Last night I put up a post that I labeled as a humor attempt where I rhetorically asked is there anyway possible the gang on the banking committee is going make it any better?
The hold to maturity price phrase that has popped up in the last few days that seems to be being used for the benefit of our elected officials seems odd to me. It strikes me as something a parent might say at career day in explaining what a bond trader does.
Am I overreacting?
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6 comments:
This assumes the security has some value at maturity. It's not clear that's true but, you have to wait a long time to find out.
This seems like too big a gift to the banks and a real temptation to game the system and dump trash that will be hidden for years.
If you are reacting against the subterfuge that this paper has a par value, you are not over-reacting.
A bond trader would explain that he almost never holds a bond to maturity, that mortgages have a much shortened duration and that he always pays the disounted value in order to get the market interest rate.
Bernanke wants to avoid paying a 'fire sale price'. He will hold them as the homeowners are foreclosed, go bankrupt, get a 'cram down'. And the $700b will drive interest rates through the roof.
Ben could not face a high school economics class; luckily, he only had to testify to Congress.
I have not seen anyone discussing the taxpayers' buying this 'toxic debt' from foreign institutions.
Proshares ultrashort ETFs like SDS and DXD and slipped 5% or more from their index values this morning. It looks like the derivatives market is starting to feel the strain.
Jody, I don't follow you. low trade on SDS is 68.55 from a close yest at 69.43. that's about 3%.
at it's high SPX was up 6 or a little more than half of 1%. so a diversion yes but not 5% and not that odd given the situation and what the fund does during normal times.
what am i missing?
Never mind - Proshares ETFs paid dividends this morning. Sorry for the false alarm!
Rog, I think you may be overreacting. While at the rating agency we worked a great deal on evaluating risk "assuming held to maturity". Effectively, we looked at default risk, but not price risk. (This was in respect of certain very sophisticated structures that were expected to be "thrown in the drawer" and never traded, and therefore price risk (and price discovery) was largely unmodeled and considered irrelevant.)
In theory, there is a point. If the banks do not have to MTM (because it is accepted that these are NEVER going to trade) then the key question is survival. There are models (an issue in themselves) that can give fairly good estimates of default risk. If you determine the price as a function of default risk, you have a better chance of clearing the markets (with the tacit understanding that the "buyer" (you and I as taxpayers) are taking these assets with the express understanding that they will not be traded, and any discount to par is intended to be solely in respect of perceived default risk.
Presumably, the MTM feeds into the default risk (see, Lehman, Bear etc). But if you can, by a stroke of the pen, decouple those two, suddenly the enterprise (holding this paper) is a bit less vulnerable.
But it begs the ultimate question: if the price to maturity is going to be used in the bailout... why bother with the bailout? If by an agreed/enforced accounting convention, the market risk could be decoupled from the asset value, why is the government and taxpayer necessary? (uh oh... I'm veering toward Mish's view that Treasury is bailing out the buddies...)
R in NY
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