Tag: Economy & Business

Understanding mark-to-market

First, as commenter That Anonymous Dude puts it, “MTM is the worst form of accounting, except for all those other forms that have been tried from time to time.”

Second, investors and regulators and reporters and corporate executives need to learn not to take any financial reporting numbers, whether marked-to-market or not, at face value. The health of a bank or any corporation can never be adequately measured by a single bottom-line number. Understanding the assumptions and uncertainties inherent in accounting numbers is crucial to understanding how to use them.

Third, Congress really ought to stay out of this. The last time the people on Capitol Hill seriously messed with accounting standards was with stock options in 1994. In the process they ruined America. As some guy wrote in Fortune a few years ago:

[W]hat it came down to in 1994 was that the powers that be in American economic life decided that dishonesty in the service of prosperity was no vice. In doing so, they may have paved the path for the outrages that followed. “Once CEOs demonstrated their political power to, in effect, roll the FASB and the SEC, they may have felt empowered to do a lot of other things too,” says Warren Buffett, a lonely voice in opposition to the options steamroller back then

Suspending mark-to-market is for zombies – The Curious Capitalist – Justin Fox – Economy – Markets – Business – TIME

The Great “Entitled To Ownership” Society

Japan had their inflated Real Estate bubble in the 90s. Remember when the on-the-books value of their land’s country was priced higher than all of our land east of the Mississippi? Their big mistake, which their economy has never recovered from with zero growth that even 0% interest rates couldn’t jump start it was they never had an RTC. We blew out all of the bad Savings and Loans paper and our economy recovered. A lot of people got rich on those holdings when Real Estate recovered. The Japanese Banks never wanted to admit their losses and “lose face”, which is a big deal in their culture.

The problem this time is that the good and bad loans have been bundled together. The “Mark to Market” change in Nov. of 2007 was a huge SEC and Financial Board mistake. It allowed the current credit swap default market to explode to 70 Trillion dollars world-wide. The only way to value these toxic securities is not mark-to-market but by discounted cash flow. In other words if 10% of the bundle isn’t paying on their mortgage than value the paper by the remaining income stream and years left to maturity.

The Faustian bargain that started all of this was when the Banks wanted permission to roll-back post-depression regulations, such as banking across State lines, selling insurance, etc. In return, Congress forced lenders to agree to stop red-lining poor neighborhoods. Now everyone wants to encourage home ownership, but the problem started when, under congressional pressure, the highly politicized, bastardized Public/Private Mortgage behemoth Fannie and Freddie lowered standards. Read Wikipedia the history of the CRA legislation that promoted this activity.  As a result, other Lenders had to drop their standards to be able to compete in the lucrative home loan business. We are now reaping the results of that race to the bottom. An ex-Miami Mortgage broker, told me how he was coached by the lenders not only what they wanted to hear but also what they didn’t want to know about. The lenders just wanted to look the other way. As long as property values kept going up their Ponzi scheme worked.

Here is a video, edited by Republicans, from a 2004 House hearing; convened to receive a report on Fannie Mae by the Office of Federal Housing Oversight that was trying to warn the Congress about “safety and soundness issues”. It became “kill the messenger”. 

Buffett’s time bomb goes off on Wall Street

Buffett’s time bomb goes off on Wall Street | U.S. | Reuters
When historians write about the current crisis, much of the blame will go to the slump in the housing and mortgage markets, which triggered the losses, layoffs and liquidations sweeping the financial industry.

But credit default swaps — complex derivatives originally designed to protect banks from deadbeat borrowers — are adding to the turmoil.

Five years ago, billionaire investor Warren Buffett called them a “time bomb” and “financial weapons of mass destruction” and directed the insurance arm of his Berkshire Hathaway Inc to exit the business. Continue reading “Buffett’s time bomb goes off on Wall Street”

The Thanksgiving That Almost Wasn’t

RealClearPolitics – Articles – The Tragedy of the Commons
When the Pilgrims first settled the Plymouth Colony, they organized their farm economy along communal lines. The goal was to share everything equally, work and produce.

They nearly all starved.

Why? When people can get the same return with a small amount of effort as with a large amount, most people will make little effort. Plymouth settlers faked illness rather than working the common property. Some even stole, despite their Puritan convictions. Total production was too meager to support the population, and famine resulted. Some ate rats, dogs, horses and cats. This went on for two years. Continue reading “The Thanksgiving That Almost Wasn’t”