Thursday, September 18, 2008

Housing and Credit addendum

Edit: Ace has a ton of good stuff. No sense in me rehashing all of it. Just check it out.
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A major contributing factor to the downward spiral of financial companies are "mark to market" accounting rules.

This is a rule change that came in after the last recession, somewhat reasonably requiring companies to report asset values at their current market value rather than according to a performance model that could sometimes be tweaked beyond reason.

But now we have a major asset bubble collapse where the assets don't have reasonable market values because the market has seized up. Your book of dodgy debts might probably perform at 80 cents on the dollar if left to maturity, but if you had to sell it in the next three days you might only get 15 cents on the dollar for it. So you have to report an 85% markdown rather than a 20% markdown. And now you have to raise 20 billion in two days or your credit rating will be lowered, and then you're bankrupt.

So when we try to figure out what regulations we need, we need to use the sniper rifle rather than the shotgun approach.

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