Dear Banker, What Value Do We Use For Assets?

Dear Banker,

There are many quandaries to resolve in this matter. First, we all understand that the bank can only liquidate assets through a foreclosure and liquidation by auction procedure, as they do not have title and must force a taking through legal action. Most often the end result is then liquidation by auction, resulting in liquidation value. This is the rule with real estate assets with the bank bidding in its mortgage and is also the likely result with non real estate collateral as well. While there are exceptions to this rule, this is the predominant result.

Thus, the question is clear: Why utilize fair market value when the procedure is controlled by liquidated value? It’s a good question that deserves an answer. The bank typically says that if the borrower in default sold the assets in fair market circumstances there would be added value and they want to capture that presumed fictional equity that could possibly be there. I believe this is a touch unreasonable as this is logic based on fiction. The only reality is that the assets will be sold at liquidated value one way or another and that value should therefore be the benchmark that both sides use. It is realistic and appropriate under defaulting circumstances. An asset sale at liquidated value is far better than an auction sale at liquidated value, but if the bank demands fair market value the assets will go to auction and after expenses and time delay will yield liquidation. What’s the point?

If sold on the market, a distressed asset sale never brings fair market value but only liquidated value. In fact, it could be argued logically that the fair market value of liquidated assets of a defunct business or an upside down defaulting business is liquidated value, so let’s all get on the same playing field. Buyers who have assets appraised will receive a liquidated value appraisal as the business is typically in default and an asset sale recognizes that the business has no goodwill and is only worth the liquidated value of the assets. Why pretend that fair market value is the benchmark? It does not get us closer to a fair conclusion that makes sense to both sides and ends up forcing the worse possible conclusion for the bank and the borrower–auction results. This is liquidated value by auction as opposed to a sale. Auction sale has huge costs and great time expended and certainly some risk to the bank in owning assets it does not want to own and will have a difficult time disposing of. Let the sale occur at liquidated value.

I suggest that the only valid benchmark for valuing assets that are in distress and are collateral for a defaulted loan is liquidated value, not fair market value.