Fallout: The Financial Crisis

Bankers need to get the price right

Marketplace Staff Apr 9, 2009
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Fallout: The Financial Crisis

Bankers need to get the price right

Marketplace Staff Apr 9, 2009
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COPY

TEXT OF COMMENTARY

Kai Ryssdal: As Jeremy Hobson alluded to, one of the reasons Wells Fargo is expecting such a bang-up first quarter is that the rules have changed. Last week the board that gets to decide these things loosened up the rules on what’s called Mark-to-Market. Companies now have more leeway to assign a value to an asset where no market for it exists. Commentator Paul Kedrosky thinks the banks are being allowed to pull a fast one.


PAUL KEDROSKY: Some people have convinced themselves that a cause of the current crisis was the awful, terrible idea of pricing things properly.

Heresy, I call it. Price things at a level at which you can sell them on the open market? Where else but in banking would you see such a silly idea? Other than in malls, of course. And corner stores. And car dealers. OK, pretty much everywhere.

Why do bankers want their own pricing rules? Good question. First, bankers and their boosters argue that it makes no sense to price things to market when you have no intention of selling them.

OK, but even though I don’t plan to sell my Beanie Baby collection right now I would like to know what they’re worth. Banks aren’t different; they just like to pretend they are if it keeps them from being taken over by the FDIC.

Second, banks say that some markets are “distressed,” so they can’t get proper prices for their wacky paper. Nice. The market for some deranged credit derivative is gone, never to return, so I get to make up a price. Call it “Mark-to-Myth” — preferably, high myths.

So, let’s summarize: Bankers don’t want to price crappy assets that they shouldn’t have bought in the first place, so they cross their fingers and say that they’re going to hold those assets forever. And if you call their bluff and tell them to price the dreck anyway, then recent changes in accounting rules mean they get to say the market is “distressed” and so they can make up prices.

No thanks. Fibs, funny money and fake markets are no way to fix banking. And anyone who feels otherwise… well, I have a bunch of $1000 purple and yellow Beanie Babies waiting for you right here.

Ryssdal: Paul Kedrosky is a senior fellow at the Kaufman Foundation. He is also the editor of the business blog, “Infectious Greed.”

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