Pricing mortgage-backed securities will be tough

— -- You probably know how much your checking account is worth. You may well know what your company's stock is worth.

But what if you had to put a price on that '87 Dodge Omni rusting in the driveway? Your collection of Beanie Babies? How about that chipped Wedgewood you picked up at Bill's Scratch 'n Dent Shoppe?

Some things are easy to price. Others, not so much. And that's the $700 billion problem facing the U.S. Treasury: how to value vast amounts of mortgage-backed securities that no one wants to buy.

And buy them they must, the government says: Otherwise, the credit crisis will continue to worsen, threatening the entire financial system.

But figuring out how much to pay is the one of the thorniest issues the government has had to wrestle with to date. Pay too much, and the government will look like patsies of the securities industry. Pay too little, and the Treasury will drive some financial services companies out of business. And ultimately, no matter what the government pays for Wall Street's garbage securities, investors, taxpayers and politicians will argue that the price wasn't right.

Sliced and diced

Mark Batatian, president of Prudential American pricing services, has been valuing obscure securities for 40 years. If you want to know General Motors' closing price on Feb. 20, 1956, or the value of that dusty stock certificate in grandpa's closet, he could find it for you. And his company, like many others on Wall Street, can give you a good estimate of a security's worth if it hasn't traded for a long time.

He values many mortgage-backed securities all the time. "They have benchmarks for those," he says. "You have a public record on a daily basis." But what about the types the Treasury will be buying? No clue. "They are totally in the ozone," he says. "No one knows what's right."

Ironically, the overwhelming majority of mortgages aren't hard to value. Mortgages are negotiable, which means they can be bought and sold. If you have a mortgage, your note has probably been sold several times, often as part of a pool of mortgages sold to mutual funds, pension funds and insurance companies.

Those overwhelming majority of mortgage-backed securities are traded frequently, and therefore, easily valued. Unfortunately, the mortgage-backed bonds that are causing so many problems are really and truly awful. Many, for example, are filled with subprime mortgages, which are home loans made to people with poor credit histories. When the economy is in recession, these people are usually most prone to defaulting on their loans.