Thursday, April 02, 2009

Mark to Market Rule Change


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"After intense pressure from lawmakers and some factions of the financial industry, the Financial Accounting Standards Board (FASB) voted on Apr. 2 to make it easier for corporate management to value assets on their balance sheets with less regard for market prices.
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The upshot, critics argue: Investors will lose even more confidence in banks' financials, exacerbating the very doubt that has helped drive the financial sector's rout in recent months. "It's downright Orwellian to protect the public. This 'oversight body' would blind them from the mistakes made by financial institutions by making accounting less transparent," Jack Ciesielski, editor of the Analyst's Accounting Observer, fumed on his blog."
Mark to Market is simple. All property and money is in the now. Promise and guessing – even past hopes and dreams, all count for nothing – it’s the bird you have, not the Turkey you bought or the eagle you think will show up later for Mai tai's at the bar.

A bag of nickels is worth a bag of nickels -- simple. A mortgage on a house is worth what you could sell it for, in cash, right this minute – also simple.

The Mark to Market rule. It was changed today to something different.

Things you have are called assets. They are your net worth, and for the big boys, the pile of stuff you use to lend and borrow with.

If you bought or sold a house two years ago, you’ve lost at least a third of your assets, maybe more. For a bank, that means they have a third less pile of money to play around with.
But really, that doesn’t seem too bad until you realize the bank used their pile to borrow 10X as much as they had. Do the math

1p/1/3p=2/3 v. (1pX10p)=10p/1/3=3.3p

SO – the bank had 1 pile (p) and now owes 3.3 piles (p) to pay back what they borrowed.
The change in the Mark to Market rule allows for banks to say the house they bought has only lost money if it had to be sold today in these panicked, distressed times. They are now allowed to make ‘reasonable estimates’ as to future worth of assets, based on historical models and wishes and dreams.

So – two things to remember.

  1. The math – our problem is not that we lost all the money we had, but that we lost all the money we could borrow as well.
  2. The analysts that evaluated worth and got us to where we are today are still employed by the companies that will evaluate us now.
But this time is different. But now we have learned from our mistakes. Our technology will allow use to see the problems before they grow. We can grow our way out of this by unleashing the forces of General Chiang Kai-shek onto the mainland of China.
Remember the time you first found out an adult was wrong about something?




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