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mark to market
Posted on 9/30/08 at 1:06 pm
Posted on 9/30/08 at 1:06 pm
what in the hell does this actually mean......?
5
Posted on 9/30/08 at 1:09 pm to morgcl
Trying to adjust the value of long-term assets to current market conditions on corporate balance sheets. There's a thread about this on the Political Talk board.
Posted on 9/30/08 at 1:10 pm to morgcl
it means that you have to take profits and losses on financial assets as they occur as opposed to being able to recognize them only when you sell the asset.
e.g.:
You bought XYZ stock 6 months ago at $100. It's time to file your quarterly financial report. XYZ - which you still own, you haven't sold it yet - is now trading at $90. Your quarterly report has to report that $10 loss as an actual loss on your income statement.
I'll try to explain differently if that is confusing.
e.g.:
You bought XYZ stock 6 months ago at $100. It's time to file your quarterly financial report. XYZ - which you still own, you haven't sold it yet - is now trading at $90. Your quarterly report has to report that $10 loss as an actual loss on your income statement.
I'll try to explain differently if that is confusing.
Posted on 9/30/08 at 1:14 pm to morgcl
Very risky and can and does mean different things in different industries.
For example, in energy, Company X may put togethor a power plant deal with Plant Y to use 50,000 MMBtu of natural gas per day with the plant to be completed in 2010 and valued at $25MM.Once it clears Company X's internal auditing procedures,say in mid Oct, Company X will go ahead now and take a certain portion of the money (40-70%) to income right now. Nonetheless,nothing will flow for another 2+ years.
For example, in energy, Company X may put togethor a power plant deal with Plant Y to use 50,000 MMBtu of natural gas per day with the plant to be completed in 2010 and valued at $25MM.Once it clears Company X's internal auditing procedures,say in mid Oct, Company X will go ahead now and take a certain portion of the money (40-70%) to income right now. Nonetheless,nothing will flow for another 2+ years.
Posted on 9/30/08 at 1:21 pm to Colonel Hapablap
I'm almost positive that it doesn't flow through to the income statement (at least as far as MBS are concerned). It is just a writedown on the value of the asset, so the loss is unrealized, and should affect the balance sheet, not the income statement.
Posted on 9/30/08 at 1:24 pm to kfizzle85
I think you're right.
Posted on 9/30/08 at 1:35 pm to Doc Fenton
Posted on 9/30/08 at 1:48 pm to Poodlebrain
It can if the corporation wants it to, I think. Aren't corporations allowed to make write-downs on their income statements?
But that's not the same thing as banking regulatory requirements to mark down the value of assets on the balance sheet.
Also, there is the indirect effect of worsening credit ratings increasing the cost of borrowing. That will certainly have an effect on reported profit.
But that's not the same thing as banking regulatory requirements to mark down the value of assets on the balance sheet.
Also, there is the indirect effect of worsening credit ratings increasing the cost of borrowing. That will certainly have an effect on reported profit.
Posted on 9/30/08 at 1:49 pm to Poodlebrain
thanks
Posted on 9/30/08 at 1:57 pm to Poodlebrain
quote:I understand the concept, but not the mechanics. Is it true that under the mark to market rule, that a derivitave, a bundle of perhaps a thousand mortgages, will have to be marked down if one mortgage, is late, or defaults? That would seem to be an inaccurate means of accounting for the value of the asset. It would also be inaccurate to NOT count the impact of the one bad mortgage. I suppose the question is one of rating standards.
Yes it does impact the income statement.
This post was edited on 9/30/08 at 2:22 pm
Posted on 9/30/08 at 1:58 pm to Poodlebrain
Poodlebrain, does it go under Comprehensive Income?
Posted on 9/30/08 at 2:01 pm to Herb
quote:
I understand the concept, but not the mechanics. Is it true that under the mark to market rule, that a derivitave, a bundle of perhaps a thousand mortgages, will have to be marked down if one mortgage, is late, or defaults?
If investors in the market for MBS think that the rate of defaults will be higher than they previously expected, then the value of the MBS will drop.
The problem is that the market for MBS is not a publicly traded liquid market. A lot of the buyers of these instruments are large institutional investors like pension funds, insurance companies, and the like.
Suppose that these big players suddenly decide to hold off on trading MBS for a year or two due to all the uncertainty surrounding their value. Now, I ask you, what is their actual objective value when nobody is trading them? Nobody knows.
Posted on 9/30/08 at 2:12 pm to Doc Fenton
quote:
Suppose that these big players suddenly decide to hold off on trading MBS for a year or two due to all the uncertainty surrounding their value. Now, I ask you, what is their actual objective value when nobody is trading them? Nobody knows.
again, the uncertainty is not about the market, it's about what is in the the MBS or CDO. Those things are completely opaque. Literally the only public knowledge that is available on them is their credit rating. If that opacity was removed, SOMEONE would come up with a non-zero price.
Posted on 9/30/08 at 2:16 pm to Colonel Hapablap
yes the lack of adequate information for parties is a big factor in all of this
but transparency is a dream that will never happen
but transparency is a dream that will never happen
Posted on 9/30/08 at 2:21 pm to Colonel Hapablap
quote:Not completely. They have a zip code, and average FICO score, etc. Cramer was fussing about that and about Cox not using the available information. I didn't get the context, but there is information available.
Those things are completely opaque.
I still don't understand why they can't be disassempled and rebundled. Simply remove the non performing mortgages.
Posted on 9/30/08 at 2:22 pm to Herb
quote:
I understand the concept, but not the mechanics. Is it true that under the mark to market rule, that a derivitave, a bundle of perhaps a thousand mortgages, will have to be marked down if one mortgage, is late, or defaults?
No that is not the case
quote:
That would seem to be an inaccurate means of accounting for the value of the asset. It would also be inaccurate to NOT count the impact of the one bad mortgage. I suppose the question is one of rating standards.
Primary evidence if observable market prices if available. If not you get into models and other valuation techniques with required disclosure as to the techniques and assumptions used.
The standard was put in place for exact circumstances where you see massive depreciation in assets (such as 22 cents on the dollar sales a few weeks back)
Posted on 9/30/08 at 2:23 pm to Herb
that doesn't really fix anything. If there's a non-performing mortgage, there's a loss. If there's a loss, someone has to eat it.
Posted on 9/30/08 at 2:25 pm to Herb
Ok. They just announced that the rule was being changed. Anouncment forthcoming. Apparently corporations will no longer be forced to carry these at zero value. 
Posted on 9/30/08 at 2:27 pm to igoringa
quote:Thanks.
quote:
--------------------------------------------------------------------------------
I understand the concept, but not the mechanics. Is it true that under the mark to market rule, that a derivitave, a bundle of perhaps a thousand mortgages, will have to be marked down if one mortgage, is late, or defaults?
--------------------------------------------------------------------------------
No that is not the case
quote:
--------------------------------------------------------------------------------
That would seem to be an inaccurate means of accounting for the value of the asset. It would also be inaccurate to NOT count the impact of the one bad mortgage. I suppose the question is one of rating standards.
--------------------------------------------------------------------------------
Primary evidence if observable market prices if available. If not you get into models and other valuation techniques with required disclosure as to the techniques and assumptions used.
The standard was put in place for exact circumstances where you see massive depreciation in assets (such as 22 cents on the dollar sales a few weeks back)
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