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Mark to market
Whiteboard Mark to market
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Be careful what you wish for.
Mark-to-market accounting has hoist the banks with their own petard. It would have been nice if the whiteboard piece had made some mention of the shortsighted forces that pushed for this accounting practice.
As long as values were on the upswing, banks were eager for mark-to-market, which inflated their assets, giving them extra leverage to blow more hot air into the financial bubble.
Now that the bubble has burst and assets are suddenly on a steep downswing, mark-to-market pulls the banks' magic carpet out from under them.
In other words, the practice tends to exaggerate movement either up or down. In tandem with fevered leverage, it predictably creates a situation of extreme instability.
When I was in Banking in the 70's Federal Commercial Banks were required to use "book value" or the purchase price of the asset. This meant that although interest rates increased dramatically causing the value of the bonds to decrease, the books overstated the market value of the bank's assets. When interest rates dropped the value of the assets increased. Since most bonds were acquired many years prior when interest rates were low, the market value of the bonds was substantially below the book value. In fact at my bank, we would have been bankrupt if forced to mark to market.
My question is when did the method of valuing assets change. When did banks start marking to market and why? Were they showing big profits by marking high interest rate bonds to market? Was it limited to commercial banks and brokers were the ones who mark to market? I'd like more history on when and how these changes took place.
Chuck O'Neil
What a great resource to get more insight on factors that have and are shaping our economy. Most of the presentations I have watched here show the Bankers and Uncle Sam (with his bag of money or rescue helicopter) but the taxpayer is not represented very often aside from the fact that we may "all need a drink".
I saw a video a while back on the fractional reserve system and how every dollar that is printed steals or takes from the money supply that is already out in the economy. I wish more people really understood what is happening to their already dwindling savings when Uncle Sam comes out with a new big bag of money.
Any chance of going over something like this or explaining why or if an economy should ever consider saving more?
This is a very educational site, I enjoy it a lot. I hope Paddy Hirsch would explain about the auction preferred rate stock (ARPS) that was also frozen awhile back. What is this investment? I know almost high networth individual were affected but I readlly don't understand, I hope Paddy would provide a lesson on this. Thank you and more power.
I have enjoyed all of the white board presentations, especially since the discussion culminates in the need for a drink!
I too would like to know more about the interaction of the Federal Reserve, the Treasury, and the Govt Spending. It seems their roles are changing/expanding under the current situation.
Amit.
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