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Wednesday, July 11, 2007

When Mark To Model Becomes Mark To Market.

Imagine sitting on billions of leveraged dollars and you get to choose how to value them? How convenient is that? Isn't mark to model fun?

" At least a third of hedge funds that invest in asset-backed bonds pick and choose values for their investment that help mask wide swings in performance, according to a survey of 1,000 funds worldwide by Paris-based Riskdata, a risk management firm for money managers.
" If you have five different brokers you will get five different quotes, so if you don't have an objective valuation process you can choose the quote which for you is the most interesting,'' said Olivier Le Marois, chief executive officer of Riskdata. "There's no consensus on where the market price is.'' "

Downgrades by Moody's and pending downgrades by S&P are about to shatter that illusion.

" The downgrades may force sales, giving investors who have relied on estimates real prices to value their own holdings. That would be novel in the market for asset-backed bonds.
The securities, backed by everything from student loans to auto payments to mortgages, almost doubled to about $9 trillion outstanding since 2000, according to the Securities Industry and Financial Markets Association. "

Source: Subprime Losses Drub Debt Securities as Ratings Drop (