Latest Mark-to-Market Rule Changes Are a Travesty

A lot of people have been asking my about my opinion of the latest M2M rule changes. Well, I find it to be a travesty that political pressure and corporate lobbying can actually change the way accounting is done. Note, I say it is a travesty, but not a surprise. I should be grateful, though. This actually means that I should be making more money as people will undoubtedly have significantly more problems evaluating companies due to the ADDED LACK of TRANSPARENCY! Hey, more people for me to sell puts to.

In an earlier posting, I made clear that the lack of transparency should bring down the valuation of the entire sector, for when in doubt, devalue - hiding market values and permanent impairment losses does nothing if casts significant doubt. Yes, there will be a momentum trading pop, but I am a longer term investor, and I see these companies being devalued as guys like me start to punch holes in them. Even more profound is that I will not be able to make macro calls on 32 stocks to drop as accurately as before (see the Doo Doo 32), but when I do hit my target, it will be the motherlode. The reason, well before the FASB political travesty that just happened, institutions had to move "other than temporary" impairments from the balance sheet to the income statement and take a loss for it. Now, they no longer have to. It was bad enough before, since the impairments that they did take weren't very accurately marked down to market. Now, there's no telling what kind of fairy tale numbers will be thrown at us. There is one thing for sure, though. Many (outside of my blog's paying subscribers, of course) will not see a company's collapse coming until they actually feel the impact of the debris slam against their cranium! FASB has effectively removed the warning signs for everyone who does not have a team of forensic CPAs and CFAs who have no conflicts of interests. In other words, just about 95% of the investment population!

Mark to Market will do nothing to aid the economic values of banks and financial institutions. Cash flows are cash flows, and losses are losses. Calling a loan a performing asset (in lieu of a non-performing assets) does not make the borrower pay his bills! As a matter, it very well may damage economic value of the companies in question due to the warped compensation system therein. For instance, many companies will not act in the best interests of the company and raise capital due to its dilutive effects when share prices are low and costs of capital are high. The alternative is that they risk running undercapitalized, which they now have considerably more freedom to do thanks to the punks pundits at the FASB. Management will receive higher bonuses due to higher per share performance metrics when compared to what they would have received had they went the safer route and diluted, but they run much, much higher risk. If, or more accurately when, the stinky brown mushy stuff hits the impeller blades, splat!!! Corporate implosion, a la Bear Stearns, Countrywide, IndyMac, Lehman Brothers, WaMu, etc. style. Let it be known that I warned on all of these companies months ahead of their implosions (save IndyMac).

Hey, if you catch HIV and then call all of your political friends, and coerce, threaten or make love to the members of the Medical Boards to change the nomenclature of virus to that of a dermal rash, it does absolutely nothing to extend your lifespan or alter your medical condition. The most it will do is allow you to fool yourself or make it easier for you to pass the disease along to others as you tell them it's just a rash (while still remaining within the confines of technical veracity) as you infect them and put their lives in danger. Just keep that in mind when evaluating the financials under the M2M rules.

Comments

[logicalthought:]

So let me get this straight, Reggie: You're saying that:

>>Many (outside of my blog's paying subscribers, of course) will not see a company's collapse coming until they actually feel the impact of the debris slam against their cranium!<<

...and yet you're ALSO saying:

>>Hey, more people for me to sell puts to.<<

So, how long will it be before you (and your blog's "paying subscribers") go broke selling puts on stocks that are headed for "zero"?

Apr 05 09:39 AM

[ifuwish2:]

reggie
you shoud go to school and learn before you take pen in hand ,,you could hurt yourself,,stupid,stupid

Apr 05 07:42 PM

[sr9web:]

Yikes Reggie!

Be careful with your analogies - no need to get the AIDs lobby against you the same way pro-Big Bank shills are...

Apr 05 07:57 PM

[surgcare:]

Good article and right on . Some people just don't get it and never will. Toxic asset anyone .

Apr 05 08:06 PM

[PainfullyAware:]

Lets All Pretend To The End.

All the accounting rule change does is buy time until realization that the "Toxic Assets" are actually still TOXIC.

I hear many argue that the banks believe their assets are worth more than the market will bear. All victims of the "Ponzi" do not want to realize they have been taken. The Derivatives are the vehicle of the ponzi that allowed for a multiplier effect. Fraudulent Valuations while the market bubble was building was the enabling mechanism.

This will not end well.

Governments are preparing for dissent; Will you bear their Tax Burdens to pay for selling the future. Enjoy The Sunshine While IT Lasts.

Apr 06 01:39 PM

[Reggie Midd...:]

"logicalthought " doesn't appear to be very logical. One would think that it would be obvious that the "selling puts" portion of the article is a typo, but for those who really don't get it, let me correct my error. I met "buy puts from", "not "selling puts to".

Here are the results for my proprietary account and the model blog portfolio for 2007 and 2008 for those who are interested in how long it will take for us to go broke:
boombustblog.com/20090...

Apr 07 11:48 AM