MBS Fallout: Mark to Market by Other Means?

I have a million things to do before I leave on Friday!

MBS Fallout: Mark to Market by Other Means?
The pyrotechnics were blazing today as news story after news story brought more and more information and developments in the mortgage saga. There is plenty of commentary out there so I just want to add a few thoughts to the debate.

He Said, She Said
The buyers of pooled MBS want the banks originating them to buy them back because they believe they were either mislead on the asset mix covered or the underlying assets were not handled correctly leading to impairment of the whole lot. In either case the banks will say "it was all right there in the literature we provided" and the buyers will say "you did not model the samples correctly vastly overstating the quality of the pool!". He said, she said indeed. How will this settle out without the legal process getting involved?

Even Though You Know How the Movie Ends, It can Still be Hard to Write the Story
There is no way the story will read as:

After moving heaven and earth and a moon sized pile of cash to save the big banks, Bank of America and Citigroup will now be broken up, bond investors dealt a severe haircut, and fraudulent activities will be prosecuted.

Not. Gonna. Happen.

So what will happen? It is way to early to know. I think Blackrock and PIMCO both know very well that BAC cannot buy back all that paper without going to the markets for serious cash. So why did they issue this note today? There is more going on here and only time will give up the answers. I know plenty of bloggers are getting the champagne on ice for the monster bank blow up, they may be waiting a long time to pop that cork.

Mark to Market by Other Means?
By far the most compelling issue to me is how this process will affect what banks hold on their balance sheet. The monster rally in the markets were largely driven by the ability of the banks to scrap mark to market accounting and go with mark to whatever you feel like accounting. If a serious look is performed on the MBS pools to determine how degraded they were and thus need to be bought back, those assets are going to have a well known clearing price! This would be mark to market by other means and thus poses a severe risk to the banks. Needless to say some kind of deal will have to be reached to prevent this.

Final Thoughts
The smoke screen being run by the banks right now is that they want to boil this all done to whether people are being foreclosed on in error. I have no doubt that in 99% of the cases the home mortgage holder is about to be foreclosed upon correctly. That really is not the issue. What is central is how fraud and corner cutting during the boom times left a mess of broken chains and packaged garbage.

Think of where we are right now, I promise it will either make you laugh or cry:

The entire US Banking system will need to have either another massive handout or some way of legalising fraud will have to be put in place to get them off the hook.

That is the condition of our finance system. Well worth saving at the tax payers expense?

Have a good night.