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hi my name is patty Harris I'm a senior editor at marketplace today I want to talk about mark-to-market the reason being because there's a big debate raging about mark-to-market some people say that it's a totally appropriate way to value a bank's assets or an investment company's assets other people say that it's one of the reasons that we're seeing the banks take such massive losses whereas in fact they may not have made some these losses at all but before we get into that debate that's just talking exactly by what mark-to-market is the term is actually fairly self-explanatory okay marketing to market means that you go out and you mark or record the value of their assets according to what the market says it is so let's say use an analogy and we'll use a toy store as analogy alright here's our toy store owner Jim nice chap Jim and his store he's got a number of types of toys he's got a he's got games all right he's got dolls he's got Legos all right now if Jim wants to find out what his store is worth all he has to do is add up the value of the stuff that in his in a store right so he wants to know how much his games he knows how much his games are worth because he calls around and he looks at the market and he find his does his price discovery so called and he finds that you know all of his games put together the various prices are going to be worth say say million dollars big store and he he's got a bunch of dolls there as well he works out how much the doll is going to be worth by doing his price discovery and he finds that they're worth say five hundred thousand all right likewise with Legos goes out prices it prices it according to the market sees what people are paying and works that out at five hundred thousand dollars as well so he really is at the end the total value of the goods that he has in his in his store is worth two million dollars say he's got another five hundred dollars in cash he's got we now know that he's got 2.5 million dollars and it all together that's the value of his business what he's done is he's gone out and he's essentially he's by marking to market he's gone out he's find out humm how much each one of his games is going to fetch in the market if he sold it that day if he wants to sell it that day as two fine that where to price it adds it all up how much the dolls how much the Legos and that gets him the value I guess you could call this the value of his portfolio of toys is two million dollars so how is this like a investment company well an investment company is really no different in that respect you know here's our banker okay and he is got in his bank he's got say bonds he's got stock and say he's a bit of venturous right he's good at and he gets some mortgage-backed securities also in order to find out how much his stuff is worth he'd go out and he'll say well how much can I get for these bonds he'll go out to the bond traders in the market he'll talk them about his bonds and they'll tell him well altogether these bonds that you have a wife say you know five million what about the stock checks out the stock a lot of it has gone down in price recently because the market citerior ated these days you know I guess a year ago with stock was worth you know seven million dollars now it's only worth another fight won't worth five right because it's deteriorated mortgage-backed securities likewise quite a significant decline here he had twenty million in mortgage-backed securities back in the day it's dropped to by 75% he's only got five million there as well so he adds up the value of his portfolio and it comes to fifteen million dollars just like Jim at the toy store he's gone out he is priced all of the items if he was going to sell them today this is what he would have to price them at according to the market he's marked it to market and this is the value that he's got all right so and just like Jim Jim hasn't sold any of these items at this point he just if he was going to sell them that day this is what they'd be worth I mean he may he may have spent two million dollars on games but he was a maybe he's a pisser he's a little bit of a bad businessman and he bought the wrong games the value of those games has fallen in the interim he's had to mark them down and now they're only worth 1 million dollars that's quite possibly the case with their with our bank manager he might have his bonds may have been worth 10 million dollars a year ago but again because of the economy has fallen nobody wants to buy bonds corporate bonds right now they've dropped by 50% they're now only worth worth a half a million so this is essentially what mark-to-market is it's a fairly simple concept what you do is you go out you find out how much your assets are worth and you price it to the market but you can see you can get an idea now of why this is impacting the banks so much because the banks have all of these assets on their books and the economy has has fallen extremely precipitously you know nobody wants to buy stock and bonds corporate bonds and mortgage-backed securities and CDs right now they're all very worried that the entire market is going to collapse so they just yank their money from the market and as a result it means that the the bid price the price they're willing to pay falls away which forces the offer price that's to say the price at which the bank would like to sell has to come down if the bank is going to actually get rid of some of its assets now you may sell yourself well maybe what if the bank doesn't get rid of those assets and the bid and the offer price stay far apart well that can certainly happen but what's been happening recently is that the banks have been also keen to get out of the market because they're worried about it falling away and they've been selling hard into the market themselves and also hedge funds have been redeeming assets they've been selling assets into the market so you can usually you can always find it you can mostly find a price for these assets because somebody is selling into the market and you'll get some distress buyer who's picking picking that stuff up at a discount price and what this means is that M the banks are recording losses by selling into the market so when you hear about Citibank you know recording a massive loss half of that is because what a proportion of that is because it's actually selling assets into the market the other half or the other proportion of that is because it's being forced to mark its assets down in the case of bonds for example now we all know that a bond can M as a maturity date in five or ten years or however many years the bond will mature and the bond total will get his money back but so Citigroup or this banker mr. Jimson here may decide that he wants to hold on to these these bonds in perpetuity he may decide he wants to hold them to maturity and get his money back so he's going to hold it no matter where the price is unfortunately because there you have all of these other sellers in the market doesn't matter what mr. Jimson thinks these other sellers have driven the price down to 50 cents on the dollar bite so they're driven it down by half that means mr. Jimson has to mark his portfolio down by 50% even though you leaves it's worth 100% in the long term he has to mark it down to 50% at this point and that's the other thing that's driving the bank's their portfolio values down so far and that's one of the reasons that people argue that it's not appropriate to market a market because you you know these these assets have life beyond just the the daily price because they can many of these assets can actually mature and pay out in time not everybody agrees with that of course they say it's entirely appropriate that you should mark these assets to market because of a bond is trading at fifty fifty cents on the dollar maybe that's because people believe there's only a 50% chance that it will actually pay out in the end so that's the reason for my marketing to market or at least one of them but the the fact is that the whole process of marketing to market certainly has impacted banks portfolios it's forcing them to record lawsuits on paper that they may not actually have realized because they haven't sold assets what what and what it has done is left them very badly most of them needing a drink