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So Much for Restoring Confidence...

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October 01, 2008 – Comments (11)

So it appears the latest bailout bill would  "allow" the SEC to suspend mark to market accounting for bank assets that are distressed. I posted on this below, but bring it up again because the more I think about it, the dumber the idea seems.

If this bailout is really about clearing out toxic debt and restoring confidence so that bankers will trade with one another again, why on earth would allow everyone to retreat to their bunkers to make up rosier valuations about their assumed-to-be-toxic holdings bolster counterparty confidence?

Is this about getting a job done or not, folks? Is it about holding your nose and cleaning up toxic assets, or is it about limping banks along with opaque balance sheets for a few more years until they finally succumb to the reality that those chopped-up HELOCs aren't worth spit in a down economy with record home-price drops?

Pull the bandage off all at once, or we'll run the risk of turning a sharp, painful, cleansing downturn into a decade-long slow bleed, as in Japan.

Sj

11 Comments – Post Your Own

#1) On October 02, 2008 at 1:19 AM, jahbu (84.50) wrote:

Hope you have a big bag full of gold hidden in the backyard.

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#2) On October 02, 2008 at 4:01 AM, saunafool (98.68) wrote:


I'm turning Japanese
I think I'm turning Japanese
I really think so
Turning Japanese
I think I'm turning Japanese
I really think so
I'm turning Japanese
I think I'm turning Japanese
I really think so
Turning Japanese
I think I'm turning Japanese
I really think so

The Vapors

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#3) On October 02, 2008 at 10:34 AM, Terok1313 (30.62) wrote:

I've been wondering the exact same thing.  Suspending mark-to-market seems like the last thing you'd want to do to restore confidence.  And confidence is the truly important currency here, not USD.

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#4) On October 02, 2008 at 10:40 AM, HKendrick (< 20) wrote:

http://www.forbes.com/2008/10/02/ubs-asset-update-markets-equity-cx_vr_1002markets08.html?partner=yahootix

 Apparently, someone can move some of these assets to the private markets.  Anyone think maybe...just maybe...we're getting played?  That banks are just holding these things because, unlike the private market...say it with me...WE ARE GOING TO OVERPAY.

Nah.  The sky is probably falling.  It must be.  I keep seeing all these screeching Fool headlines.  And a disinterested Warren Buffett tells us it's a good idea and we'll make money.  That'd be enough for me to greenlight pushing all our chips to the middle of the table. 

In all seriousness, though, Seth:

I think the mainstream media is covering this much better than the Fool.  Many of these Fool editorials have the feel of sales pitches (like the ones I get in my inbox every week regarding the latest Fool product).  Don't get me wrong.  I love this place, and think there are some truly great minds here.  But the last two weeks have been a bit disappointing.

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#5) On October 02, 2008 at 11:18 AM, HKendrick (< 20) wrote:

"Suspending mark-to-market seems like the last thing you'd want to do to restore confidence."

Terok, you guys (you and Seth) seem to be saying the market does a pretty good job of valuing these assets.  So this bailout truly is a subsidy, right?  In other words, we may recoup some money (or even make some), but we shouldn't expect to.

On the other hand, if one's story is that the market isn't valuing these things properly, what's wrong with suspending mark-to-market rules?  Does it really make things more opaque?  It seems like it might make it easier for institutions to unload these things a little at a time, without the necessity of moving them all off the balance sheet at once.  And if the market can't find some sort of intrinsic value for the assets without reference to an accounting convention (whatever that convention may be), then it's a crapshoot anyway.

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#6) On October 02, 2008 at 11:18 AM, TMFBent (99.81) wrote:

You'll notice you haven't seen my name attached to any of those "sales pitches." I have not been convinced that we're not the patsy in the poker game, and I'm still not.

One great thing about the Fool is that I've not been pressured to take up anyone else's line on this, either. Many other companies would have said "sign here or else."

And I hear you on the inbox messaging and ads.

Sj

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#7) On October 02, 2008 at 2:36 PM, TheGarcipian (33.33) wrote:

Seth, I totally concur. Eliminating or suspending mark-to-market is just plain stupid. Do we play by the rules only when everyone's making money, or do we capriciously change them at will?  That's funny because if I am allowed to say my house is worth $350K but any buyers out there would not pay more than $260K, then who am I fooling? And if they know I've artificially inflated that asset beyond what they can figure out it is really worth, then they'll be out of the house and driving away faster than you can say "Lost Sale!"

As you and Terok (and I, in my latest blog entry) have noted, the problem is about trust and confidence. This suspension of the rules only serves to undermine that confidence.

On a side note, I'm glad to know TMF execs are not pressuring you to sign on with them and their plea to Congress to pass this Corporate Welfare bailout.

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#8) On October 02, 2008 at 3:01 PM, HKendrick (< 20) wrote:

"As you and Terok (and I, in my latest blog entry) have noted, the problem is about trust and confidence. This suspension of the rules only serves to undermine that confidence."

 I think what you guys are talking about here is more a disclosure issue than an accounting rule issue.   Just require as much transparency with respect to the individual assets in question (e.g., make them open their books, models, assumptions, histories, etc.) and let the market sort it out.  As I said, if you think the market is working now (and you'd have to, I think, to insist on mark-to-market valuation), then any bailout is clearly a subsidy (because the market is acting as if these things are nearly worthless).  And if you don't think the market is working, then insisting on mark-to-market accounting doesn't make much sense; by definition it would only be giving you poor information.

As to the "fairness" of letting these guys mark-to-market on the way up and not the way down:  we are where we are, and, to paraphrase Clint Eastwood, fairness has nothing to do with it.

Respectfully,

Dennis

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#9) On October 02, 2008 at 5:57 PM, ByrneShill (78.09) wrote:

  That's funny because if I am allowed to say my house is worth $350K but any buyers out there would not pay more than $260K, then who am I fooling? And if they know I've artificially inflated that asset beyond what they can figure out it is really worth, then they'll be out of the house and driving away faster than you can say "Lost Sale!"

More importantly, nobody would lend you more than 260k on that house. Which leads me to believe that to get you guys out of that crisis, the 700B should be spent on houses, not on CDOs and CDS. buy 700B of houses, burn them down to the ground, and voilà, you bailed out just about everyone. Sounds dumb? Not much more than that bailout.

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#10) On October 02, 2008 at 5:57 PM, ByrneShill (78.09) wrote:

  That's funny because if I am allowed to say my house is worth $350K but any buyers out there would not pay more than $260K, then who am I fooling? And if they know I've artificially inflated that asset beyond what they can figure out it is really worth, then they'll be out of the house and driving away faster than you can say "Lost Sale!"

More importantly, nobody would lend you more than 260k on that house. Which leads me to believe that to get you guys out of that crisis, the 700B should be spent on houses, not on CDOs and CDS. buy 700B of houses, burn them down to the ground, and voilà, you bailed out just about everyone. Sounds dumb? Not much more than that bailout.

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#11) On October 03, 2008 at 9:17 AM, ByrneShill (78.09) wrote:

  That's funny because if I am allowed to say my house is worth $350K but any buyers out there would not pay more than $260K, then who am I fooling? And if they know I've artificially inflated that asset beyond what they can figure out it is really worth, then they'll be out of the house and driving away faster than you can say "Lost Sale!"

More importantly, nobody would lend you more than 260k on that house. Which leads me to believe that to get you guys out of that crisis, the 700B should be spent on houses, not on CDOs and CDS. buy 700B of houses, burn them down to the ground, and voilà, you bailed out just about everyone. Sounds dumb? Not much more than that bailout.

Report this comment

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