i don't like it!!

Okley dokley, let's see if I'm getting it. "Mark to market" is when a company goes by the price an asset would fetch in the marketplace today, even though it won't be sold until some future date.

Am I getting it? HUGE thanks for the help!

"mark to market" is simply pricing an asset at the most recently transacted price in the market, even if it's illiquid. i.e. if a certain kind of product only sells once a month, but 29 days ago sold at $100, well, you can only carry that asset on your books at $100, not the $200 you thought it was worth.

The difference here is "market prices" seem out of whack with "hold to maturity" pricing as I described above, where you value a bond based on default rate, loss severity, etc.

It is quite complicated and I don't like the idea of a bailout etc, but I don't think it's the end of the world either. It could very well have long-term effects on our economy, and not for the betterment of it, but well, life is hard, not a rose garden, etc etc.

That's a huge relief, David. I'm glad to hear it. The entire Wall Street mess seems endlessly complicated. I've been trying to figure out the meaning of the phrase "mark to market," using Wikipedia and other sources, with little luck, as just one example.

Since it's so complicated and there seems to be so much at stake, not understanding makes it all the more frightening. So, very much appreciate the explanation.

Depends on what they buy them for.

Let's say you have a $1B set of mortgages made to 10,000 people for $100,000 each. Let's say they're all 100% LTV for sake of argument and pretty low-rated paper.

Let's say you foreclose on 50% of them, and you have a 50% loss severity (i.e. you only recover $50,000 from the sale of the house). What would you buy that tranche of loans for to break even on the underlying asset?

If you said $750M, you're correct ($500M foreclosures, recover $250M of that). But wait, the notes bear interest too, and if you bought at $0.75 on the dollar, you're probably getting paid double-digit interest, which is probably appropriate considering these things are essentially junk bonds now. We're seeing these things marked down to what I think are somewhat ridiculous levels, i.e. assuming that 90% of loans will fail, etc etc.

If the gov't buys these loans at the recent marked prices (anywhere from a nickel to $0.22 on the dollar), I actually think it's definitely possible the gov't won't lose any money on the deal over time. Using the above math, $0.20 on the dollar assumes some combination of, say, 90% default rate and 70% loss severity. If that's the "real value" of this debt, stop what you're doing, convert all of your assets to gold, buy a gun and a shack in Montana, because that's the end, my friend.

If it's not the end, then as long as the gov't doesn't pay $0.90 on the dollar, we'll probably do all right.

This is all very interesting, gentlemen! What do you make of the buyout? What if the government buys all these loans and the borrowers default, which seems almost inevitable to me?

Adam,

1) True....then again, from 1929 to 1930 the market dropped...30%. Still twice as much as this year so far. And it dropped another 30% the next year. I'd also mention that the Nasdaq dropped over 80% earlier this decade; I don't recall talking about a "Great Depression" redux back then. We're also not 1 year into this bear market, we're 7 years into this bear market. The markets were this same level back around year-end 1998/early 1999. We've already had 10 years of going nowhere in nominal terms in the stock market (and of course we're 20%+off the peak of 2000). If you "bought the market" back 10 years ago, you did nothing but lose money to inflation. Soon we'll say the same thing about housing.

2) Interest rates will eventually rise. When I see bond yields at 54 year lows (i.e. prices are at 54 year highs), I take the other side of that trade. Anything at a multi-decade high, I take the other side of that trade. That's as close as you'll ever get to free money.

3) CD laddering doesn't have to be 1 year, 2 year. It can easily be 1 month, 3 months, etc. Naturally, you have 1-3 months of pure liquid cash on hand for emergencies.

4) Short-selling can be achieved through several alternative means. Put buying, for example, is still legal, even on financials. Single stock futures also are still working.

Two other points:

1. CD laddering has it's own risks. Unlike a bond-ladder with, say, US treasuries, you cannot liquidate your positions without a large penalty.
2. Short selling is a bit risky now. The government has already declared shorting of financial institutions to be "illegal". What's to stop the government from outlawing shorting in general? In July the government outlawed shorting of financial institutions temporarily. That caused short sellers to have to cover their positions, resulting in a 40% loss for short-sellers in the matter of a couple of weeks! It did provide a false, temporary boost to the stocks of financial companies, though, which is all the government really cares about!

David:

1. It took three years from peak-to-trough for the market to drop 90% in the Great Depression. There were several mini bull markets along the way! We're only one year into this bear market.

2. Interest rates may decline if we go into a recession. You have to ask yourself, which is more likely: inflation or recession (or depression). It is not a foregone conclusion that interest rates will rise (in the short to mid range). I think interest rates will eventually rise.

PS. I become progressively more bullish on stocks the closer we get to what I believe is the ultimate near-term bottom of 900-1000 on the S&P 500 (another 20%ish drop here). I'm not saying we'll hit that, but if we do, I'm likely to be "backing up the truck" and buying stocks with abandon.

There's the last bit of free advice.

Personally, I would not buy bonds, as they are overpriced, and will drop when/if interest rates rise. For the "less sophisticated" investor, I would recommend insured CD ladders and just pure liquid cash for your "emergency money." For long-term accounts, dollar-cost averaging (i.e. buying your diversified stock & bond fund every two weeks or whatever) is probably your best bet for long-term appreciation that will beat the overall market.

If you are an active/experienced investor, I recommend several more esoteric strategies, including shorting stocks, betting on rising interest rates, at least over the next 3-5 years, and selective stock picking. If you'd like more advice, well, it doesn't come free :).

Jackie! That is enormously helpful, thanks! Right down to the street address and phone number. Jackie, I am wondering - do you think it's smart right now for people to move their investments from stocks to cash and bonds? (I apologize if my question itself is flawed; feel free to explain more if I've misspoken.)

Ah, David, that's just the kind of information we need right now, and I really appreciate it. What about all the people who are saying that the problem is going to get worse and worse? Do you, like riverbird, think some people, particularly the news media, like to exaggerate and catastrophize?

Here's a very useful link to a story about Wells Fargo Bank in the Chron that gives a balanced view of how trustworthy the bank is:

http://www.sfgate.com/cgi-bin/...

Not only was there 25%+ unemployment in the great depression, markets dropped about 90%. the general stock market is down about 14% this year. Not exactly an enormous crash.

If your money is in an FDIC insured bank and you have less than 100K in it, then you will be fine. During the last savings and loan round of bank failures (Bush I era) very few people had trouble accessing their money for any length of time.
If any bank ever tells you that you can't access your money due to some "glitch in a database changeover" problem, call this department immediately.

Commissioner
State Department of Financial Institutions
111 Pine St., Suite 1100
San Francisco, CA 94111
415-263-8555
Toll free in CA: 1-800-622-0620 (for consumer complaints against CA state-licensed banks, the "800" number reaches the Consumer Services Office, located in Sacramento, CA.
Fax: 415-989-5310
E-mail: consumer@dfi.ca.gov
Web site: www.dfi.ca.gov

My suggestion is not to listen to whoever is saying banks are going to fail. People, particularly cable news reporters and their viewers, are addicted to adrenalin, so they make everything sound worse than it really is, spreading panic all around to get their adrenalin rush.
Here's what I've done in the last two weeks about my finances: Nothing. I'm keeping my checking account in Bank of America, my money market account and mutual fund investments in Vanguard and my 401k unchanged.