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Here's a reason to be furious: right in the middle of the worst economic crisis since the Great Depression, the government has caved in to the big banks to allow them to cook their books

I'm surprised that there hasn't been more outrage on the left at the decision by accounting authorities, the FASB, last week to allow tamper with "mark to market" accounting.

Here is a blog by Floyd Norris of the New York Times that lays out all the issues.

"Mark to market" may seem complex, but in essence it is really simple. What it means is that banks are required to properly value all the junk and crap on their balance sheets, so that people know how solvent they are or are not.

Obviously banks don't want to do that, and now they have gotten their way.

Here's Norris:

The Financial Accounting Standards Board changed the rules today, as expected, to give banks more leeway in determining what their assets are worth. The board says it is also requiring better disclosures, but it will be a week before we get details on that, and longer than that to see how the banks interpret that rule.

As readers of this blog know, the change came after a subcommittee of the House Financial Services Committee made clear that FASB could be destroyed if it did not knuckle under to the banking lobby.

Arthur Levitt and Bill Donaldson, two former chairmen of the Securities and Exchange Commission, bemoaned the politicization of the board, but the current chairman of the commission, Mary Schapiro, does not appear to have resisted the political pressure. That is understandable, but not necessarily admirable.

Barney Frank, head of the House Financial Services Committee, thinks it is a great idea:

"I applaud the very important actions taken by FASB today, which has made significant progress toward addressing inaccurate asset valuations in the markets. The FASB believes the rule can be applied more fairly and take into account the currently dysfunctional state of some markets. The integrity of the standard-setting process is preserved, while avoiding the pro-cyclical effects of improper valuation practices."

So do wingnuts like Steve Forbes and Newt Gingrich.

As Norris describes, the feds have backed down and forced accounting changes before. What's amazing to me is that it is happening again, smack in the middle of the worst financial crisis since the Great Depression.

This sucks, bigtime.

P.S. The head of this blog sucks. as did the first sentence. I believe in mark-to-market, and the ones tampering with it are involved in a con game.

Originally posted to Tom Sykes on Tue Apr 07, 2009 at 09:23 AM PDT.

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Comment Preferences

  •  You do know that we survived from 1934 to 2007 (7+ / 0-)

    without mark to market accounting, right? And that mark to market accounting also has downsides on the Upside.... When a market is in a overheated bubble (like the housing market in 04 to 07) the banks happily over-value their assets because of that same market.

    Frankly, I have no clue whether the FASB rule changes are a good thing or a bad thing. I've heard both sides of the argument, and I am at total loss. But it might do you some credit to acknowledge that there is a little more grey in this issue than there is black and white.

    "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

    by Larry Madill on Tue Apr 07, 2009 at 09:29:51 AM PDT

  •  Voo Doo Ekonomiks..The very same bankers that (3+ / 0-)
    Recommended by:
    PsychoSavannah, Superpole, Earth Ling

    allowed and encouraged the melt down are now back in full control mode..All the fraud, all the theft, all the churning and burning is suddely washed away..All this was accomplished by the Bankers with no crimes being committed...? BS ! Who would or could believe that yet here we sit by watching as these same count "our money" one more time...Where are the indictments, the grand juries...Hello ! Those fuks stold the money...hello...Oh wow, let's send Martha Stewart back to prison again...WTF

    Desolation aint so bad..

    by memorybabe on Tue Apr 07, 2009 at 09:32:25 AM PDT

  •  You have it backwards (3+ / 0-)
    Recommended by:
    sullivanst, keonhp, memorybabe

    The new rule lets the bank get out of doing mark to market. That's the con game.

  •  "Value" is what someone is (3+ / 0-)
    Recommended by:
    CitizenOfEarth, Superpole, memorybabe

    willing to pay for something.  Since no one will buy these "toxic assets", seems to me their "value" is zero.  That means that nothing can be added to the balance sheet for these "assets", which means the banks that hold a lot of them are, effectively, insolvent.

    •  But most of those "toxic assets" (3+ / 0-)
      Recommended by:
      Wisper, ticket punch, keonhp

      will mature in the next two to three years, and will pay out just fine. Most people are still paying their mortgages, and its only a few mortgages in each CDO that is causing them to be toxic. Which is why the banks aren't selling them and instead choosing to hold onto them. So are the banks insolvent or not? Are the toxic assets bad or not?

      I don't know. No one else does either. It's like the Shrodinger's Cat of economics. The judgement of what is insolvent and what is toxic is based entirely upon your perception at a given time.

      "You Can't Piss on Hospitality... I WON'T ALLOW IT!" Michael Waits, Troll 2

      by Larry Madill on Tue Apr 07, 2009 at 09:41:28 AM PDT

      [ Parent ]

      •  historically speaking (2+ / 0-)
        Recommended by:
        PsychoSavannah, Larry Madill

        they should mature at par, but the part that worries me is that historically speaking we didn't have as many ninja loans and shit like that, so i really go back and forth about the 'legacy' assets, and whether or not it's a great idea to scoop 'em up like fake nikes.

        now, the thing is that according to FASB, if an asset becomes FASB level 3 (completely illiquid market, no observable price), then you have no choice but to mark to model -- which, correct me if i'm wrong, but it looks like a large number of assets are exhibiting FASB L3 properties.  the whole business gets pretty sticky when you realize that some assets pricing at around 80 cents right now are showing a market around 20-30 cents (when there's even visibility at all).

        all in all i'd say it's a pretty fascinating time to be watching the markets.  what we learn now might introduce new methods of pricing and hedging risk for the future.

        i don't want no peace, gimme equal rights and justice.

        by keonhp on Tue Apr 07, 2009 at 10:34:14 AM PDT

        [ Parent ]

      •  Don't forget the madness of the bubble (0+ / 0-)

        House flippers were paying a half million for gutted brownstones in neighborhoods controlled by gangs and crack dealers. Hey, prices always go up -- you're a fool if you are not flipping houses.

        Well, now the bubble burst and the bank owns the paper on all those crack houses.

        The only thing for sure is that the taxpayer will be stuck with that half million mortgage as the bankers sail off in their yachts to summer in the Hamptons.

        Today's Economic Threat Level: SEVERE, Rewards for the guilty, punishment of the innocent.

        by CitizenOfEarth on Tue Apr 07, 2009 at 11:12:47 AM PDT

        [ Parent ]

    •  That's not always true. (1+ / 0-)
      Recommended by:
      burrow owl

      Say I had a golden goose.
      Say I knew it laid a 1oz pure gold egg every week.
      Say I believe it will live 10 years from today, and have actuarial data to justify that assumption.

      That goose has a very real value, since the spot price of gold is currently $873/oz. It's going to produce somewhere around $450,000 of gold over its lifetime.

      But noone believes in this golden goose. They assume it's a fake, and noone will pay my bargain-basement asking price of $300,000 (I need the cash fast, because I'm behind on my mortgage).

      Does that mean it's "value" is zero? Your definition would say it is. Objective reality says it's worth a lot.

      I would never die for my beliefs because I might be wrong. - Bertrand Russell
      -5.38, -6.41

      by sullivanst on Tue Apr 07, 2009 at 10:15:29 AM PDT

      [ Parent ]

      •  How on earth do you figure that no one is (0+ / 0-)

        willing to buy this golden egg laying goose?

        People are buying gold mines and have right through this.  If a gold mine has a value so do these so called toxic assets, but some gold mines are worthless and so are some of these toxic assets.

        •  If I offered you a golden goose today (0+ / 0-)

          Would you buy it off me, sight unseen?

          Right, you wouldn't, because you don't believe golden geese exist.

          The simple fact is that 90% of mortgage borrowers are making their payments. To suggest that their mortgages have zero value because they're packaged in an opaque security that nobody trusts any more is obviously false.

          I would never die for my beliefs because I might be wrong. - Bertrand Russell
          -5.38, -6.41

          by sullivanst on Tue Apr 07, 2009 at 10:28:29 AM PDT

          [ Parent ]

          •  Until someone, somewhere sits (0+ / 0-)

            down and unravels all the bullshit bad mortgages that are packaged in with the good mortgages, no one can value anything.  The bad loans that were made WILL affect the pricing on these "assets" and they will never be worth what they were said to be  worth.  Why isn't that the very first step being taken?????

            The golden goose analogy doesn't take into account that the owner wanted more eggs to make more money, so he gave the goose extra food to make it lay more eggs, effectively bloating the goose until it got sick and laid very few eggs.  Since the goose's owner had leveraged his house to 30 times the amount he expected from those eggs, he loses everything....the way it SHOULD happen.  

            •  Actually, the good & bad mortgages are separated (0+ / 0-)

              by the tranching process in most private-sector CMOs.

              Let's say I have 400 "similar" mortgages - they are of the same type (say, 7/1 ARMs tied to LIBOR) and similar interest rates. They have different maturity dates.

              I create 4 tranches of 100 loans each from these 400. But I don't say which are which, to begin with.

              Instead, I say that when the first 100 loans are paid off, I'll pay the super-senior tranche off in full.

              Then, when the next 100 loans are paid off, I'll pay the senior tranche off in full.

              Now, let's say 150 of the 400 loans default - they're ARMs after all - so I won't be able to pay the junior tranche in full, I'll default on it.

              The super-junior tranche gets nothing. Oh dear.

              But I can't "unravel" which mortgage goes into which tranche. I simply don't know until they're paid off or defaulted which goes where.

              What's worse, I wasn't the issuer for most of the mortgages. I just bought them off a primary issuer. I don't have all the underwriting details, and alarmingly often, I don't have the actual 'paper', and might not know where it is.

              I would never die for my beliefs because I might be wrong. - Bertrand Russell
              -5.38, -6.41

              by sullivanst on Tue Apr 07, 2009 at 12:01:23 PM PDT

              [ Parent ]

          •  How is a golden goose any different than (0+ / 0-)

            a gold mine?

            •  Because we both believe that goldmines exist (0+ / 0-)

              But have you ever seen a golden goose?
              Do you truly believe in them?

              I would never die for my beliefs because I might be wrong. - Bertrand Russell
              -5.38, -6.41

              by sullivanst on Tue Apr 07, 2009 at 11:32:37 AM PDT

              [ Parent ]

              •  Well if these toxic assets are golden gooses (0+ / 0-)

                then no wonder nobody wants to buy them.

                There value does not exist.

                •  It's not that their value doesn't exist (0+ / 0-)

                  It's that none of the potential buyers is willing to pay what the banks say they're worth.

                  The simple fact is that we have absolutely no way of knowing what the true value is. Noone outside of the banks has all the information required to come to a true valuation, and it's entirely possible that even the banks don't have that information either. In fact, the root cause of this crisis is that the models the banks were using didn't correctly predict the risks.

                  The current default rates on the mortgages underlying MBS - even on subprime mortgages - are simply not high enough to justify the severity of the discounts that buyers are demanding. The bid prices on MBS are clearly far below the true value of the assets.

                  I would never die for my beliefs because I might be wrong. - Bertrand Russell
                  -5.38, -6.41

                  by sullivanst on Tue Apr 07, 2009 at 01:42:22 PM PDT

                  [ Parent ]

      •  That's in a bubble gold market.... (0+ / 0-)

        The golden goose analogy doesn't take into account that the owner wanted more eggs to make more money, so he gave the goose extra food to make it lay more eggs, effectively bloating the goose until it got sick and laid very few eggs.  Since the goose's owner had leveraged his house to 30 times the amount he expected from those eggs, he loses everything....the way it SHOULD happen.  

        •  No, the goose still has value. (0+ / 0-)

          It's simply factually incorrect to say it has zero value, just because the market doesn't believe in it.

          Plus, you have to bear in mind that 48.9% of Bank of America stock and 58% of Citigroup stock is owned by 'institutions' - pension & mutual funds. If you force seizure by forcing a valuation that simply everybody with a clue agrees is artificially low (and Krugman has certainly explicitly stated that he believes the bid price on MBS is below their true value), that amounts to daylight robbery from people's 401(k)s and IRAs.

          I would never die for my beliefs because I might be wrong. - Bertrand Russell
          -5.38, -6.41

          by sullivanst on Tue Apr 07, 2009 at 11:39:54 AM PDT

          [ Parent ]

    •  In fact they could have a negative value (0+ / 0-)

      Even if the house itself is worthless (except to crack dealers), the bank owns it and has to pay real estate tax on it.

      Today's Economic Threat Level: SEVERE, Rewards for the guilty, punishment of the innocent.

      by CitizenOfEarth on Tue Apr 07, 2009 at 11:16:22 AM PDT

      [ Parent ]

  •  Apparently from reading William Black's interview (2+ / 0-)
    Recommended by:
    CitizenOfEarth, shann

    and follow up, Geithner and company have been acting in an illegal manner all through this whole bailout mess.

    THere is too much to be outraged about to even be outraged anymore.

  •  This is not even CLOSE to accurate (2+ / 0-)
    Recommended by:
    FG, synductive99

    or fair for that matter.

    Mark to Market has no consideration of the current market.  So when the credit market siezed up and NO ONE could get a mortgage over $350,000 no matter WHAT their credit score was, you realize Mark to Market then forced every single piece of real estate in every single portfolio be adjusted to $350,000 at the most.

    2500 square foot penthouse loft on the Upper West Side of Manhattan?  $350K.  6 bed room, 3 car garage single family home on 6 acres in Potomac, Maryland?  $350K.  4 bedroom beach house with ocean-front views and a water front property line in Malibu, CA?  $350K.

    This is nowhere near accurate.  No bank is going to sell these kinds of assets in the current market.  Those properties are worth MILLIONS.  They just need to sit on them until the credit market eases back up and they will be PRIME assets. Forcing them to take an immediate loss on this kind of thing just because the lack of a buyer or competitive market will drive down the price TODAY is not fair to a business trying to balance an asset sheet.

    You should think these kinds of business world realities through before just layering on more "All bank4ers are teh crookz!! 1!" bullshit-rage with your book-cooking and fraud accusations.

    Thinking men can not be ruled. --Ayn Rand

    by Wisper on Tue Apr 07, 2009 at 09:44:32 AM PDT

    •  Really? (4+ / 0-)
      Recommended by:
      Superpole, shann, penguinsong, Earth Ling

      All those mortgages are just gonna re-bubble, huh? Prices in Los Angeles and San Diego are going to magically increase 40 percent over the next few years? Well, I guess we don't have anything to worry about then! All hail Tim Geithner!

      •  No.. they will not reach their high point again (0+ / 0-)

        nor will they stay at their current low point.  And much of the downward pressure is not a true revaluation of real estate as much as it is a lack of ability to finance through credit.

        Unless you think the mortgage industry will never unfreeze to allow people with good credit and proven income to take on mortgages of $400K+.

        If the banks tried to appraise these assets at their 2006 high-water mark that would be dishonest.  So how is it "honest" to force them to use the 2009 Q1 low-water mark?

        Thinking men can not be ruled. --Ayn Rand

        by Wisper on Tue Apr 07, 2009 at 09:59:08 AM PDT

        [ Parent ]

        •  Then let them pull these CDO's apart and argue (1+ / 0-)
          Recommended by:

          their case.  This blanket ruling just allows them to hide the problems.  

          •  Those CDOs ARE being pulled apart (0+ / 0-)

            as much as they can.  Once they are securitized and sold off in thousands, if not millions, of pieces its not a simple matter of reconstruction.

            Liddy has already deleveraged over 60% of all the Credit Default Swap deals at AIG.  He is working to unwind these contracts.

            If the Government really does start buying up these toxic assets where they OWN enough stakes in the actual mortgage-backed securities they could attempt to reaggragate them in to more meaningful and transparent categories that could be renegotiated/refinanced/bought out/dissolved/etc.  

            But mark to market is just one more artificial pressure device subjected to extreme knee-jerk day-to-day flucuations that isn't helping right now.  It didn't even exist before 2007 so stop trying to act like this has always been such a bastion of consumer protection.

            Thinking men can not be ruled. --Ayn Rand

            by Wisper on Tue Apr 07, 2009 at 10:06:18 AM PDT

            [ Parent ]

        •  It's unlikely that this is a low watermark. (2+ / 0-)
          Recommended by:
          phenry, Wisper

          You are right on the important point that if there is no market for a specific class of assets at this point, the whole mark to market idea becomes fantasy. I think mark to market is one of those economic models that work well on paper but in real life, especially during a crisis, often don't work.

          •  Thats what most critics are saying (1+ / 0-)
            Recommended by:

            (even the good guys like Frank)

            It was a good idea gone bad.  It sounds good but the consequences just start muddying the waters even more.  And they are not trying to completely get rid of it, but just calibrate it a bit to protect it from shackling legitimate institution's balance sheets during times when the market is swinging in such extremes.

            Thinking men can not be ruled. --Ayn Rand

            by Wisper on Tue Apr 07, 2009 at 10:07:59 AM PDT

            [ Parent ]

        •  right - won't stay at current prices - they'll go (2+ / 0-)
          Recommended by:
          suresh, phenry


          Then eventually they'll come back up to the historical norms.  But that's going to take a while as we continue to give our money to the banksters rather than putting it into the real economy.

          •  Anyone who thinks the bottom is in is nuts (2+ / 0-)
            Recommended by:
            phenry, Earth Ling

            Especially in no-doc, stated income, I/O, Option ARM land known as California. Sorry, but the recast era has just started for Alt-A's and Prime Loans vintage 2004-2007. We're talking Jumbo's so FHA, Freddie, and Fannie are irrelevant. Anyone one who thinks we can re-inflate the bubble is going to be in for a shock. There will be a lot of homes $200k underwater or more when this is done. No amount of money printing or bullsh*t account is going to save this goose.

    •  But they are crooks in $2000 Armani suits but (0+ / 0-)

      crooks non the less.  Do you really believe they did not know about the CDOs and the Liar's loans and the NINJA loans that they were happy to have in their portfolios until everything exploded?  Now did they have help certainly, our government from the Reagan administration, Clinton administration and Bush administration were deeply complicit in all this.  We own those assets and we decide if they should be liquidated.  Are there honest bankers?  Sure there are and they sit in the small and regional banks that did not get involved this this crap and ran their businesses in a prudent way?  But the assholes worried about mark to market...not so much.

      •  Yes... Barney Frank is in cahoots (3+ / 0-)

        with Armani Suit wearing asshole banker-crooks.

        THere are going to be a lot of rule changes in the next 18 months.  That's what re-regulation looks like.  Everything is not the result of some backroom deal to allow nefarious boogey rich men to screw you.

        The goal should be market accuracy.  What are those kinds of assets really worth.  They shouldn't be allowed to pick numbers of the air or use artificially inflated values... but by the same token they shouldn't be forced to value them at dirt-poor level just because there is a present-day credit crisis that everyone around the world is trying to fix.

        Thinking men can not be ruled. --Ayn Rand

        by Wisper on Tue Apr 07, 2009 at 10:02:21 AM PDT

        [ Parent ]

        •  You and I agree on that point. I want (0+ / 0-)

          transparency, that is the only thing that will fix this mess.  I oppose a blanket rule..I want them to unwind these portfolio's.

          •  One other father had a belief that we (0+ / 0-)

            argued over(we vehemently disagreed over it) and you know what all the rich Armani wearing ass holes for the 2nd time in a hundred years just proved him can't get REALLY rich honestly.

            •  Don't you think that's a bit overstated? (1+ / 0-)
              Recommended by:

              you can't get REALLY rich honestly.

              It depends what you mean by "honestly."  Within the bounds of law? You certainly can get really rich while complying with the law.  I'll give you one example from here in New Orleans.  Al Copeland became a zillionaire because he opened a tiny store in Arabi, Louisiana, selling spicy fried chicken when everybody else was selling the bland stuff.  Personally, he was a bit flamboyant -- a couple of divorces, a big big Christmas lighting display every year, a fight with a guy who was convicted for bribing Gov. Edwin Edwards -- but I don't think there's any question that he became really rich honestly. Do I think he, personally, was perfect?  Of course not.  He made some good and some bad personal decisions, and some good and some bad business decisions (most notably, his purchase of Church's was not a good business move). If you want to say that perfect people can't get really rich, I'd agree with you -- only because there is no such thing as a perfect person.  Every person is flawed.  But can ordinary, flawed human beings get really rich through honest means?  Of course they can.  

              •  His point is that at some point you are going to (0+ / 0-)

                have to throw someone or something under the bus.  You are going to have to give up a personal ethical standard.  Do you really believe these Wall Street guys did not know that these exotic investments were extremely risky and the investors were nothing more than fish.  Listen to Harry Markopoulos...the picture he paints is absolutely appalling.  As far as your example, I can't say, only his customers and employee's can say.  If you poll'd his employee's would they say he made his money by cheating them out of a decent living.  Many businesses do exactly that.  The people I know that run small businesses well, they pay their employee's fairly, treat them and their customers well but are not zillionaires.  There are some things that are more important than money...self respect and intregity are among them.

    •  Umm, If Indeed There is no Fraud (0+ / 0-)

      then WHY no fully independent stress tests/audits of the zombie banks getting federal money.. and a full reporting to we the people?

      it's obvious the zombie's have something(s) large to hide.. fraud and insolvency being in the main.

      you know, it's interesting.. if you or I try to commit tax fraud, the IRS comes in and seizes everything.. all of your bank accounts, etc., so that a full accounting can be done.

      huge, politically connected banks on the other hand can get Billions in corporate welfare and-- are NOT required to be transparent.


      "AIG: A bottomless pit masquerading as an insurance company". The Economist.

      by Superpole on Tue Apr 07, 2009 at 10:11:15 AM PDT

      [ Parent ]

  •  This is mark-to-make-believe, not mark-to-market (1+ / 0-)
    Recommended by:

    Actual mark-to-market pricing is what's considered proper. Folks...and now our own government...are conflating the very meaning of the term.

    But, then again, even Bloomberg's conflating this!

    Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes]"

    What we have now is "mark-to-make-believe" valuations...that have no bearing on reality.

    Add this to FASB's new "definition" of the term, "net income," and it's the Enronization of American business.

    Wall Street, even after this last round of bailouts is concluded, will still have $5.2 trillion in off-the-books "assets," much of which must now be posted back on their books.

    So, what happens? Well, from now on one plus one equals three! And, it's "legal," too! Problem here is it undermines international confidence in our economy. Details...details...details.

    This is a sad day for American business.

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Tue Apr 07, 2009 at 09:49:25 AM PDT

  •  mark to market (3+ / 0-)
    Recommended by:
    burrow owl, coffeetalk, keonhp

    does not reflect reality either. Reality is that these securities are not going to be sold anytime soon and the cash flows will support a higher value than is currently assigned based on a ''fire sale'' designation.

    If done correctly, the new approach will be a more realistic picture of the ultimate economic value of these secruities.

    I realize this is not good news for the cheerleaders of bank failure,but better for our financial stability.

    And the major audit firms will be tested to sign off on the new valuations with their own liability at stake so it is not going to be some kind of con job or they will be destroyed themselves.

    •  i agree in some part (0+ / 0-)

      but at the same time, it becomes very difficult to price assets when they're illiquid, and most of the pricing models that deal with liquidity will often price in a premium (not a discount) for illiquid assets, to account for the greater deal of uncertainty in price.  kind of the way you see incredibly wide bid-ask spreads in shallow markets.

      i don't want no peace, gimme equal rights and justice.

      by keonhp on Tue Apr 07, 2009 at 10:37:47 AM PDT

      [ Parent ]

  •  Mark-to-market requires there be a market (1+ / 0-)
    Recommended by:
    burrow owl

    and that the market be liquid.

    When there's a class of asset that the current offer is 60, and the current bid is 25, i.e. massive illiquidity, what actually is the market price? We don't know, because there are no trades.

    I would never die for my beliefs because I might be wrong. - Bertrand Russell
    -5.38, -6.41

    by sullivanst on Tue Apr 07, 2009 at 10:05:23 AM PDT

    •  Buyers set the price not sellers - always (0+ / 0-)

      The only people who think sellers set the price are Banks, the Fed, and the US Treasury who live in fantasy land in which they can pretend assets are worth more than what buyers will pay for them. Reminds me of stickiness in the housing market as sellers hold on to their list price and end up taking deeper losses later. Sorry but illiquid assets is a myth, it's just that if banks sold their assets off at fair market they would be insolvent. Too bad.

      •  OK, sell me your house for $1 (0+ / 0-)

        There, I just set the price of your house.

        Oh, what's that? You won't sell for $1? You think it's worth more?

        Welcome to the wonderful world of CDO. The holders of the assets won't sell them because they believe them to be worth more than the bid price.

        Buyers don't set the price. The price is agreed on between buyer and seller. BTW, try "setting the price" next time you go to the supermarket. I think you might discover that the normal run of things in most people's lives is that the seller sets the price.

        It's very obvious when you look at the discount that potential buyers are demanding on CDOs, and compare it to the default rate, that their bids are not realistic. The bid price is nowhere near the true value of the assets.

        I would never die for my beliefs because I might be wrong. - Bertrand Russell
        -5.38, -6.41

        by sullivanst on Tue Apr 07, 2009 at 02:51:16 PM PDT

        [ Parent ]

        •  If I'm bankrupt the court will sell off my assets (0+ / 0-)

          If your $1 is the highest bid then so be it, same holds true for the BHC's. In a distressed asset situation the buyers always set the price. BHC's only have a choice because the Treasury and Fed feel obligated to keep them alive at the taxpayers expense. Once the Fed takes the banking division into receivership it will be time to liquidate their remaining assets, they are insolvent. That will happen either sooner or later.

          •  Sigh. (0+ / 0-)

            You've just precisely made the case for allowing flexibility from mark-to-market.

            If my next door neighbor goes bankrupt, and his house is auctioned for $1, does that make my house worth $1, even though I'm still making my mortgage payments? Of course not.

            The decision whether a bank is insolvent can't be made on the assumption that the bank is already insolvent. You might as well shut every business in the country down on that basis, because if you liquidated every business at once, all assets would be worthless because of the glut - so noone has any assets.

            I would never die for my beliefs because I might be wrong. - Bertrand Russell
            -5.38, -6.41

            by sullivanst on Wed Apr 08, 2009 at 08:32:16 AM PDT

            [ Parent ]

            •  If you're making payments (0+ / 0-)

              Then you wouldn't get foreclosed on; worst case the mortgage gets resold as is. If you do get foreclosed it's best to get those assets off the books, hence an auction. If the auction produces only $1 then that's what the market has deemed the property worth. The bank is not receiving funds from anyone after foreclosure; in fact they are paying taxes and HOA's. You can't zombie such property forever.

  •  Wisper and Larry are absolutely right. (1+ / 0-)
    Recommended by:
    burrow owl

    Mark to Market has huge faults and problems.  If you want an example, read "The Smartest Guys in the Room" about the Enron mess.  The accounting fraud that was at the basis of the Enron deal was made possible because of, and largely because of, mark to market accounting.  They were operating in one of those "bubbles" that people here have mentioned, and they'd buy an asset -- or, more often, take a financial trading position -- and immediately use "mark to market" accounting to recognize a "profit" on that asset or financial position. Not a good thing.  

    You can't automatically assume that, because banks want to do away with "mark to market" accounting, that it should be kept in place.  Taking positions on something like this requires, at the very least, a full understanding of all the ramifications.  

    •  You got it backwards (0+ / 0-)

      Enron used mark to myth or mark to fantasy not mark to market. They just pretended that their assets had a much greater (future) value. Mark to market forces accounting to today's value not tomorrows.

  •  I screwed up the had and first sentence (0+ / 0-)

    I favor mark to market. Sorry. New to all this.

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