Friday, August 10, 2007
Mark to Model -- Singular
by Ken Houghton
I have no conceptual problem with marking to model so long as (1) actual trading prices are not significantly different from the model and (2) the model used is consistent.
Apparently, the SEC is starting to share that last concern:
Note that the same method doesn't require the same price. But especially assets that are Held for Sale (HFS) are supposed to be marked with the best information available. This may not have been happening:
The first rule of reporting losses is that you can survive if you detail the entire problem upfront. If you report an $8 million loss the first day and $4 million more the next, you'll run into more problems than if you report $12 million on Day 1.
Liquidity and Transparency: they're not just for text books any more.
There has been much discussion (often heated enough to cover Tom's household energy needs) about "marking to model." (Tanta at CR has been especially good on this issue.)
I have no conceptual problem with marking to model so long as (1) actual trading prices are not significantly different from the model and (2) the model used is consistent.
Apparently, the SEC is starting to share that last concern:
U.S. regulators are scrutinizing the books of Wall Street's largest investment banks amid questions they are hiding losses from subprime mortgages, people familiar with the inquiry said.
The Securities and Exchange Commission wants to see whether firms are calculating the value of subprime-mortgage assets on their books the same way they calculate those values for their brokerage clients, such as hedge funds.
Note that the same method doesn't require the same price. But especially assets that are Held for Sale (HFS) are supposed to be marked with the best information available. This may not have been happening:
Wall Street banks are in a sensitive period as turmoil in U.S. mortgage markets generate losses for investors and push some lenders into bankruptcy. Yet few investment banks have disclosed significant subprime losses in recent periods.
The scrutiny may also help pinpoint whether hedge funds accurately report their results to investors, the Journal reported, citing an unnamed source. Regulatory checks into how firms calculate values of certain assets could boost the accuracy of performance reports to investors. [emphasis mine]
The first rule of reporting losses is that you can survive if you detail the entire problem upfront. If you report an $8 million loss the first day and $4 million more the next, you'll run into more problems than if you report $12 million on Day 1.
Liquidity and Transparency: they're not just for text books any more.
Labels: hedge funds, High Finance, Moral Hazard, Personal Finance Advice of Alan Greenspan, principal/agent problems, subprime
