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### MEMBER DIARY

# Mark to Mystery

One of the many causes of our recent financial failures is “mark-to-market” accounting: whether a simple mortgage or a complicated investment vehicle, “mark-to-market” sets the value of the investment at whatever price anybody might be willing to pay.

In reasonable times, this is a reasonable accounting practice. But when the market disappears, prices are even more imaginary than the complex formulae that investment bankers use to calculate them.

Some mortgage-based “toxic assets” recently traded at 22 cents on the dollar … the only price that greedy private buyers were willing to offer … although our Government (bought and paid for by the lenders) has suggested picking them up at 80 or even 100 cents on the dollar … *after* letting “mark-to-market” rules that *they* made *cause* the recent collapse.

“What disturbs me most about the FASB [Financial Accounting Standards Board] action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,” said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.

I’ve little idea how to calculate “derivative” values, but the underlying mortgages should be straightforward to value: just set the mortgaged property values at 70% of whatever the local taxing authorities set them at *last year*, while the poop was just getting pushed into the fan. When there is no market amongst traders, and the formulae have failed, basic real estate assessments should be used.

Unless you want to use this:

C_rho(u,v) = Phi_{rho} left(Phi^{-1}(u), Phi^{-1}(v) right)

where u and v in [0,1] and ? denotes the standard normal cumulative distribution function.

Differentiating C yields the copula density function:

c_rho(u,v) = frac{phi_{X,Y, rho} (Phi^{-1}(u), Phi^{-1}(v) )} {phi(Phi^{-1}(u)) phi(Phi^{-1}(v))}

where

phi_{X,Y, rho}(x,y) = frac{1}{2 pisqrt{1-rho^2}} exp left (- frac{1}{2(1-rho^2)} left [{x^2+y^2} -2rho xy right ] right )

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