canadian_investor

FASB Unlikely to Suspend Mark to Market

The real problem with mark-to-market is not the VALUE of the POTENTIAL losses, it’s their AMORTIZATION.

For MANY kinds of LONG-TERM assets, accounting rules managed to come up with different AMORTIZATION techniques (trying to show the REAL losses of value over the EXPECTED LIFE of the ASSET by applying different durations and linearity). Why is it different with MBS or CDOs?

The PURPOSE of accounting is to REFLECT THE REALITY OF THE UNDERLYING BUSINESS. Even if these MARKETS are EFFICIENT and they REFLECT THE REAL VALUE of these assets, requiring write downs (thus UPFRONT capital TODAY) for your next 3, 5 or in some cases 20 years of MARKET ESTIMATED LOSSES will look very stupid 70 years from now… just like it probably did in 1938!

The Wonders of Mark-to-Market: Simultaneously Well-Capitalized and Insolvent

CalTexan is perfectly right. I would add the following comment:

The problem with mark-to-market is not the VALUE of the (potential) losses, it’s their AMORTIZATION.

So far, accounting rules managed to come up with different AMORTIZATION (loss of value over TIME) periods for MANY kinds of ASSETS (depending on their nature, some are 3 years; others are 5 or 10 years). Why is it different with ABS, MBS and CDOs?
The ROLE of accounting is to REFLECT, AS CLOSE AS POSSIBLE, THE REALITY OF THE UNDERLYING BUSINESS!

Even if these “VERY ILLIQUID MARKETS” are right and those are the real values of these assets, requiring write downs (thus UPFRONT capital TODAY) for your next 3, 5 or 10 years of “MARKET ESTIMATED LOSSES” will look very stupid in 70 years from now… just like it probably did in 1938!

Santelli's Rant: A Watershed Moment?

Well said Rick, but I’m afraid you’re missing the point here! Indeed, stupid people made stupid mistakes. But if this was the only reason, such a mess would have happen long time ago (are people more stupid now than they were in the 80s or 90s?). The only reason your “neighbor” bought an “extra-bathroom-house-... is only because this time, he was ALLOWED to be “stupid”.

Regulators (by permitting gigantic mortgage-back securities leverage) combined to greedy bankers (according “stupid” loans KNOWING they would punt the problem through derivatives) IS IN FACT the reason it happened this time. Here, in Canada, our regulations and banking rules would do not allow for such a fiasco… Are Canadians less stupid than Americans? I don’t think so! We were just good at protecting “stupid” people from other “stupid” people. That’s all!

So Rick, let’s face it, EVERYBODY was “stupid” for letting these absurd regulations, policies and business behaviors take place. Yes, your neighbor is “stupid”. What surprises me is that you (and all the intelligent people in America) don’t already know that! If you knew, all this chaos would have never happen. Just like us.

wdhalgren ---

My guess is that history will record that "high skewness" on EITHER "personal responsibility of capitalism" OR "risk pooling of collectivism" have been proven wrong!

Staying Defensive While Wondering 'What's Next?'

constructe : Mark to market is only a couple of years old. We had banks (and were somehow able to value them) for decades!

Of course the mark-to-model rules were not perfect. Some of them failed from time to time but such a GLOBAL financial mess never happened before. One must admit that correlation is close to 1...

Let's face it, there are times when markets are very irrational and mark-to-market is seriously flawed when this happens... especially when there is no market at all!

Staying Defensive While Wondering 'What's Next?'

constructe : Mark to market is only a couple of years old... and we had banks for a couple of centuries!

Of course the mark-to-model rules were not perfect. Some of them failed from time to time but such a GLOBAL financial mess never happened before. One must admit that correlation is close to 1...

Let's face it, there are times when markets are very irrational and mark-to-market is seriously flawed when it happens (especially when there is no market at all!).