A nickel will get you a dollar:
At least at the Fed. Some paper, which is part of the mix that the Fed has indicated a willingness to purchase, is, according to price estimates
, almost worthless:
The first public price estimates for specific structured credit securities to have emerged since the start of the credit crisis show that values have fallen sharply.
Some securities have lost almost a third of their value – even though many were considered to be so safe that they carried top-notch ratings from the credit ratings agencies.
Meanwhile, some subprime mortgage-linked securities issued by groups such as UBS have lost almost 95 per cent of their value.
The price estimates were made in a legal filing following a decision by JPMorgan Chase to publish detailed securities valuations in a Canadian court. The securities are linked to commercial loans and medium-grade mortgages.
So, a security that is worth five cents but has a "pretend" value of a dollar, will be treated as worth a dollar by the Fed. The Fed is giving money to con men.
The written down values are as much a fiction as the face values, perhaps more so. JP Morgan has significant interest in overstating the degree of tanking when their earnings are already expected to be in the toilet because of write-downs.
You can always take those overstated paper losses back into income later, improving your future period performance.
Never write down 50 cents when you can write down a whole dollar and save 50 cents in your back pocket for a bad earnings day.
J.Goodwin: Yes, I agree with you, but when it comes to valuing this stuff, you've got to start somewhere. And at least "formallly", that's the starting point which the Fed is buying in to. (It also means that if there is a revision upwards, somebody, somewhere along in the process, loses big. Maybe it won't be the Fed, but it might.