本文发表在 rolia.net 枫下论坛Like Zuluking mentioned, no one know the exact size of the taxic waste. Two reasons: 1. The complexitiy of the securities. For many MBS, CMBS, CDOs, they were sliced and re-packaged N times that nobobody knows exactly what's the underlying assets are, let alone the intrinsic values. 2. The disfunctioning markets makes valution extremely difficult if not impossible.
Two methods of valuation: intrisic value approach that discounts future cash flows to the present value. For a MBS, for instance, as you said, future payments are unpredictable because of the unknown default rates and delinuent rates. Those inputs are contingent on the economy - on a macro level, the GDP growth rate, inflation and unemployment rates; on a micro level, how consumer feels of their pockets, therefore the willingness to spend, as well as how corporates feels of the profit prospects in intermediary or long term, hence the willingness to invest/expand. In short, in a world filled with high uncertainty, the best maybe creat senarioes to get a sense of how bad it could be.
Even the discount rate is changing dramaticlly because of the dramatic change of availability of liquidity and the degree of risk aversion of the market. Therefore, intrisic valuation even using complex simulation models do not work well in current situation. Garbage in, garbage out.
The market relative valuation works only if market is functioning. In fact, asset pricing is a pivatal role of capital markets. but now markets totally disfuncting - no liquidity, no flow, no trade, no financing. Everything is still, no trading to give a fair market value of assets. What a terrible situation it is. JP Morgan acquired WaMu. The latter has $176 billion exposure to mortgage markets, including more risky ones with payment deferral options . JPM write them down 31 billlion. This latest transaction will provide a benchmark to gauge the value of similar assets. JPM may derived the 20% mark down based on current available information. But things will and are changing. Maybe 40% write down is appropriate 3 months from now.
Back to your topic, is $700 billion enough? Some say the first tranche may be $350 bn that's far from enough. Like you and Zuluking said, if mortgage trouble spill over to other security classes via the deterioration of economy, this could be only the begining of the end.
we are in an uncharted era, everthing is experimental in nature. Let the smart guys like Paulson and Benanke to cope with the tough situation. We just carefully observe, think and learn.更多精彩文章及讨论，请光临枫下论坛 rolia.net
Two methods of valuation: intrisic value approach that discounts future cash flows to the present value. For a MBS, for instance, as you said, future payments are unpredictable because of the unknown default rates and delinuent rates. Those inputs are contingent on the economy - on a macro level, the GDP growth rate, inflation and unemployment rates; on a micro level, how consumer feels of their pockets, therefore the willingness to spend, as well as how corporates feels of the profit prospects in intermediary or long term, hence the willingness to invest/expand. In short, in a world filled with high uncertainty, the best maybe creat senarioes to get a sense of how bad it could be.
Even the discount rate is changing dramaticlly because of the dramatic change of availability of liquidity and the degree of risk aversion of the market. Therefore, intrisic valuation even using complex simulation models do not work well in current situation. Garbage in, garbage out.
The market relative valuation works only if market is functioning. In fact, asset pricing is a pivatal role of capital markets. but now markets totally disfuncting - no liquidity, no flow, no trade, no financing. Everything is still, no trading to give a fair market value of assets. What a terrible situation it is. JP Morgan acquired WaMu. The latter has $176 billion exposure to mortgage markets, including more risky ones with payment deferral options . JPM write them down 31 billlion. This latest transaction will provide a benchmark to gauge the value of similar assets. JPM may derived the 20% mark down based on current available information. But things will and are changing. Maybe 40% write down is appropriate 3 months from now.
Back to your topic, is $700 billion enough? Some say the first tranche may be $350 bn that's far from enough. Like you and Zuluking said, if mortgage trouble spill over to other security classes via the deterioration of economy, this could be only the begining of the end.
we are in an uncharted era, everthing is experimental in nature. Let the smart guys like Paulson and Benanke to cope with the tough situation. We just carefully observe, think and learn.更多精彩文章及讨论，请光临枫下论坛 rolia.net