Dividends Under The Bridge? Markit Responds to CMSA

by REIT Wrecks on April 14, 2008

In responding to the Commercial Mortgage Securities Association’s (“CMSA”) letter regarding increased transparency on CMBX trading, the Markit Group (the administrator of the CMBX indices) has apparently responded with a modern-day version of “Frankly my dear, I don’t give a damn.”

Evidently, Markit is contending that since the CMBX trades on the OTC derivatives market, Markit does not have access to trading data (either volumes and/or number of daily trades).

They also pointed out that trading volumes have never been published for other OTC derivative products (e.g. rates, FX, commodities), except for general surveys by ISDA, so it’s unlikely that precise CMBX volume and trading data would ever be known. This would be good news for the speculators who make a living off of playing the index, and who now appear to be unloading their short positions.

I wrote about how all this is creating a the mother of all dislocations for REITs and financials in the recent article How Markit Turned Mr. Market into Mr. Magoo and much earlier in a March article entitled Mr. Market Trips on Mark to Market.

With respect to mark-to-market accounting, Reuters reported that Fed Chairman Ben Bernanke recently threw his policy-making heft behind the “if it ain’t broke don’t fix it” crowd in declining to recommend changes to mark-to-market.

According to Reuters, when asked about the issue in a question and answer session, Bernanke said that on balance mark-to-market has worked well, but “it’s also true in the current context, that mark-to-market accounting has been sometimes destabilizing in that sales of assets into very illiquid markets had led to reductions in prices, which have caused writedowns which have sometimes caused firesales, and you get into an adverse dynamic which has caused problems in some of our markets,”

While he said mark-to-market accounting has been a positive influence for investors, he also said that valuations should be determined during normally functioning, stable markets, not times when assets are illiquid.

Dottie Cunningham, CEO of CMSA, expressed the same concern in the CMSA’s original letter to the Markit Group. “In a volatile market, this mark-to-market process becomes a self-fulfilling prophecy, driving prices down based on index trading activity rather than asset fundamentals,” she said. “Some market participants may be relying on what we believe is a distorted value that perpetuates the current cycle of no issuance, erroneous spread widening and additional mark-to-market write downs.”

So what can Markit expect next from the CMSA? Perhaps it will be a modern-day version of “I’ll get you my pretty”. Fortunately, for far-sighted investors who can stomach the turmoil and almost daily drumbeat of bad news, it really doesn’t matter. As Bernanke said, mark to market has been good for long-term investors.

In an act of self-healing triage, the market has put itself on sale, and this will almost certainly cause liquidity and prices to recover. It will take some time, but at this point and with these discounts, the recovery may shift into higher gear sooner rather than later. In the meantime, you get paid to sit and watch the show.

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