Neoprene

Mark-to-market accounting is one of those ideas that sound brilliant until you try to do it when there is no market. That’s where mark-to-model comes in: companies say things are worth what they ought to be worth.
But as Wall Street’s credit squeeze has worsened, even mark-to-model seems to be too generous a term. Mark-to-muddle may be closer to reality.
Consider Citigroup, which says it may report a loss of $8 billion to $11 billion on a portfolio of $43 billion in “super-senior” securities from those esoteric things called collateralized debt obligations, or C.D.O.’s. Those are securities that Citi evidently saw as being of little or no concern only a few months ago. Now up to a quarter of their value may be gone.
Is that number too high or too low? Who can know? There is no market for these securities, and not nearly enough public information available to create one. The only companies in a position to really understand the paper are the ones that manufactured it — that is to say Citi and perhaps some of its competitors. None of them want any more of the paper, so there are no informed buyers around.
Without a market, where did those numbers come from? Citi has disclosed something about that, and it sounds every bit as reliable as reading tea leaves.
First, you should understand the securities themselves. The underlying source of payment is subprime mortgages, and that is a market where the outlook keeps getting worse. But these securities are “super-senior” — a great salesman’s phrase — and will not suffer unless losses grow to extreme levels that wipe out the value of junior securities backed by the same loans. The losses are not that high yet, or even close to it, but fear is rising.
So how can we estimate what the market price would be if there were a market? First, Citi thought it needed to estimate how much money the securities would eventually bring in. To make that estimate, it had to guess what will happen to house prices. Then it had to decide how risky the forecast was and pick an interest rate at which to discount the estimates. The riskier it is, the higher the rate Citi should choose and the bigger the loss it should take.
Come to think of it, tea leaf reading may be more reliable.

aus der New York Times vom 09.11.2007, Artikel „Reading the Tea Leaves of Financial Statements“ von Floyd Norris.
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