The Demise of "Mark to Model" and Related

[TJ_98370]

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Could it be that investors have caught on to the fictional valuations and risk ratings?
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Global issuance of the complex debt securities at the heart of the credit bubble has collapsed in the wake of thousands of ratings downgrades this year, cutting huge revenues from the biggest investment banks.
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The volume of collateralised debt obligations, which pool together bonds, loans and other debt, sold in the first half of this year is equivalent to just 10 per cent of the volume in the first half of 2007, according to the latest data from Dealogic and Total Securitization......

........Investors have deserted all kinds of complex products since last summer, but CDOs have suffered disproportionately as waves of downgrades have hit these deals. Analysts at Morgan Stanley said on Thursday that more than 10,000 ratings downgrades had been handed out by the ratings agencies so far this year.
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With Fannie and Freddie in trouble and funding from the secondary mortgage market drying up, it is going to get significantly more difficult to get a mortgage loan, methinks. Fewer buyers qualifying for loans means downward pressure on real estate prices, right?
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[TJ_98370]

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Merrill Lynch is liquidating their CDO's because investors have caught on to their fictionalized mark to model values!
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"Until the true value and the mark to model converge it's going to be difficult for investors to have confidence in anything Wall Street management says,'' – Julian Mann, a mortgage and asset-backed bond manager at First Pacific Advisors LLC in Los Angeles.
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July 29 (Bloomberg) -- Merrill Lynch & Co.'s decision to liquidate $30.6 billion of collateralized debt obligations at a fifth of their face value ``suggests the endgame'' for CDO risk at financial companies, Bank of America Corp. analysts said.
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The sale reduces uncertainty for brokers, banks and bond insurers, analysts led by Jeffrey Rosenberg in New York said......
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...``Selling off the portfolio at levels below marks creates initial losses but relieves future uncertainty,'' Rosenberg wrote.....
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.....Merrill agreed to sell $30.6 billion of CDOs -- the mortgage-related securities that have caused most of the firm's losses -- for $6.7 billion and provide financing for about 75 percent of the purchase price. The financing for the sale to Dallas-based private-equity firm Lone Star Funds is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion....
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.......Merrill providing financing for the deal ``suggests that the true value of the assets is quite a bit less,'' said Julian Mann, a mortgage and asset-backed bond manager at First Pacific Advisors LLC in Los Angeles, which manages $11 billion.
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``Until the true value and the mark to model converge it's going to be difficult for investors to have confidence in anything Wall Street management says,'' he said....
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[sniglet]

[TJ_98370]

[SeattleMoose]

"My perception of the problem is that Mr. over-clever investment banker "gamed" the system so severely that the actual amount of risk was obscured and the ratings agencies were clueless. Either that or the ratings agencies just went along with the game."

Everyone "in the game" was doing very well from 2003-2006. Where is the incentive to blow the whistle when you are living high off the hog? During this time the whole financial industry (branch lenders and field appraisers to major Wallstreet banks/firms) were recording "record profits". In addition, there were huge bonuses for the "captains of industry" who were knowingly or not, running their "ships" onto the rocks. I guess the "fog of greed" was a bit thick to see what was just ahead?

The "feeding frenzy" was all based on smoke and mirrors. The whole financial model is rotten from top to bottom. How does one apply a fix to any part of a completely rotten structure? Seems the only true fix is dynamite.

And once we have all our problems "fixed", won't it then be just a matter of time until the next crop of young, eager, and greedy Harvard MBAs start figuring out how to retire by 30....again?

Until WE as a species cure OURSELVES of greed, lying, and corruption, then we will be doomed to repeat.

[rose-colored-coolaid]

[Robroy]

[Robroy]

[rose-colored-coolaid]

[Robroy]

[perfectfire]

[Robroy]