Sunday, 15 March 2009

Getting markets to work "properly again"

How do we value those nasty toxic assets?

A good discussion of the matter is to be found in the following article

The main problem that the article brings out, not explicitly, but by default arises when the author writes: "The issue for an investor is what will those toxic assets be worth whenever the markets start to work properly again."

But the question then becomes - What criteria does one us to decide on when the markets are working properly again? A cynic might suggest that in the current circumstances the banks would only agree that the market is working properly again when they can unload their toxic assets at the full value they are currently carrying them on their balance sheets.

The market is illiquid at present because the value that the seller wants to realize is so far from what any potential buyer wants to pay that no trades are taking place. The absence of a current clearing price does not mean the absence of a market - it just means that the market is illiquid.
This unearths the elusive and circular quality of liquidity. If by "properly working market" one means a liquid market then how does one bring the bid and the ask closer together to find a clearing price which will encourage further trades and therefore enhance liquidity...and so on?

While the standoff continues and until either (a) changes in M2M provide the required smokescreen or (b)government decides to overpay for the assets or (c) the economy makes an astounding recovery and the distressed asset prices rebound dramatically - to argue whether some banks are technically insolvent or not is a bit of an academic sideshow to the fact that they have effectively been rendered as no longer fit for purpose and highly unlikely to attract new capital from the private sector.

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