...Every model in the universe will give it some positive value. Yet, a bond which will never receive another cashflow is worth 0. IDC may be tied into TRACE, and BVAL is mining quotes from Bberg emails, but the bond is worth $0. It's really that simple...It is almost that simple, except when you open up your Pershing account and look at your holdings there is a price next to it. We all know it comes from IDC and it's just a made up price that doesn't have a firm grip on reality, but try telling your investors that. Try telling your auditor that! They're going to argue with you until the cow's come home that the value in the Pershing account is Level 1 (even though it is not "quoted prices in active markets for identical assets or liabilities"). In reality these are more likely a Level 2 pricing source, which according to FAS 157 is "based on market observables" using inputs that are observable in the market such as quoted prices for similar assets. Level 3 is the broadest category and includes unobservable inputs for assets where there is "little, if any, market activity".
The best place in the world to get the most accurate pricing is to call up your friendly dealer, or evaluate the security yourself and determine it's value on your own. Neither of these are favored by either FASB or your friendly auditor, and in some cases investors don't prefer that method either.They all want to see a nice clean print out on a monthly statement.
If the values were always a little high, or a little low, then it would be something you could manage, but they're not - they're all over the place. I've personally witnessed cases where IDC had a bond marked at half what it actually traded at the same day - can you imagine if you reported to investors a value that was either 50% of or 2 times reality? That is what IDC (and the others do).
So, that is my long-winded rant that brings us to WBCMT 2006-C24 K. It defaulted in May. Default means that it will no longer receive any principal or interest, it has a factor of 0, and could not be worth any dollar amount to anyone - you couldn't trade it if you wanted to, because it's gone.
Or is it? BVAL, Bloomberg's valuation tool pegged it at over $7 on 5/17, the last valuation they have for it (likely because they marked it as defaulted that day). Needless to say that seems a little high - especially if you look at their historical pricing where they actually improved it's price substantially the last month.
|As of 5/17 (likely the day their system noted it as defaulted)|
IDC is a little better in that they at least have it priced lower, $1.78, but they're still showing (via Pershing) the holding has a $178k value (for $1mm face) this morning. That's an entry-level Bentley.
|As of this morning, last night's value|
IDC, BVAL, Trepp - they're all just trying to provide a model-in-a-box solution to investors, and any model is bound to have flaws. The real problem is that the accounting authorities of the world hold this methodology in such high esteem.
If someone has an image of Trepp's valuation for this bond, let me know and I'll post it.