To ask bank shareholders to take a greater hit so that bottom feeders
can profit from a suspension of classic good accounting for held-to-maturity assets is nonsense.
Jan. 21, 2009 (World News Trust) -- Paul Krugman, in a New York Times column Monday, entitled "Wall Street Voodoo," states his
conclusion that our banks are walking dead and that the shareholder
investments in those banks should be wiped out so as to reflect the
current values on offer for "toxic assets" (derivatives that are
tranches of aggregated mortgages).
It is hard to disagree with Krugman because he always gets his facts
correct, but in this case his conclusion is not one I share.
There is
indeed no current working market for those "toxic assets," and while
certain bottom feeders are offering silly prices for the investments,
those prices are "the market" only if the concept of "held to maturity"
is now dead along with a death of the need of pricing cash flows to a
rate of return that is "market.
Those "toxic" assets are not toxic --
and have a value much higher than on offer -- until such time that the
cash flows from those assets actually are greatly reduced. So the
missing fact in Paul's comment is that cash flows have held up
very well.
Assuming there will indeed be greatly increased defaults
on mortgages and corresponding decreases in those cash flows, the
marking-to-market of those held-to-maturity assets at a "market" rate
produces values of those toxic assets only a few percent less than
face.
To ask shareholders to take a greater hit so that bottom feeders
can profit from a suspension of classic good accounting for held-to-maturity assets is nonsense.
***
William Chirolas brings 40 years of real-world business experience in
local, state, national, and international tax, pensions, and finance to
the world of blogging. A graduate of MIT, he calls the Boston area
home, except when visiting kids and grandkids. Send an email.