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The claim that these "Mortgage Backed Securities" (aka Mortgage Soup Cans) can't be properly valued is crap.

By Andrew Pollack on 10/01/2008 at 05:27 PM EDT

How many times, when oil goes up over $150 a barrel, when home prices skyrocket to ridiculous levels, or for that matter when Disney charges you five bucks for a bottle of water, have you heard that "The Market Sets The Price"? Oil was worth $150 a barrel because that's what the marketplace said it was worth. A few weeks later it was only worth $90 a barrel. What changed? The opinion of the market on its value is what changed.

The latest gem of a deregulatory ruling by the SEC (Securities and Exchange Commission -- the market cops) answers the claim by banks that these securities "cannot be accurately valued".

Banks are required to keep a number on their books which represents the CURRENT value of all assets. Specifically, they are not allowed to list the price they paid for them. They must list the value if it were to be sold at the current market price.

The banks (and others) are claiming they can't do this right now, because these securities cannot be valued accurately. They tried to get legislation passed excusing them from the requirement. They failed to get that legislation through. Now the SEC has put out a letter which essentially says they can write their own estimate of the value of these assets. They've been told that for the time being, nobody is going to be looking too closely at what they've put down. Essentially, its "pick a number" day.

This is utter bullshit. In the same way that oil can be worth $150 a barrel then $90 and then $190 in the same month, the value of any commodity is what the market will pay for it. Period. That is its value. There is no inherent, intrinsic value in oil. There is only what it costs to buy it.

The whole point of these conniving, manipulative, over-dressed wankers turning mortgages into a commodity market instead of individual assets was to allow the market to value the bad ones higher than they otherwise would be worth. That was the game, in a nutshell. Just as with oil, the value of these "mortgaged backed securities" is whatever the market will pay for them. If, for the time being, that is next to zero -- then that's the number that should be on the books.

If you want to understand the problem better, stop calling these "mortgaged backed securities". Instead, call it "barrels of mortgage soup". That's closer to the truth. If you take ten thousand mortgages and mix them up in a giant vat, simmer on medium heat for a while, then distribute the blended mix in barrels, that's what you've got for a commodity. They threw too many rotten ingredients into the soup, and now the soup tastes crappy. Now they can't sell barrels of it for $190 any more. Now they can barely get anything for them at all.

Just like barrels of oil, barrels of Mortgage Soup do not have an "unknowable intrinsic value". They have a value, and it is whatever the market says it is. If banks and corporate investment brokers don't LIKE that value, they should not have blended them together as a commodity in the first place.

If they get valued low enough, someone will buy them and make money. That's how the market works.

Right now, the citizens of the United States -- through the 700 billion dollar bailout -- are the ones who will buy the bad soup and try to filter the crappy stuff, to make back what they can on the good. Any attempt to artificially keep the value of that soup high by "guessing" at a mythical "intrinsic value" is anti-capitalist and probably criminal.

So welcome to the new game, friends. Watch as the SEC allows these investment corporations to hedge the value of their spoiled cans of mortgage soup just a bit higher, and maybe just a bit more, and all just before the government comes along to take them off their hands and wash away any responsibility. The higher they get away with claiming the "inherent, intrinsic, real value" of these bad cans of mortgage soup are, the more it costs us in the bailout and the less painful to the bottom line at the banks.

Even as we bail out the last bullshit caused problem, they're starting on the next one.


There are  - loading -  comments....

re: The claim that these "Mortgage Backed Securities" (aka Mortgage Soup Cans) can't be properly valued is crap.By Bob Balaban on 10/01/2008 at 06:37 PM EDT
Interesting analogy, I like it. The mapping to oil isn't quite accurate,
because the price of oil today is what you pay to get it in 3 or 6 or 9 months,
it's a "futures" market. Futures markets are way more wide open to speculation
than "regular" markets, where you take delivery of what you buy right away.

You can pay $150/barrel now for oil to be delivered in 90 days (I'm making up
the numbers). But you don't really want oil in 90 days, what are you going to
do with it when they drop it off in your driveway?

No, you're hoping the price will go up, and you can sell "your" oil in 30 days
as a 60-day future for more than you paid for it. You're specualating that the
price will go up, not down. You have no intention of actually taking delivery.

In some ways, mortgage-backed securities are similar, in other ways not. It's
still speculation - you're not going to live in any of the houses you "own",
you're hoping that the value of the property goes up, and you can sell at a
profit. You're also betting that the person who took out the mortgage will
continue paying interest and service fees on it, you get some of that money too.

As long as real estate prices kept escalating (the bubble effect happened when
they kept going up just because people expected them to keep going up, not
because the properties were really "worth" that much), everything was fine.
People could "flip" a property in a few months or a year, and not worry too
much that they were paying too much interest on a mortgage that was too big for
them -- they knew they were going to bail on it anyway. Others were talked into
bigger loans than they could afford because they had house-envy. Still others
committed fraud, claiming they could afford the payments when they knew they
couldn't.

When the prices stopped going up (people finally, way late, said "I'm not
paying that for this shack"), the whole thing collapsed. The "value" of the
properties collapsed, people couldn't sell, and had to face really paying the
inflated mortgages, many defaulted. The securities became worthless.

The same is unlikely to happen with oil (or at least, it's unlikely to be as
precipitous or as bad), because we still REALLY NEED oil. I need it to heat my
house and to take hot showers. Electric companies need it to make electricity.
Navies and merchant shipping need it to make boats go places, airlines need it
for the same reason.

But yeah, supply and demand still kinda work, even with all the fancy shmancy
manipulations....


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