It's been awhile since I posted here, but I thought I'd get things going for the new year!
The issue for the markets and the economy is whether we are indeed in a global credit crunch, why and what is the solution.
I rather like to keep things brief, so here goes.
We are in the throws of a global credit crunch, particularly in the United States. The root cause of this is that a $20 trillion market known as structured finance is essentially frozen. Trades are not being made, leaving assets on the balance sheet of financial institutions who would, in many cases, prefer to move them off if they only knew what they were worth. Moreover, risk capital won't come in because the risk capital doesn't know what they are worth either.
All of the pricing models devised by Ph.D.s blew up. It might be because they relied upon assumptions instead of actual data, but that's getting a little ahead of the story.
FAS 114, FAS 140 and FAS 157 are not working properly because to some extent, they all assumed that some level of fair trade value would always be available. The current climate disabuses the FASB of that notion.
So, the assets sit on the balance sheets and are constantly written down as the litany of bad news hits the markets and the fear-based indices of the ABX keep being hammered to the delight of some market participants.
So, what is the real problem? Opacity, of course, is the problem and root cause. In this $20 trillion market, there are essentially no trades. Financial institutions and risk takers cannot determine fair value.
The solution is transparency. I don't mean TRACE or some reports that are not standardized and are 30 to 60 days late. Real transparency would be the capture, processing, analyzing, standardizing and reporting on a daily basis of the performance of the underlying collateral.
What follows from that would be independent, third-party pricing pivoting on the real data.
For that concept, take a look at the following link:
www.tyillc.com (use www)
With actual transparency, the market for structured finance securities will thaw, risk capital will come in and the credit crunch will be alleviated.
Sure, there will be problems, but the market will return to normal gradually (or maybe faster), some institutions will need merger partners, some will write up assets that were market down too much in the fear environment. But overall, the markets will become deeper and more liquid than ever before.
Transparency is the permanent solution to the problem.
Now, is there the political will? Or, will a market force be sufficient to change things? |
