Can prediction markets – virtual markets – play a role in valuing toxic assets? A critical obstacle in evaluating the health of financial institutions and devising approaches so they can get rid of the questionable assets on their books is how to value those assets. Since many of the securitized assets are made up of bad mortgages bundled with more standard ones, there’s no easy way to determine value. Thus, plans to set up U.S. government public-private partnerships to buy up troubled assets still faces that underlying problem.
What’s needed is more information about what those distressed assets are worth in the market. But how to get that information presents a conundrum. Government setting the prices won’t work. As my colleague John Berlau has noted in advocating reform of mark-to-market rules,
. . . if the government sets the price of asset securities too low, it could spread the contagion mark-to-market losses even further. If it sets the price too high, taxpayers will lose out.
Perhaps prediction markets can help remove some of the opaqueness. Some readers more expert than I on virtual markets may want to weigh in on this.