The most salient characteristic of the current crisis -- "current" meaning for an entire year by now -- is its surrealism. That surrealism, in turn, is driven by the continuing belief that mark-to-market accounting, once spread widely enough, can finally clear away the obscurities and the opacities, and give us truth, value, a bottom, a solid place to rebuild. Eh, maybe. Maybe it's still too early, but the headlines continue to emphasize not solidity and value, but a shifting phantasmagoria. It's like the '60s all over again. Now, of course, some of this arises from the fact that the economy has slowed and that real estate, already hammered on the subprime end, has softened across the board. But does anyone really believe that the "true" condition of real estate -- subprime or blue chip -- in any given reporting period is accurately translated through the indexes into the valuations of various structured pools? I'm not saying it's better; I'm not saying it's worse; I'm saying that, in a world where we wonder if LIBOR is getting accurately set, these mortgage indexes make you wonder -- particularly in sectors where liquidity is scarce or nonexistent.
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Second, some of this stems from naïve reporting or analysis. For example, as soon as Merrill Lynch & Co. unloaded $30 billion in CDOs to Lone Star Funds, speculation bubbled up that a new floor had been set to revalue mortgage CDOs. Numbers were tossed about -- 22 cents on the dollar, 36 cents -- suggesting that battered firms such as Citigroup Inc. or Lehman Brothers Inc. needed to immediately follow with similar write-downs and capital infusions. Then, for the rest of the week, the papers scrambled to explain why (a) that couldn't be done and (b) how Merrill needed to give out more information or get everyone really, really mad. In short, first frighten, then bewilder.
Then there are two stories that appeared Thursday, both of which would convince disinterested outsiders that we were truly nuts. The fine folks at the Financial Accounting Standards Board decided to wait, well, a year, before they forced banks to bring off-balance-sheet vehicles onto the mother ships and into the clear light of mark-to-market. It's a relief that FASB held up and, let's face it, hidden assets have been a big problem since Enron. But the underlying premise here is that our current mark-to-market regime needs to be universal and is as straightforward as counting coins in my pocket. Both of those are deeply problematic, though in many circles viewed as inviolable as the post-Enron notion that empowered shareholders will effectively eliminate corporate corruption.
Then there is the decision by the fine folks in Connecticut to sue the credit raters over muni ratings, which the Nutmeg State says gets discriminated against. Maybe the Nutmegs are right. Maybe the credit raters are in cahoots with the bond insurers. But what does this suit really tell us? Either credit raters have no idea what they're doing (there's some evidence of that) or Connecticut is trying to bully the raters into favorable treatment for munis. Here's my conclusion: After decades of analyzing credit, we still can't get it right, but we should apply the higher math of mark-to-market universally -- but not until next year because, well, the weather has been bad for an entire year.
All this makes me really eager to venture into the markets, weather map in hand, in my little dinghy. - Robert Teitelman
