This stuff is super interesting! Only time i've ever stayed up late on a school night watching videos on the economy. Thank you Sal for making the world a smarter place!
Banks don't benefit, investors and regulators do. Part of a bank's risk policies should be to avoid assets and leverage where the volatility in the market price of the asset can make the bank insolvent. I agree that market prices aren't perfect, but if you don't use them, you're essentially making up numbers to suit your own ends.
Damn interesting and easy to understand. I've never taken economics classes but I am teaching myself with the internet and specially your videos. awesome.
if you understand that a home is an "illiquid" investment, you should understand that a bucket full of 10,000 mortgages can be far less liquid. At one time there was a more active market in buckets full of mortgages, but that market has come to a screeching halt. Not many of the mortgages are in default and going into forclosure, but the crisis is due to the associated fear. Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!
I think your videos are excellent, but can you explain why it is so important to use to Mark to Market when these assets are still creating cash flow and the default rates are not as high as what the short term market says they are. I really believe using this accounting rule which has not been in existence very long and magnifying the problem. I would think if banks did not have to mark these assets down so low they would have the capital to lend out. I would appreciate your feedback.
so they most oftenly use mark to market as means of using a professional model that the public is confortable with. does that mean that mark to market is not enforced and banks just use it because it is popular or because it is enforced? im thinking about becoming and investor and im trying to learn as much as i can. i appreciate your responses and your patience. if you could respond to these questions, i would be really grateful.
You're always going to have some intrinsic value in your cdo bundle whatever the market says that day. Most of them are still performing and you are receiving payments plus interest so throwing out mark to model is throwing the baby out with the bathwater. Mark to market is essentially saying your cdo bundle is worthless which it isn't. Mark to market means that AAA holders go to the wall for no tangible reason. And thats what makes these free marketeers dangerous idealogues.
but what could a bank get out of using mark to market. i mean in many instances mark to market is lower than what they actually have and they very often have to find extra funds from other sources as a result of having low share prices. and it's not that i don't believe banks rip people off. but in this case i think mark to market can cause a lot of problems for everybody including banks unfairly. and brokers can rip people off because of margins.
it seems to me that mark to market will remove risk at the cost of incintive. sounds like bad news for a economy heading into a recession. not only that but i think it would pin down prices and drive interest rates up as banks try to regain lost capitol from undervalued assets.
I'm late on this, I know, but.... On the video it isn't 500B. It is (point).500B, or half of a billion, which is, of course, equal to 500M. At least I'm pretty sure that's what he did. :-)
hmm..then i must be a bit confused by what you're video was trying to get acrossed. are you just showing that banks don't really ever have clue to exactly what they have. because you say that banks are at risk with mark to market and they usually lower their equity balance to fit mark to market in order to make themselves look. am i right? i guess im missing the point of the video. are you pointing out that banks are fraudulant or a victim of cercumstance?
or perhaps are you saying that banks just do not keep up with their finances and create confusion for themselves and other investors involved? hmm.. i think by comming up with these questions its got me thinking about the answer. i think you might be saying that banks like to attract people with their accounting records. and lower it to the market price gradually not to look like they are misleading anyone but get away with having a good balance sheet as long as they can.
Dude YOU ARE THE FREAKING BEST!!!!!!!!!!!!!!!! I cannot help but understand!! Can you please be my teacher XD and oh BTW I'm a science student but, damn I understood this perfectly ;)
@khanacademy Do you think the problem could be solved by making those Ph.D.s independent from the asset being valuated? The arguments you gave against mark-to-model seem extremely strong, and the communist way of doing things seems more rational. If they're not on the bank's payroll, couldn't they be trusted to do a better job than the market?
"Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!" No ... Mark-to-myth allows banks to overstate the true value of their assets
I think what you're doing is wonderful and I've really learned a lot from your lectures, however, I think you should leave political ideologies and references out of the "classroom". It only deters from the content when you go off into pointing at the political spectrum. Just my opinion though.
This stuff is super interesting! Only time i've ever stayed up late on a school night watching videos on the economy. Thank you Sal for making the world a smarter place!
Banks don't benefit, investors and regulators do. Part of a bank's risk policies should be to avoid assets and leverage where the volatility in the market price of the asset can make the bank insolvent. I agree that market prices aren't perfect, but if you don't use them, you're essentially making up numbers to suit your own ends.
It's called blaming the messenger. A lot of people in finance would love to fudge reality as long as possible.
Looking forward for Bailout 5! Can't wait to see you explain how the investment bank got so leverage. Thanks a billion.
Damn interesting and easy to understand.
I've never taken economics classes but I am teaching myself with the internet and specially your videos.
awesome.
if you understand that a home is an "illiquid" investment, you should understand that a bucket full of 10,000 mortgages can be far less liquid. At one time there was a more active market in buckets full of mortgages, but that market has come to a screeching halt. Not many of the mortgages are in default and going into forclosure, but the crisis is due to the associated fear. Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!
"Im to worked up to answer the phone" Funny Sal is the best sal
Housing prices can go down????? :)
I think your videos are excellent, but can you explain why it is so important to use to Mark to Market when these assets are still creating cash flow and the default rates are not as high as what the short term market says they are. I really believe using this accounting rule which has not been in existence very long and magnifying the problem. I would think if banks did not have to mark these assets down so low they would have the capital to lend out. I would appreciate your feedback.
no one:
Sal: Well i guess i ran out of time
Awesome....as usual....Thanks Sal.....
so they most oftenly use mark to market as means of using a professional model that the public is confortable with. does that mean that mark to market is not enforced and banks just use it because it is popular or because it is enforced? im thinking about becoming and investor and im trying to learn as much as i can. i appreciate your responses and your patience. if you could respond to these questions, i would be really grateful.
You're always going to have some intrinsic value in your cdo bundle whatever the market says that day. Most of them are still performing and you are receiving payments plus interest so throwing out mark to model is throwing the baby out with the bathwater. Mark to market is essentially saying your cdo bundle is worthless which it isn't. Mark to market means that AAA holders go to the wall for no tangible reason. And thats what makes these free marketeers dangerous idealogues.
best rant ever! enjoyed it :) but u r right, this is instruction, not opinion.
This guy is great!
Sal pulling back curtains since '07!
Just wondering. What do you think Congress should do? Do you think they should bail out Wall St.? ...or, do you think they should let fate decide?
brilliant!
but what could a bank get out of using mark to market. i mean in many instances mark to market is lower than what they actually have and they very often have to find extra funds from other sources as a result of having low share prices. and it's not that i don't believe banks rip people off. but in this case i think mark to market can cause a lot of problems for everybody including banks unfairly. and brokers can rip people off because of margins.
it seems to me that mark to market will remove risk at the cost of incintive. sounds like bad news for a economy heading into a recession. not only that but i think it would pin down prices and drive interest rates up as banks try to regain lost capitol from undervalued assets.
I'm late on this, I know, but....
On the video it isn't 500B. It is (point).500B, or half of a billion, which is, of course, equal to 500M.
At least I'm pretty sure that's what he did. :-)
hmm..then i must be a bit confused by what you're video was trying to get acrossed. are you just showing that banks don't really ever have clue to exactly what they have. because you say that banks are at risk with mark to market and they usually lower their equity balance to fit mark to market in order to make themselves look. am i right? i guess im missing the point of the video. are you pointing out that banks are fraudulant or a victim of cercumstance?
or perhaps are you saying that banks just do not keep up with their finances and create confusion for themselves and other investors involved? hmm.. i think by comming up with these questions its got me thinking about the answer. i think you might be saying that banks like to attract people with their accounting records. and lower it to the market price gradually not to look like they are misleading anyone but get away with having a good balance sheet as long as they can.
Dude YOU ARE THE FREAKING BEST!!!!!!!!!!!!!!!! I cannot help but understand!! Can you please be my teacher XD and oh BTW I'm a science student but, damn I understood this perfectly ;)
thanks
Sorry to be picky..I think there is an error on the bottom left, it should be 500M instead of 500B.
Very good video(s) otherwise :)
Why am I feeling old and lagging, seeing that this video was published 15 years ago?
10:10 god i love you
thanxxxxx
Awesome
@khanacademy Do you think the problem could be solved by making those Ph.D.s independent from the asset being valuated? The arguments you gave against mark-to-model seem extremely strong, and the communist way of doing things seems more rational. If they're not on the bank's payroll, couldn't they be trusted to do a better job than the market?
If you want to buy these securities because you think they will be worth more than they are now than you should buy them. But do NOT force me to.
One word: Enron
“The best people they can find” or the best people the can buy 🤭
"Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!"
No ... Mark-to-myth allows banks to overstate the true value of their assets
I think what you're doing is wonderful and I've really learned a lot from your lectures, however, I think you should leave political ideologies and references out of the "classroom". It only deters from the content when you go off into pointing at the political spectrum. Just my opinion though.
I disagree
so why does donald trump claim that mark to marked is a cause of the crisis?
1 communist disliked this video