Bailout 4: Mark-to-model vs. mark-to-market

[melpod77]

This stuff is super interesting! Only time i've ever stayed up late on a school night watching videos on the economy. Thank you Sal for making the world a smarter place!

[flyingbeagles]

Wow, this is actually interesting HAHA :P

[supriya55]

best rant ever! enjoyed it :) but u r right, this is instruction, not opinion.

[Mraaa4u]

Dude YOU ARE THE FREAKING BEST!!!!!!!!!!!!!!!! I cannot help but understand!! Can you please be my teacher XD and oh BTW I'm a science student but, damn I understood this perfectly ;)

[Toshirozawa]

I think what you're doing is wonderful and I've really learned a lot from your lectures, however, I think you should leave political ideologies and references out of the "classroom". It only deters from the content when you go off into pointing at the political spectrum. Just my opinion though.

[parklinkin52]

@Toshirozawa  He does leave it out of the classroom... And anyway he has every right not to, how much did you pay for these videos again? that's right, nothing. He can do whatever the hell he wants.

[zwergnasezwergnase]

frankly, you should post a donation account. you are doing groundwork to the public of the sort which makes people like me, here in germany , reasess the worth of their english skills :)

thank you sir

[olipop84]

This guy is great!

[bertly71]

I would say that their books are cooked to the point of well done.

[imanerd36]

One word: Enron

[personova]

Goodwill - An intangible asset which provides a competitive advantage. This is very important to some private equity firms, to value stock offerings, and reduce tax liability.

[wrongloop]

Damn interesting and easy to understand.

I've never taken economics classes but I am teaching myself with the internet and specially your videos.

awesome.

[bharati1986]

brilliant!

[moobyjoe]

Housing prices can go down????? :)

[JLZesbaugh]

Mark to Market seems of only value if a company needs to liquidate.

It seems like a better model would just put X in the value of the residential CDOS, which essentially you have suggested. Or put a range on the asset.

Or simply ust have three columns: Assets-Speculation-Liabilities­.

That alone could keep most companies out of the red.

[lacon007]

"Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!"

No ... Mark-to-myth allows banks to overstate the true value of their assets

[GreenBlazerGolf]

Exactly! "Mark-to-myth" -- I'll have to borrow that phrase from you lacon007.

I laugh at so called expert financial advisers who claim to believe in a free market, but then say we shouldn't let the market value these assets.

[ficote72]

If there is no market present don't you think is for some reason???

Looks like bankers still don't want to realize the housing boom ended. Or maybe they are waiting for an inflation boom, a lost in any case, and a bait for stupid investors.

This m2m rule is an assurance of the insolvency to smart investors.

[bassthunder]

if you understand that a home is an "illiquid" investment, you should understand that a bucket full of 10,000 mortgages can be far less liquid. At one time there was a more active market in buckets full of mortgages, but that market has come to a screeching halt. Not many of the mortgages are in default and going into forclosure, but the crisis is due to the associated fear. Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!

[white1h]

Thank you +++!

[pwj3351]

Mark-to-market is when your neighbor sells his house at a bargain price of say $200,000. Now your bank comes to you and says your house is approx the same value as your neighbor's, but you currently owe us $225,000. Next, the bank says they immediately need you to pay $50,000 because your property won't support the current mortgage. This happens even though you plan to keep your home long term and payoff the current mortgage. --That's what banks are experiencing today with mark-to-market.

[pwj3351]

You are confusing intelligence with education. Having a PhD does not make someone the smartest person in the room.

[mkellykelly]

I think your videos are excellent, but can you explain why it is so important to use to Mark to Market when these assets are still creating cash flow and the default rates are not as high as what the short term market says they are. I really believe using this accounting rule which has not been in existence very long and magnifying the problem. I would think if banks did not have to mark these assets down so low they would have the capital to lend out. I would appreciate your feedback.

[U2BHistory]

I'm looking forward to the Solution in the Bailout. So far you seem to have the best grasp of what's going on from what I've listened to. I'm hoping it's coming.

U2BHistory

Also wouldn't mind hearing your viewpoints on my video for a solution.

[mrjaywilliams]

Sorry to be picky..I think there is an error on the bottom left, it should be 500M instead of 500B.

Very good video(s) otherwise :)

[SouthronSteel]

I'm late on this, I know, but....

On the video it isn't 500B. It is (point).500B, or half of a billion, which is, of course, equal to 500M.

At least I'm pretty sure that's what he did. :-)

[swag909]

it seems to me that mark to market will remove risk at the cost of incintive. sounds like bad news for a economy heading into a recession. not only that but i think it would pin down prices and drive interest rates up as banks try to regain lost capitol from undervalued assets.

[Brettwbeyer14]

but what could a bank get out of using mark to market. i mean in many instances mark to market is lower than what they actually have and they very often have to find extra funds from other sources as a result of having low share prices. and it's not that i don't believe banks rip people off. but in this case i think mark to market can cause a lot of problems for everybody including banks unfairly. and brokers can rip people off because of margins.

[khanacademy]

Banks don't benefit, investors and regulators do. Part of a bank's risk policies should be to avoid assets and leverage where the volatility in the market price of the asset can make the bank insolvent. I agree that market prices aren't perfect, but if you don't use them, you're essentially making up numbers to suit your own ends.

[Brettwbeyer14]

hmm..then i must be a bit confused by what you're video was trying to get acrossed. are you just showing that banks don't really ever have clue to exactly what they have. because you say that banks are at risk with mark to market and they usually lower their equity balance to fit mark to market in order to make themselves look. am i right? i guess im missing the point of the video. are you pointing out that banks are fraudulant or a victim of cercumstance?

[frother]

@khanacademy Do you think the problem could be solved by making those Ph.D.s independent from the asset being valuated? The arguments you gave against mark-to-model seem extremely strong, and the communist way of doing things seems more rational. If they're not on the bank's payroll, couldn't they be trusted to do a better job than the market?

[Brettwbeyer14]

or perhaps are you saying that banks just do not keep up with their finances and create confusion for themselves and other investors involved? hmm.. i think by comming up with these questions its got me thinking about the answer. i think you might be saying that banks like to attract people with their accounting records. and lower it to the market price gradually not to look like they are misleading anyone but get away with having a good balance sheet as long as they can.

[Brettwbeyer14]

so why does donald trump claim that mark to marked is a cause of the crisis?

[khanacademy]

It's called blaming the messenger. A lot of people in finance would love to fudge reality as long as possible.

[Brettwbeyer14]

so they most oftenly use mark to market as means of using a professional model that the public is confortable with. does that mean that mark to market is not enforced and banks just use it because it is popular or because it is enforced? im thinking about becoming and investor and im trying to learn as much as i can. i appreciate your responses and your patience. if you could respond to these questions, i would be really grateful.

[woofwoofbone]

The smart guys screw the dumb guys.

[slipperystuff]

BRILLIANT. Thank you for putting these on the web. Your web site is awesome as well.

[onething1984]

You done a really good job. Go ahead. thank you very much

[acidtrashy]

You're always going to have some intrinsic value in your cdo bundle whatever the market says that day. Most of them are still performing and you are receiving payments plus interest so throwing out mark to model is throwing the baby out with the bathwater. Mark to market is essentially saying your cdo bundle is worthless which it isn't. Mark to market means that AAA holders go to the wall for no tangible reason. And thats what makes these free marketeers dangerous idealogues.

[mongobobo]

If you want to buy these securities because you think they will be worth more than they are now than you should buy them. But do NOT force me to.

[arushichopra]

i am an economics student from st. stephens' college, new delhi. i have been struggling to understand how the credit crisis and sub prime crisis came about for quite a while now. have been reading up on it... but the way you clarified the whole thing to me just in a matter of a few hours.. im highly impressed by you and am exceptionally thankful to you:)

[cymonsgames]

I love your videos, all of them. Came for the math instruction, stayed for this. I'll be checking out the rest later.

I'd love to know more about the process of making these videos. What software do we see here? What input device are you using?

[IntegrateOne]

M2M may in general be a good way to value assets/securities, but a "snapshot" M2M can over spin values both positive or negative.

You have a CDO that's FMV 2 months ago was $40B and is currently $10B because the homes backing them are depressed (with real value 2 to 3 times more long term). Now banks that can only loan Asset value times 10 can only loan $100B rather than $400B 2 months ago. Now you have a liquidity problem making credit not available or banks incorrectly insolvent, ie: 9/30/08

[rnams]

Sal,

Your style, clarity of speech and pictorial depiction is the best I have seen... Thx a ton !

[podman51]

This is great, thanks $700 billion. Can't wait for bailout 5!

[pongman]

Just wondering. What do you think Congress should do? Do you think they should bail out Wall St.? ...or, do you think they should let fate decide?

[Renault12]

Looking forward for Bailout 5! Can't wait to see you explain how the investment bank got so leverage. Thanks a billion.

[tvrt350]

Awesome....as usual....Thanks Sal.....

[shiv86]

thanks

[Waranle]

thanxxxxx