h&f 0049 Pin The Tail on the Assets …Or, Confronting Flashover Fire

Pin the Tail on the Assets

Pin the Tail on the Assets

The problem with the $700bn bailout? Figuring out how to actually spend it.  How will the government assign value to the assets we’re buying from the failed companies before turning the money loose in an attempt to bring confidence (and thus, calm) to financial markets.

The bailout now afoot will have a moment of reckoning as the assignment of value to the near-dead assets is the trickiest of games.

A brief look at one reason why…

THE COLLATERAL GAP

Sure there’s the overt acknowldgement of the difficulty of valuing assets in a market sense, mark-to-market now being essentially worthless as a guide because there’s no market:

“Technically, assets are only worth what a buyer is willing to pay for them. If no one wants to buy mortgage-backed securities, then right now they are worthless — but that doesn’t mean they will always be worthless. Paulson has suggested that one way to set prices would be through what’s known as a reverse auction, the goal of which is to drive prices down, rather than up.” [source: NPR]

But there’s a complex underlying problem not as much talked about… “The challenge that US Treasury Secretary Hank Paulson faces when working out the problems with Fannie Mae or Freddie Mac is that a significant number of mortgages that serve as collateral for US mortgage backed securities markets are not real. They do not exist.” Sounds weird, no? Check the scenario as fully examined at Solari.com.

HOW WE GOT HERE: FLASHOVER FIRE

A physical way to think of our current economy is found in the behavior of fire. A building fire may first start burning from an original source of fuel, but, shortly after that start, “heat causes materials, like wood, candle wax or fabrics, to release gases, which then fuel the fire in the presence of oxygen.” [source: NYT]

Our fire is similar as much of the original material is gone but the fire has spread to the rest of the assets due to that process, also called FLASHOVER…  “The classic example of flashover is where a piece of furniture is set alight in a domestic room. The fire on the furniture produces a layer of hot smoke across the ceiling in the room. The radiated heat from this layer causes pyrolysis (heating of the other surfaces in the room, causing them to give off flammable gases). When the surface temperatures become high enough, these gases mesmically ignite and, in the space of a few seconds, every surface in the room may be on fire. When the phenomenon occurs in open air, it is called a firestorm.” [source: Wikipedia]

I’ve seen video of this process and the eerie part is to see the chair NOT on fire, all fuel used up.  That is, the fire blazes on and grows despite the original fuel (“incipient” in the graph) being burned out.

How An Economy Burns

How An Economy Burns

With our whole economic house still burning, we now have to wade in, sort the burnt chairs from the barely surviving ones and then put a price on them …in terms of the whole house.

I know I’m stretching the analogy – Sue me; I’m a geek – and it may be vulnerable in a couple of spots, but I do have one firm conviction: We’re the water they’re using to put this fire out.

Yuk.

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~ by ericjhenderson on September 23, 2008.

3 Responses to “h&f 0049 Pin The Tail on the Assets …Or, Confronting Flashover Fire”

  1. O – Still dazzled by the analogy… and aflame. Sing ‘O The Times.

  2. […] Pin the Tail on the Assets At hustleandfloe.com […]

  3. […] 23, in  we looked into the center of the proposed solution to this whole tanked economy thing with hustleandfloe # 0049: Pin The Tail on The Assets, essentially describing the work of HOW any bailout money would be allocated. On  October 4, The […]

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