And yet, there is a value  that  can be assigned to these securities by mathematical means, using the null case which originally assumed that the value  of  the  underlying asset was fixed and assigned to a certain value.  This would have been the value of the  instrument had the  meltdown never occurred, if the  real estate bubble had not burst and no decrease occurred in  the valuation of the  assets backing the securities.  This value is now of course not real,it is an imaginary value that could be called the base valuation of the securities.  This base value is computable since all of the variables in the derivatives equation used in the pricing formula are known and set to their original, i.e. base value.

An additional component of the  valuation is the real or present value of the securities.  This involves a price discovery that  is of unbelievable complexity, if we can not  assign a fixed value to  the  underlying  assets but must  instead rely on external market forces , which vary by region and by other factor.  This component could be called the speculative value or imaginary value  of the  pricing formula, a value that can not be determined, an accounting entity that is a variable. We are asking a paper accounting system to record a value that floats on a daily basis, clearly this is not in the  realm of accounting, but is in the scope  of cybernetic economics.

The value  of a security then would be a dual entity, a real base value which is  fixed to  the original  contracted valuation, and a variable speculative value that can be computed on a case by case basis, using formulas with higher order derivatives that allow for a float on the fixed indexed used in the original valuation.  For mortgage backed securities and derivatives, the unrealized part would  be a variable discount to the base price, for orinal mortgages, the unrealized part would be a variable premium to the base price. BOth the base and the discount/premeum would be recorded in the system, the base would be subject to payments and mortgage interests, the discount/premium would not, it would be treated as an unrealaized profit/loss which can only be determined on  a case by case basis, at the time the  asset is transfered to another owner.  Olny  the base price woiuld  be monetized, the unrealized portion would only be  transftered to  the new owner as part of the mortgage or security truch, after a final price negotiation at thetime of the sale.  

For example, if a home was mortgaged for $100,000.- and included in a trunch with derivative risk factors which yielded a base value in the securitized bundle of X, the base value of the trunch would be as originally priced in the derivative formula, but  the true value of the security would now be X base plus Y imaginary.   If we can allow banks to trade the securities as dual valued components, base plus imaginary, we could unlock the accounting hold that has us in this  conundrum, without the use of tax dollars.

To  homeowners, a mortgage payment covers an amount that is no longer real, it is a base value plus an imaginary balloon. The base value is the currently appraised value   of the home, it is the price of the imaginary part that is unaccountable at this time.  At the  Bank of America, the mortgage resets have been successfully underwritten in this manner, homeowners are granted a reset in their base mortgage but must pay a  balloon.

When real estate is bought or sold, the value of the real estate must take into  account that there is a speculative component in its valuation, so that this bubble can be reduced according to the future value  of the property.  This dual valuation would enable people to  sell their homes if they are "upside down" in their mortgage, since the  base value would reflect the  assessed value of the property, and the speculative bubble would be passed on to the  new owner's account, in the hopes that it would be reduced in time, when property values increase once again.

When  mortgage baked securities and their derivatives are bought or sold, their value would be the base or original negotiated value, plus  the imaginary discount.  The transfer of securities would also involve a base plus imaginary accrual, in the hope that the imaginary discount would be reduced when the underlying property assessments reach their original base values. 

Atlanta, GA
Sep 23, 2008