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Barron’s
Jacqueline Doherty seems to think banks brought their mark-to-market accounting problems on themselves, by investing too much in securities. That’s nuts. Doherty misses three huge points:
1. If banks did not hold as many securities as they do, many more would have failed. In a liquidity crisis, where bank runs can kill a bank, a bank’s only source of liquidity is its securities portfolio. If you think securities prices are under pressure, look at whole loan pricing and try to sell loans quickly.
2. Fair value is a relative concept, based on the holder's cost of funds. A relatively healthy bank's cost to carry is lower than the market's required rate of return. Accordingly, the securities’ value to banks is higher than the "market" price.
3. Securitization and capital requirements are the reason banks hold more securities now than they did in the past. It’s more capital-efficient for a bank to hold securities instead of whole mortgages. This makes sense because it securities are generally less risky: most securities on a bank's balance are highly rated and have substantial subordination below them. So banks give up yield for liquidity, capital efficiency, and safety.
Doherty’s right, though, when she points out MTM’s pro-cyclical effect--which has helped take a bad situation and make it much worse.
What do you think? Let me know!
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