is no market for them and thus they have "no-value". It is highly unlikely that mortgage defaults are going to be high enough to actually make these securities worthless in the long run, and thus these companies will not see a reduction in cash flow, just a loss of asset value.
by SilverOz on Tue Dec 04, 2007 at 05:18:05 AM PDT
The only value for securitized mortgage assets is the cash flow they are expected to generate. The two track in tandem with each other. An "on-paper" writedown indicates that the underlying asset will not generate the cash flow that was expected (otherwise, there would not be a writedown), or that the confidence that it will generate the expected cash flow has fallen (which amounts to basically the same thing).
The reason why their market value is zero is because no one knows how to evaluate their future cash flow due to the high and unpredictable rates of default. As soon as someone figures out a reliable way to price these assets, the market value will fall to track with their expected cash flow level. If no one ever figures out such a method, then their prices will be very low or zero since it's unclear whether any positive cash flow will resul from them.
For mortgage securities, stocks, and most other kinds of equity, cash flow = value. There is no other metric for evaluation.
(-5.50,-6.67): Left Libertarian
by Sparhawk on Tue Dec 04, 2007 at 10:22:58 AM PDT
As far as I know virtually all of the mortgage backed securities out there are currently producing cash flow. And value is determined by what someone else will pay for something, not the cash flow it produces. The problem that has lead to the writedowns is that there is no market for these securities as they are poison to a company's stock/image, thus while they are producing cash flow, they have no value.
by SilverOz on Tue Dec 04, 2007 at 10:29:39 AM PDT
Ah, but fundamental value of a security is determined more or less entirely by the cash flow it can generate.
Lets say a given security is expected to pay $1000/year in dividends (or interest from mortgages, or what have you). What's an appropriate market price for that security? It's not $2000, right, otherwise you could make 50% for nothing. One probably would not pay $20000 for it, since you can make 5% in a money market at zero risk. So, it's priced depending on its risk. If it's a moderately conservative investment, you might think 7% is a decent return, so ~$14,200 might be a good market price for an asset that pays $1000/year.
But what happens if that asset that you bought for $14,200 suddenly starts with massive defaults that you didn't expect, now bringing the yield down to $500/year? Oops, now $500/$14200 = 3.5%, a horrible investment. So, the market price of your security there is going to fall until the yield for an investor is appropriate.
Assuming you were reasonably sure that the payout would be $500 from now on (even after the initial meltdown), the market price will again fall to levels that should suggest a 7% yield, so $500/7% = $7,150 (since again, you can make 5% no risk, and anything higher than 7% is too high a return so the seller won't want to sell for that price). The original owner of that security has lost either (1) 50% of its market value if they were to sell it or (2) 50% of their cash flow if they weren't. Either way, bad news.
Now, consider a situation in which no one knows what the cash flow from a given investment might be. It could range from $0 up to the theoretical max payout ($1000 in our example), but it has just lost a lot of cash flow due to defaults, it might lose more, and even worse, very few people even understand the mechanisms through which it even pays its dividend at all! How do you value such an "investment"?
If you're smart, you don't touch it at all. If no one wants to touch it, its market value is zero even though it's still generating cash flow because no one can figure out the proper price to buy it at since next month the cash flow could be a lot, zero, or somewhere in between, and no one knows what price will generate an appropriate 7% or whatever yield for the money paid.
Like I said, if this situation sorts itself out and someone can reliably (and convincingly) figure out the cash flow for these securities, they'll have a market value again defined by the expected payout versus risk. But now, since no one knows the payout OR the risk, they can't be valued, so no one is buying them.
by Sparhawk on Tue Dec 04, 2007 at 10:51:33 AM PDT
Additionally, lots of banks and mortgage originators are actively doing what they can to see that the proper valuation of these securities is not done or done correctly, because banks like Citi still have lots of this toxic crap on their balance sheet, still written on their balance sheets as having a market value of (in our example) $14,200 even though the real value is much lower.
If anyone actually did the work to valuate these securities (by figuring out the actual and/or expected yield as I described above), the value would drop like a stone and banks would have to write that shit on their balance sheet, resulting in mega losses (Citi controls more subprime securities than its entire market capitalization at this point. If the subprime securities are worthless enough, Citi could go bankrupt if price discovery were forced!).
So, they try to push the price discovery out as far as they can so they can keep writing the fictional number on their balance sheet and stay solvent, hoping that the market will get better, that the Fed will help them, or some other event protects them.
by Sparhawk on Tue Dec 04, 2007 at 11:05:43 AM PDT
...if you're still here, do I basically have the above right?
by Sparhawk on Tue Dec 04, 2007 at 11:06:36 AM PDT
Securities are valued based mostly on income, but book value & liquidation value enter into it to. Right now, most stocks are selling at 4-5 times book value, which is quite high. This implies they're unusually profitable. Which means that either
a) Competitors could come along
or
b) Earnings could fall to a lower ROI.
I tend to think we're in a security bubble as well as a real estate bubble. There's a lot of investment money around, and not that much stuff to own with it. Interest rates have to be kept low to keep it invested, and corporations have to be more ruthless about keeping out competition (at least those who would compete on price)
by Downpuppy on Tue Dec 04, 2007 at 11:30:28 AM PDT
a sense you are both right. Your description is spot on for sure and Silver Oz may be correct in assuming that as of now most of the mortgages are still performing, or at least enough are to generate expected income to the bond holder. But those performance levels are changing and the market knows it. That gives rise to your valuation issues.
by Gary Norton on Tue Dec 04, 2007 at 11:37:49 AM PDT
I appreciate the feedback. It's certainly interesting stuff.
by Sparhawk on Tue Dec 04, 2007 at 11:48:29 AM PDT
wide narrow
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