Amid ‘panic,’ what’s a portfolio worth?

Kai Ryssdal Aug 14, 2007

Amid ‘panic,’ what’s a portfolio worth?

Kai Ryssdal Aug 14, 2007


Kai Ryssdal: Mattel shares gave up about 2.5 percent today. Could have been worse, given the rout on Wall Street. Investors threw in the towel early this morning after disappointing earnings news from Wal-Mart and Home Depot. That sowed fears consumer spending might be slowing down. Never a good thing, the analysts will tell you.

For the most part, though, it was the financial sector people were keeping an eye on. The big investment banks like Goldman Sachs and Bear Stearns. Everybody’s waiting for the next shoe to drop as credit keeps getting tighter and tighter. And they didn’t have to wait long today.

Although that thudding sound you might have heard came from an unlikely source. Sentinel Management Group, out of Northbrook, Ill. runs funds that handle trades out of the commodities futures markets. Or at least it did run those funds.

The group said today it’s going to stop letting investors redeem their shares until what it called “the panic” is over. Echoing the news from BNP Paribas of last week, Sentinel’s having trouble figuring out exactly what those shares might be worth.

Steven Miller tracks what’s called the leveraged finance market for Standard & Poors. Steven, good to have you here.

Steven Miller: Thanks for having me on.

Ryssdal: Steven, this might sound like a really basic question, but how can it be that they can’t value the assets they have?

Miller: Well, it’s a very complicated thing. So normally, a portfolio of bonds or stocks would be easy to value. You’d look at where things are trading on an exchange in an actively bid market, and everyday and every minute, really, you’d be able to look at what the price is and come up with a value for your portfolio. But in these markets for structured finance assets, which tend to be a lot less liquid and that are not exchange traded, you often have to look beyond the simple price and go to a model, or some sort of complicated analytical tool, to be able to value them.

Ryssdal: And so why can’t they do that now?

Miller: Well, what happens is with structured finance assets, because they’re not actively traded, often what you do is you mark them to where new issues are clearing in the primary market. So in other words, you would look at where a new mortgage-backed security is being sold to investors today to be able to then draw a comparison to the bonds you hold in your portfolio that might have been put into the market a year ago or two years ago.

So when the new-issue market breaks down and seizes up like it is today, it’s very hard to look at the new-issue market for a price. And therefore, it becomes enormously hard to value assets that have been outstanding for awhile.

Ryssdal: That’s the function known as mark to market, right?

Miller: Exactly. And really, in these structured finance markets, mark to market is the kind way of putting it. Really what you’re doing is marking to a model. And the model only works as long as there’s dated feed into that model. And what happens in times of dislocation is there’s a lot less data, the data is less robust, and therefore it’s much harder to mark the assets.

Ryssdal: Dislocation sounds like a fancy word for the markets not working right?

Miller: Well, what I mean by dislocation, yeah, it is a fancy word for that. But really, what we mean there is there’s not a lot of new issue going on, because people are struggling to come up with a price at which they buy the paper. So if you have a new pool of mortgages or credit cards, or whatever the pool happens to represent, there’s still a lot of discussion and a lot of what they call price discovery going on to decide where those . . . where that pool would be placed with new investors today.

Ryssdal: All right, let me make sure I understand this. Because of the credit crunch or liquidity squeeze, or whatever you want to call it, not many people, not many groups are bringing new mortgages to the market. So you guys have no way of figuring out what they should actually be worth in a functioning market.

Miller: That’s right.

Ryssdal: How long is it going to take — and what’s it going to take — for people to be able to mark to these models, or mark to an actual market effectively?

Miller: The jury’s out on all that now. I think what it’s gonna take is some clarity around how high delinquencies get. Whether housing prices have found a period of stability here or whether there’s another leg to go on this correction. I think once all of the underlying assets get sorted out, then people will be able to much more confidently mark to market, because you’ll start to see new issue again that people can use as a peg to hang their existing portfolio on.

Ryssdal: Care to spitball a time frame for me?

Miller: My best guess is you’ll start to see that end of this year, early next year, that things start to settle out and stabilize and you have a new level that they reach in order to clear new deals in the new issue market.

Ryssdal: All right Steven, thanks a lot. Steven Miller at Standard & Poor’s LCD.

Miller: All right, thank you.

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