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« Employment Listing: Communications Advisor | Main | ETF Update: Cramer and Harvard Agree on China »

February 13, 2009



Patrick -- I read the FT article. I am open to your explanation. It discusses the "default" of a complex security, involving many underlying loans. The article makes no sense to me, so feel free to explain.

Those analyzing these securities go into detail, talking about complete failure in subprime, for example. There is a recovery rate even for these loans. I have yet to see one where everything failed.

What am I missing?




I appreciate the thoughtful comments on this article. I do wish that some of the M2M opponents would actually analyze some securities.

Meanwhile, I suspect there will be a day when the rules will change. When it happens, it will create a massive change in perceived valuation, giving us some time.

We shall see.

Thanks again,



I believe that Mr. Patrick makes reference to the fact that CDO tranches are trading at 50%. These tranches are often 'leveraged' with respect ot losses. The M2M price is probably much more accurate than pricing them at par.

Interesting to note that Mr. Patrick feels that he bears no responsibility for the loading ML balance sheet with this toxic waste or helping distribute toxic waste around the street.

Reminds of a drug pusher who then complains about the rising crime rate.

El Gerente

Martin, the third method is reconstruction valuation, the ratio of which to prevailing market price helps determine profitability of subdividing.

Even with the SAME method of valuation, different investors have different prices, because they desire different rates of cash flow, have better or worse terms of borrow, or can commit more initial capital. So it goes beyond simple choice of method and into details below that. Continue the real estate example with tax benefit or equity buildup assumptions and we see that valuation is impossible from a strictly objectivist viewpoint.

Like in stock market - price is NOT an agreed upon value. I buy because I think it worth more than I pay, you sell to me because you think it worth less, we don't agree on value.

Mark to market is mark to model, with the model being a price at which something sold. It is a model none the less.

Buffett would probably say that market price is irrational at times and a poorer model than many, which is why he buys value. His model might be said to be better than mark to market.


This data from a Financial Times piece today kind of vindicates the M2M crowd:


There is something seriously wrong with a method that applies one valuation to a loan and another to a securitized loan.

But does the bank get something from that? For instance, smaller regulated capital requirements. I'm not a banker, but there has to be a reason it was set up that way to begin with. And seeing how these guys operate, they were probably exploiting a loophole.

martin chow

There are many methodologies used to value assets depending on the purpose of the valuation. In real estate, there are at least 3, including the prevailing market price - the price in comparison to similar properites that sold recently in the surrounding area for a comparable property, and valuation based on discounted cash flows. In bankruptcy cases, there is valuation of a company based on the liquidation scenario of the company at a distressed sale price and the going-concern valuation based on an estimate of value of the company if were to remain a viable company. No one method is all inclusive.

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