Jadogsl

My Response to Soros' Views of CDS

CDS should have been labeled Insurance that way setasides would have been made. The state regulated part of AIG did not get in trouble.

Mark to Market accounting created a bigger problem than was there. If I insure an individual I don't pay unless he dies. If he gets sick I don't raise his premiums until he gets well again. Mark to Market accounting essentially killed Bear and Lehman.

Mark-to-Market: A Rule That Begs to Be Broken

There doesn't seem to be a realization by the fair value supporters that mark to market lending ( my phrase, newly invented to clarify the position ) , the precursor and not so distant cousin of mark to market accounting, such as margin on brokerage accounts or asset lending on housing etc., actually created the bubble(s).

This I believe is the argument that can win over those that don't 'get' the gist of the real debate here. The problem is from a PR perspective mark to market accounting 'sounds' very reasonable and those that argue against it are lableled as charlatans wanting a quick fix by hiding losses

The irony is that as it stands mark to mark accounting and lending ( again ) have and will make bubbles and busts exagerrated. Our society and economy need to take the opposite tack ( Jamie Dimon agrees ). Not only should accounting be based on cash flow models so should lending in all its variety of structures. Do this and 2008 does not occur as the real estate bubble has no way of forming. Neither does 1999 or 1929 as margin use would have not existed for stocks that did not meet the cash flow worth to allow the public and institutions to lever up. ( institutions should have the freedom to lend any dollar amount to anyone but the risk to lender and lendee should be flagged by some type of exclusion to normal lending resulting in higher rates and setasides by the lender for capital risk i.e. it should not be a normal course of business )

The business cycle will always exist but it could be significantly mitigated with applied common sense.

If successful, the modification of mark to market accounting and the application of a baseline of cash flow lending on all assets could alter the economic landscape in dramatic fashion and begin a new economic reality that could permanently alter the overly cyclical nature of the business cycle in a way that brings unprecedented prosperity.

In the end it could be that the huge flaws uncovered in fair value accounting may eventually lead to the realization of the embedded flaw that George Soros referred to in Alchemy of Finance as Reflexivity.
The theory that lending based on overvalued assets during booms and undervalued assets during busts is responsible for creating such havoc within the capitalist system and if left to its own devices leads to financial chaos.

Mark-to-Market: The Bogeyman of the 1930s Is Back

There doesn't seem to be a realization by the fair value supporters that mark to market lending ( my phrase, newly invented to clarify the position ) , the precursor and not so distant cousin of mark to market accounting, such as margin on brokerage accounts or asset lending on housing etc., actually created the bubble(s).

This I believe is the argument that can win over those that don't 'get' the gist of the real debate here. The problem is from a PR perspective mark to market accounting 'sounds' very reasonable and those that argue against it are lableled as charlatans wanting a quick fix by hiding losses

The irony is that as it stands mark to mark accounting and lending ( again ) have and will make bubbles and busts exagerrated. Our society and economy need to take the opposite tack ( Jamie Dimon agrees ). Not only should accounting be based on cash flow models so should lending in all its variety of structures. Do this and 2008 does not occur as the real estate bubble has no way of forming. Neither does 1999 or 1929 as margin use would have not existed for stocks that did not meet the cash flow worth to allow the public and institutions to lever up. ( institutions should have the freedom to lend any dollar amount to anyone but the risk to lender and lendee should be flagged by some type of exclusion to normal lending resulting in higher rates and setasides by the lender for capital risk i.e. it should not be a normal course of business )

The business cycle will always exist but it could be significantly mitigated with applied common sense.

If successful, the modification of mark to market accounting and the application of a baseline of cash flow lending on all assets could alter the economic landscape in dramatic fashion and begin a new economic reality that could permanently alter the overly cyclical nature of the business cycle in a way that brings unprecedented prosperity.

In the end it could be that the huge flaws uncovered in fair value accounting may eventually lead to the realization of the embedded flaw that George Soros referred to in Alchemy of Finance as Reflexivity.
The theory that lending based on overvalued assets during booms and undervalued assets during busts is responsible for creating such havoc within the capitalist system and if left to its own devices leads to financial chaos.

5-1/2 Ways to Make the Market Rally

People don't get it. It's mark to market that provides the most false information about value. Read below.

Former Fed Officials agree... Thanks for your comments, which are quite thoughtful. I will keep up this fight until SFAS 157 is suspended, as it is destroying our financial system and taking the economy with it. Best regards, Bill William M. Isaac
Chairman
The Secura Group of LECG


--- On Fri, 11/21/08, Bob McTeer wrote:

Thanks. I heard Sec Paulson on the radio yesterday refer to mark to market accounting as "pro cyclical." That's encouraging. Bob


--- On Thu, 11/20/08, Jadogsl wrote:


Did the enforcement of Fair Value Accounting i.e FAS 157 effective for fiscal years beginning after November 15, 2007 coincide with the early stages of the meltdown of the bond and equity markets ? Or was it a coincidence ?

There is no doubt that some financial-services firms found themselves ill-equipped to perform such acrobatics. Finance executives in the sector complained that the fair-value rules were "pro-cyclical" - that they were a self-fulfilling prophecy forcing banks to sell their securities in plummeting markets. ( paraphrased from CFO.com )

The big picture, a common sense view .... CSCO stock was at $80 in 2000. The cash flow value was $18. Had margin been against $18 instead of $80 the bubble in tech stocks may never have happened. Also in 2002, CSCO was at $11. Cash flow value ? $18. How do the purists defend Fair Value accounting 'allowing' margin loans against an $80 stocks really worth $18 by conservative estimates ? Migrate this example to Las Vegas real estate in 2005 and you have the achilles heal of Fair Value accounting.

George Soros speaks of reflexivity as the main component of his investing thesis. The key element is banks lending against overvalued assets create bubbles and the withdrawal of lending against falling asset values creates the bust. A mark to model across all spectrums, Margin...Home lending etc would REDUCE the risk to our financial system and bring sanity to our financial markets.

The real fix is INDEPENDENT firms that audit companies. Firing without cause should be eliminated when it comes to these firms. Whistleblower laws with teeth wouldn't hurt either. After all Enron wasn't a mark to market issue. Top people knew the value of the assets but were afraid to speak. It was a regulatory issue.

Finally, the toxic mortgage paper at Bear Stearns, seems its performing
well, Bear needed not go under at all. If you can't find this link it's on
seeking alpha website, search for Bear Stearns.

seekingalpha.com/artic...

The Rules on Buybacks Ought to Be Changed for Citigroup

Former Fed Officials agree...

Thanks for your comments, which are quite thoughtful. I will keep up this fight until SFAS 157 is suspended, as it is destroying our financial system and taking the economy with it.
Best regards, Bill William M. Isaac
Chairman
The Secura Group of LECG


--- On Fri, 11/21/08, Bob McTeer wrote:

From: Bob McTeer <soupcolddog@yahoo....

Thanks. I heard Sec Paulson on the radio yesterday refer to mark to market accounting as "pro cyclical." That's encouraging. Bob

______________________...

Did the enforcement of Fair Value Accounting i.e FAS 157 effective for fiscal years beginning after November 15, 2007 coincide with the early stages of the meltdown of the bond and equity markets ? Or was it a coincidence ?

There is no doubt that some financial-services firms found themselves ill-equipped to perform such acrobatics. Finance executives in the sector complained that the fair-value rules were "pro-cyclical" - that they were a self-fulfilling prophecy forcing banks to sell their securities in plummeting markets. ( paraphrased from CFO.com )

The big picture, a common sense view .... CSCO stock was at $80 in 2000. The cash flow value was $18. Had margin been against $18 instead of $80 the bubble in tech stocks may never have happened. Also in 2002, CSCO was at $11. Cash flow value ? $18. How do the purists defend Fair Value accounting 'allowing' margin loans against an $80 stocks really worth $18 by conservative estimates ? Migrate this example to Las Vegas real estate in 2005 and you have the achilles heal of Fair Value accounting.

George Soros speaks of reflexivity as the main component of his investing thesis. The key element is banks lending against overvalued assets create bubbles and the withdrawal of lending against falling asset values creates the bust. A mark to model across all spectrums, Margin...Home lending etc would REDUCE the risk to our financial system and bring sanity to our financial markets.

The real fix is INDEPENDENT firms that audit companies. Firing without cause should be eliminated when it comes to these firms. Whistleblower laws with teeth wouldn't hurt either. After all Enron wasn't a mark to market issue. Top people knew the value of the assets but were afraid to speak. It was a regulatory issue.

The case is made by an esteemed former official ... sec.gov/comments/4-573...

The effects are felt .....
www.researchrecap.com/.../

The proof is in ......
seekingalpha.com/artic...

TARP Takes a Wrong Turn

if you read nothing else read the last link in this comment

Former Fed Officials agree...

Thanks for your comments, which are quite thoughtful. I will keep up this fight until SFAS 157 is suspended, as it is destroying our financial system and taking the economy with it.
Best regards, Bill William M. Isaac
Chairman
The Secura Group of LECG


--- On Fri, 11/21/08, Bob McTeer <soupcolddog@yahoo.... wrote:

From: Bob McTeer
Date: Friday, November 21, 2008, 10:22 AM

Thanks. I heard Sec Paulson on the radio yesterday refer to mark to market accounting as "pro cyclical." That's encouraging. Bob


Here is what they were responing to...

Did the enforcement of Fair Value Accounting i.e FAS 157 effective for fiscal years beginning after November 15, 2007 coincide with the early stages of the meltdown of the bond and equity markets ? Or was it a coincidence ?

There is no doubt that some financial-services firms found themselves ill-equipped to perform such acrobatics. Finance executives in the sector complained that the fair-value rules were "pro-cyclical" - that they were a self-fulfilling prophecy forcing banks to sell their securities in plummeting markets. ( paraphrased from CFO.com )

The big picture, a common sense view .... CSCO stock was at $80 in 2000. The cash flow value was $18. Had margin been against $18 instead of $80 the bubble in tech stocks may never have happened. Also in 2002, CSCO was at $11. Cash flow value ? $18. How do the purists defend Fair Value accounting 'allowing' margin loans against an $80 stocks really worth $18 by conservative estimates ? Migrate this example to Las Vegas real estate in 2005 and you have the achilles heal of Fair Value accounting.

The reverse is now happening, a downward spiral as assets sell below their intrinsic value.

George Soros speaks of reflexivity as the main component of his investing thesis. The key element is banks lending against overvalued assets create bubbles and the withdrawal of lending against falling asset values creates the bust. A mark to model across all spectrums, Margin...Home lending etc would REDUCE the risk to our financial system and bring sanity to our financial markets.

The real fix is INDEPENDENT firms that audit companies. Firing without cause should be eliminated when it comes to these firms. Whistleblower laws with teeth wouldn't hurt either. After all the problems where known within Enron and reported to upper management. It wasn't a mark to market issue it was a regulatory issue.


The case is made by an esteemed former official ... sec.gov/comments/4-573...

The effects are felt .....
www.researchrecap.com/.../

The proof is in .....
seekingalpha.com/artic...