[Cloud9...68]

I saw $1.99 for regular at a station here in Austin.



I'm not sure what to think about where they are headed. If the recession we're heading into is as bad as many are predicting, we could be below $1.00, though that seems highly unlikely. The worldwide demand for petroleum is really plumetting, though, and with the recent oil discoveries destined to come online over the next few years, along with the additional refinery capacity that's slowly been added over the last few years, we could have the perfect storm for some serious downward price pressure.



Are we going to start talking about bail-outs for the soon-to-be-struggling oil companies soon? <img src="/forum/images/smilies/968/blink.gif" class="smilie" alt="" /> On the other hand, who knows what sort of unforeseen world events could drive prices back up? Like I've said before, I would never bet a nickel on the direction of any commodity price.



Being the eternal optimist that I am, I'm hoping that peoples' memories of $4+ gas will be long enough that they will continue to shun gas-guzzling vehicles. That will also put downward pressure on gas prices. I'm not sure I agree with many of you that high gas prices through massive taxation are such a good thing, although having been to Europe many times over the past few years, I agree that their public transportation is truly wonderful.

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[flash]

to settle the score, our poor fathers brought forth upon this continent a screwed nation, conceived in liberated tea, but now dedicated to the proposition that some men are more equal than others



as long as that idea lives, the rich will do whatever lines their pockets the most, and the masses will pay the price, and as of late, it is again with "their last full measure of devotion"



sorry - election day rant and all that

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[Cloud9...68]

[quote name='Duckman' post='61779' date='Oct 16 2008, 08:43 PM']Most of you don't know that I've worked in the financial services industry for over thirty-five years. For the last twenty plus of those in the investment side of the business. No, I don't work for a firm that originated, sold, packaged or bought sub-prime mortgages. No, I haven't profited from this mess.



However, many friends have asked me about the "bail out" and just what the heck is going on. I wrote the following as an explanation for them and I'll share it with you. It's long but this situation isn't simple. Read it or ignor it if you wish.[/quote]

Duckman,



That's the best explanation of our current financial situation I've ever read (been so busy lately, that I've just now gotten around to reading it!). I omitted it from this post to save space.



I just have one question (my sincerest apologies for taking this thread WAY far away from current gas prices, but I think the more people understand how we got into this mess, the better off we'll all be) - What exactly is meant by the term "marked to market", and why couldn't the bond holders (by whom I assume you mean the likes of Fannie Mae, Freddie Mac, Lehman Brothers, etc.) hang onto the crappy mortgage backed securities until the situation improved? Surely they had plenty of other assets they could liquidate at a profit (or at least not a loss) to raise the cash needed to satisfy their borrowers. In other words, why exactly did they need to sell so many of these particular "toxic" securities in such a short time, creating massive losses? It has to do with the 3% capitilization requirement, right? OK, that's more than one question... I think I basically understand it, but I'm sure your elaboration will help further clear it up in my mind.



Sorry, I'm not a financial guy (just a humble engineer), so please bear with me if my questions are stupid. Thanks.

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[Duckman]

No, Cloud, it isn't a stupid question at all.



"Marked to Market" describes the SEC requirement that a publicly traded company must value it's assets at their fair market value as of the end of each calendar quarter. The requirement is for the public's protection, so that we can rely on the accuracy of information provided to shareholders and potential investors. The SEC sets very rigid standards that were made even more rigid and restrictive in the wake of the Enron debacle. Compliance with Sarbanes Oxley (http://www.soxlaw.com/) has added anohter entire layer of reporting requirements. So, while you or I as individuals can value our personal assets any way we choose, publicly traded companies cannot.



I can claim that my 968 is worth $35k if I wish. I can defend that value by saying I have at least that much invested in it during my ownership. However, if I was required to Mark it to Market, I'd have to list the value based on the sales price that similar 968s have brought recently and the price it might bring if I had to sell it RIGHT NOW. Now, my 968 is really strong and really nice, but with 170k miles, I'd be lucky to sell it for $10k.



If you were considering buying stock in Duckman, Inc., which value do you think should be used?

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[Cloud9...68]

Thanks for the explanation; makes perfect sense. Now, to my question relating to why all these financial institutions apparently had to liquidate all the rapidly-depreciating mortgage backed securities. First, why did they have to sell them at all? Was it because as lending institutions, they needed to raise money for the business of lending, as since they all had such low levels of liquidity due to the lax liquidity ratio standards, none of them had much cash on hand? And why couldn't they have sold other securities they had on their books? Or had they already exhausted these?



And one more pesky question - I've read that credit default swaps bore a large share of the responsibility for the financial collapse, yet you didn't mention them in your essay. Comments?



Thanks - this is incredibly eduational, and nice job weaving the 968 into your example. <img src="/forum/images/smilies/968/wink.gif" class="smilie" alt="" />

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[Duckman]

My bad. I didn't fully explain.



The banks didn't have to sell but it didn't matter. They had to mark the securities to the market value, which was dependent upon the price they would bring if they did have to sell. The act of marking them down in value, let's say from the $35k they paid for the 968 Bond, to the $10k the 968 Bond was worth in the marketplace, caused the erosion of capital that made them insolvent.



Credit Default Swaps are derivative securities that in reality are a form of insurance. They were a significant problem but not a problem directly related to the bank mortgage security meltdown that the rescue plan was attempting to fix. However, indirectly they are connected to the problem and exacerbated it.



Read this: http://www.investorwords.com/5876/credit..._swap.html It’s a pretty good explanation.



When a lender, in this case a bondholder, wants to insure their receivable, in this case a bond backed by securitized mortgages, against default, it can do so via a Credit Default Swap. For a fee (insurance premium) the insurer, such as AIG, assumes the risk of default and the bondholder is protected.



However, over time insurers began selling these Credit Default Swaps to more people than just the bondholders. In many cases a single bond worth $35k (remember my 968 bond) was insured against default to many different members. If 968forums.com collected premiums and insured five of our members against default on my 968 bond, and then I default, Flash cannot possibly pay off his obligation to all five of our insured members. Oops!



Yes, the insurer collected premiums but has long since spent the money or paid it out to shareholders as dividends. Maybe they finally invested in the 968 Turbo conversion they always wanted.

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