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I don't get it. How is it beneficial to anyone but the bank to pretend that something worth 50,000 is worth 100,000? Isn't false accounting part of what got us into the current situation?its not fudging the books. right now a business has to write down a loss before they take it. getting rid market to market would actually help things especially financials
I don't get it. How is it beneficial to anyone but the bank to pretend that something worth 50,000 is worth 100,000? Isn't false accounting part of what got us into the current situation?its not fudging the books. right now a business has to write down a loss before they take it. getting rid market to market would actually help things especially financials
A timely piece from the WSJ
Steve Forbes Says Barack Obama's Economic Policy Repeats George W. Bush's Mistakes - WSJ.com
How so?I used to support m2m but have changed my mind. I think it is contributing to the downward spiral in the financial system.
How so?I used to support m2m but have changed my mind. I think it is contributing to the downward spiral in the financial system.
Okay.
But what if the banks need to pay off their liabilities? If their assets are artificially valued they quite possibly couldn't do it without the Federal Government stepping in...and depending on the size of the bank not even then.
How so?I used to support m2m but have changed my mind. I think it is contributing to the downward spiral in the financial system.
Banks have been effectively insolvent in the past. Too many times, in fact (and disturbingly). Banks were effectively insolvent after the Latin American debt defaults in the early 80s and again in the early 90s after the last real estate boom and the S&L debacle. Many banks went under but for many banks, book value was not written down. This allowed banks to replenish their capital over time by borrowing from the Fed for cheap, i.e. 3% and buying higher yielding Treasury bonds, i.e. 8%, earning a spread of 5%.
Nowadays, banks do not have the option, or at least to the same extent they once had. Now, if an asset is marked to market, and the asset is written down, they have to raise capital. But if you knew that a bank would have to raise capital and dilute your holdings, why would you own a bank stock? So investors sell their stock, driving the price down, which means the company has to raise even more stock to raise the same amount of capital, which dilutes existing shareholders even more, which means the company has to raise even more stock, and so on, until the share capital is essentially destroyed.
This is what is happening in the financial system today as a negative downward spiral has engulfed the stocks, and is a big reason why stocks keep going down every day.