# market to market accounting



## wimpy77 (Mar 4, 2009)

there is tentatively a house finance meeting march 12 to talk about suspending market to market accounting for 12 to 18 months.


----------



## Immanuel (Mar 4, 2009)

I haven't really followed this, but what is the significance of doing that as you see it?

By the way, it is Mark to Market rather than Market to market if anyone wants to look it up.

I'm not sure exactly what this will accomplish or why the thought on suspending the procedure.  I understand the idea, but have not really weighted out the consequences of the suspension.  Anyone have any insight on this?

Immie


----------



## wimpy77 (Mar 4, 2009)

when i get to a more stable computer i will post a link


----------



## DavidS (Mar 5, 2009)

wimpy77 said:


> there is tentatively a house finance meeting march 12 to talk about suspending market to market accounting for 12 to 18 months.



Everyone on the floor of the NYSE has said that this needs to be done away with completely. THIS would trigger a rally in the markets if it was suspended.

For those who don't know what mark-to-market is, here is an example:

If an investor owns 10 shares of a stock purchased for $4 per share, and that stock now trades at $6, the "mark-to-market" value of the shares is equal to (10 shares × $6), or $60, whereas the book value might (depending on the accounting principles used) only equal $40.

Similarly, if the stock falls to $3, the mark-to-market value is $30 and the investor has lost $10 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.

Mark-to-market accounting - Wikipedia, the free encyclopedia


----------



## Skull Pilot (Mar 5, 2009)

Mark to market is basically a way of making a loss on paper seem like a real loss.

It is especially damaging to the housing market.  A lender holding a 30 year note, even though the loan is being serviced and will most likely continue to be serviced for the next 29 years is compelled to write down the asset acting as collateral for the loan as if it had to be sold today. It's reactionary silliness to think that this would be the case and in over 86% of mortgages it is not the case.

Suspending mark to market and only writing down actual losses rather than potential losses will go a long way to stabilizing things and particularly the housing market.


----------



## Terral (Mar 5, 2009)

Hi David and Wimpy:

Now I can see the reason why you guys want to chase me out of these economy discussions . . . 



DavidS said:


> wimpy77 said:
> 
> 
> > there is tentatively a house finance meeting march 12 to talk about suspending market to market accounting for 12 to 18 months.
> ...



David is confusing apples and oranges by even bringing up *the NYSE and stock purchases*, because *this mark-to-market topic* is about how *home values are established* having nothing to do with stocks at all. A good place to find information about this topic is at *MarkToMarket.com &#8211; Real Estate Valuation Services *(here).

If you read through the marketwatch.com news story (here) then you will see:



> &#8220;And this year, the accounting rule has wiped out well over $100 billion in asset-values tied to *home mortgages and loans issued to finance acquisitions*.



Some people want to throw away* the &#8220;fair value&#8221; accounting methods* used by property appraisers to determine *the value of distressed properties* in favor of simply pulling a number out of thin air to help banks represent *a much &#8216;higher&#8217; value* for *&#8216;toxic assets&#8217;* on their balance sheets. The property appraisers at marktomarket.com will plug the data from your property into their computer (I sold real estate for years since the mid 1970's) where comparisons will be made against similar properties that have sold in the past three or six months &#8216;and&#8217; against properties like yours that have failed to sell over the same period. Their appraisal will give you *a fair market &#8216;mark-to-market&#8217; value of your property* in the* &#8216;current economic environment,&#8217;* which is what determining *&#8216;fair market value&#8217; is all about*. Your property is worth whatever buyers in your area right now *&#8216;are&#8217; willing to pay* for similar properties *in &#8216;your&#8217; neighborhood* and not the higher price that banks want to use to bolster the appearance of their mortgage-backed securities portfolio through fancy calculations and bribes to government officials. 

Removing &#8216;mark-to-market&#8217; methods from the equation is a terrible idea, because we deliberately walk away from *the kind of &#8216;transparency&#8217;* that is needed for eventually solving *the &#8216;deflationary&#8217; problems* of continuing home-price devaluation. If the bank really believes that *their distressed property is worth &#8216;more&#8217;* than the number assigned by *the mark-to-market property appraiser*, then let him simply sell the property at that inflated price. :0) The real problem facing these banks is that the value of their mortgage-backed securities portfolios is* &#8216;decreasing&#8217; with every passing day* &#8216;and&#8217; with every passing week &#8216;and&#8217; every passing month and quarter, because the housing market is currently caught in *a deflationary tailspin that has no bottom!* The housing market cannot find a bottom, because the Gov&#8217;t keeps playing around with *the fundamentals* &#8216;and&#8217; the market cannot make decisions based upon all the uncertainty. *Outsourcing is killing JOBS* and *too many Illegal Alien Foreign Nationals* are *&#8216;displacing&#8217; too many U.S. workers from JOBS*, which means *the &#8216;price&#8217;* that legal U.S. Citizens *&#8216;can&#8217; afford to pay* is continuing to go DOWN. 

This is the same exact point that I make on David&#8217;s *&#8220;The Official Dow 7000&#8221;* Thread here, but Beavis is unwilling to make the *&#8220;NO BOTTOM&#8221; in the Housing Market &#8216;and&#8217; Stock Market* connection. So he sends nasty notes in my direction telling me to *&#8216;go away&#8217;* (heh), because somebody is very much full of himself and trying to lead these readers in a completely different direction than that told by all the evidence. If we investigate the information on David&#8217;s Wiki link (here), the we also see:



> *Effect on subprime crisis and Emergency Economic Stabilization Act of 2008*
> 
> Former FDIC Chair William Isaac placed much of the blame for *the subprime mortgage crisis* on the Securities and Exchange Commission and *its fair-value accounting rules*, especially the requirement *for banks to "mark-to-market" their assets, particularly the mortgage backed securities.*[6] Whether this is true or not was subject to an ongoing debate during 2008. [7]
> 
> The debate arises because *this accounting rule requires companies to adjust the value of marketable securities* (such as the mortgage-backed securities (MBS) at the center of the crisis) *to their market value.* The intent of the standard is *to help INVESTORS understand THE VALUE of these assets AT A POINT IN TIME* [the present], rather than* just their historical purchase price*. Because *the market for these assets is distressed*, it is difficult to sell many MBS at other than fire-sale prices, which may be *below the actual value* that the mortgage cash flow related to the MBS would merit. As initially interpreted by companies and their auditors, the typically *lower sale value* was used as *the market value* rather than the cash flow value. Many large financial institutions recognized significant losses during 2007 and 2008 as a result of marking-down MBS asset prices to market value.&#8221;


 
These *&#8216;financial institutions&#8217;* want to *assign &#8216;their&#8217; inflated price* to each *&#8216;distressed&#8217; property* in their own mortgage-backed securities portfolio, so they can obtain higher sums of taxpayer money when liquidating these assets off their balance sheets; even though nobody on God&#8217;s Green Earth is willing to actually pay that price in the real market. Remember that mark-to-market accounting, to determine *the &#8216;fair market value,&#8217;* was instituted *&#8220;to help INVESTORS understand the value of these assets at a point in time.&#8221;* If the banks really want to liquidate these distressed properties* &#8216;today&#8217; for removal off of their balance sheets*, then the only way to establish *the &#8216;real&#8217; fair value* is to use *the same &#8216;mark-to-market&#8217; formulas* that apply to everybody else and their properties. Period. 

Call up the property appraiser and have him place his name on the dotted line along with *the &#8216;fair market value&#8217; of your property* and pay his commission, because that number will be based upon *all available data* related to comparable homes in the same neighborhood for this particular day and &#8216;time.&#8217; Eliminating mark-to-market protocols will only open the door to banking institutions coming up with *their own numbers based upon wishful thinking*, when their only intention is to unload *the &#8216;toxic asset&#8217; onto We The People*, or someone else foolish enough to buy into their fantasy. 

GL,

Terral


----------



## editec (Mar 5, 2009)

Skull Pilot said:


> Mark to market is basically a way of making a loss on paper seem like a real loss.
> 
> It is especially damaging to the housing market. A lender holding a 30 year note, even though the loan is being serviced and will most likely continue to be serviced for the next 29 years is compelled to write down the asset acting as collateral for the loan as if it had to be sold today. It's reactionary silliness to think that this would be the case and in over 86% of mortgages it is not the case.
> 
> Suspending mark to market and only writing down actual losses rather than potential losses will go a long way to stabilizing things and particularly the housing market.


 
Sounds like a good plan to me.

How can banks establish a value to those toxic assets when there is no market for them?

And if the government (as it appears to have been doing) is declaring banks insolvent based on unknowable valuations of thier assets, then we appear to be shooting off our own feet by making banks fearful that their assets values will be established by the government without having a REAL MARKET to test those valuations against.


----------



## Skull Pilot (Mar 5, 2009)

editec said:


> Skull Pilot said:
> 
> 
> > Mark to market is basically a way of making a loss on paper seem like a real loss.
> ...



that's the point, there is no market for some of these assets, but there will be again eventually.  So why call assets held as collateral as worthless if they're not needed to recoup money lent?

As I said better than 86% of mortgages are NOT in trouble and there will most likely be no need to liquidate the collateralized assets to recoup a loss from a loan default. So don't claim a loss until it actually happens.


----------



## wimpy77 (Mar 5, 2009)

Terral said:


> Hi David and Wimpy:
> 
> Now I can see the reason why you guys want to chase me out of these economy discussions . . .
> 
> ...



your conspiracy theories are stupid and retarded.


----------



## DavidS (Mar 5, 2009)

wimpy77 said:


> Terral said:
> 
> 
> > Hi David and Wimpy:
> ...



Just ignore him. Trolls usually starve when no one feeds them. 

Hey, I found a new avatar for you:


----------



## Ravi (Mar 5, 2009)

editec said:


> Skull Pilot said:
> 
> 
> > Mark to market is basically a way of making a loss on paper seem like a real loss.
> ...


This sound vaguely communistic, I'm surprised that Skull Pilot supports it. The banks would happily get rid of mark to market because that means, on paper at least, they would be solvent.


----------



## wimpy77 (Mar 5, 2009)

there's not communistic about it. most economist agree that he should be suspended for at least a year.


----------



## Ravi (Mar 5, 2009)

wimpy77 said:


> there's not communistic about it. most economist agree that he should be suspended for at least a year.


Communist might be the wrong word. But it certainly isn't free market. The government would basically tell the banks that they could value their assets however they wished. So if they had to foreclose on a house with a mortgage of $500,000 and they could only sell the house on the market for $250,000, they could hold onto the house until the market rebounds and pretend its current market value was $500,000. 

I'm not quite sure what you'd call it.


----------



## Terral (Mar 5, 2009)

Hi Skull and Editec:

Hopefully I am quoting both of you guys correctly. :0) 



Skull Pilot said:


> Suspending mark to market and only writing down actual losses rather than potential losses will go a long way to stabilizing things and particularly the housing market.
> 
> Editec&#8217;s reply >> Sounds like a good plan to me.



Maybe I am missing something here. What plan? :0) Suspending mark-to-market procedures eliminates &#8216;fair market value&#8217; from the equation. What in the heck are &#8220;actual loses&#8221; and how are you defining &#8216;potential losses?&#8217; Here is an example:

The bank hands over $350,000.00 to a homeowner in Los Angeles in 2005 and the owner walks away in June of 2007, because the* &#8216;fair market value&#8217;* has deteriorated to only $150,000.00. The *&#8216;actual loss&#8217; *can be much higher than the $200.000.00 represented by *the new deflated home value*, because our homeowner trashed the place, and removed all the appliances, and even the light fixtures on his way out the door. He also took a sledgehammer to the drywall and ripped the ceilings down, before spray painting obscenities on all the remaining walls. Now the bank must spend another $100,000.00 to make repairs in order to bring the home value back up to the $150,000.00 price that *people in that neighborhood &#8216;are&#8217; willing to pay* for *that property*. The *&#8216;potential losses&#8217;* can actually be much greater depending upon the amount of damage done by the angry homeowner on his way out the door.



Skull Pilot said:


> Mark to market is basically a way of making a loss on paper seem like a real loss.



We disagree. The bank has already handed over *the full mortgage amount to the seller*, when the house sold and the new homeowner took possession on the day of closing. Therefore, the bank suffered* the &#8216;real loss&#8217; on the day of closing*, because the new homeowner eventually walked away from the property. *Mark-to-market Valuation Methods* help the property appraiser (and subsequent investor) determine *the &#8216;fair market value&#8217;* of any given property in the USA on any given day. 



Skull Pilot said:


> It is especially damaging to the housing market.



No. *Displacement* (Bureau of Labor link) of *too many U.S. Citizens *from *the &#8216;workplace&#8217; and &#8220;JOBS&#8221; *through Outsourcing and too many Foreign Nationals is damaging to the housing market &#8216;and&#8217; everything connected to the housing market like the Stock Market. Mark-to-market accounting is only *a method for calculating the &#8216;fair market value&#8217; of properties in a given market.*



Skull Pilot said:


> A lender holding a 30 year note, even though the loan is being serviced and will most likely continue to be serviced for the next 29 years is compelled to write down the asset acting as collateral for the loan as if it had to be sold today. It's reactionary silliness to think that this would be the case and in over 86% of mortgages it is not the case.



With 10,000 foreclosures happening every single day (story), then your numbers appear a little bit off to say the very least. The banks are all worried about getting *these &#8216;toxic assets&#8217; off their balance sheets* &#8216;and&#8217; without having to take the haircut on *the difference between the original mortgage amount* &#8216;and&#8217; *what the market &#8216;is&#8217; willing to pay &#8216;today.&#8217;* If the bank wishes to buy the property to become part of *their &#8216;holdings portfolio,&#8217;* then all they have to do is cough up the money to pay off the original loan and *the &#8216;toxic asset&#8217; is off their balance sheet.* :0) Here is the bank&#8217;s problem in a nutshell:

We are looking at 10,000 foreclosures every day that have an average mortgage amount of around 250,000 dollars from the 2003-2007 housing bubble. At 10,000 foreclosures EVERY DAY, that amounts to 10,000 times 250,000 or *two and a half billion dollars* in *&#8216;potential losses&#8217; EVERY DAY*. That number is *$2,500,000,000.00* in case anybody is losing count of the zeros. That amounts to *5 Billion dollars in &#8216;potential  losses&#8217; every two days* or Senor Obama&#8217;s 75 Billion Dollars every thirty days! The historical value of the distressed property means NOTHING, which anybody knows who ever tried to unload a distressed property or anything else in a deflated market. Some people think that We The People should allow bankers to inflate property values to reflect home prices at some future time, but what happens when we enter *the Second Great Depression* &#8216;and&#8217; every property in America is worth far less than anything we can imagine even today? 

No sir. If the banks want to get these distressed properties off their balance sheets, they *MUST play* by the *same rules* as everybody else. The big fat 800-pound gorilla in the room is the very same *&#8216;deflation spiral&#8217;* that comes from unloading *&#8216;all&#8217; of these distressed properties* onto the market AT THE VERY SAME TIME. If you can get the $350,000-dollar home for $100,000 dollars at the *Government Distressed Property Sale*, then why would you pay *&#8216;more&#8217; than that* on the open market? :0) The problem is that *these &#8216;distressed fire-sale properties&#8217;* will destroy property values in the open market &#8216;and&#8217; thereby *lower the value of &#8216;all&#8217; the properties* in the same bank mortgage-backed securities portfolio that* &#8216;eliminating&#8217; the mark-to-market rules* is supposed to fix. 

The math simply DOES NOT WORK, which is the very reason that the banks themselves refused to implement the original TARP Plan in the first place, because the banks would be putting the gun to their own heads to pull the trigger. However, the fact that the banks have stalled their efforts to actually remove toxic assets from their  balance sheets has also allowed &#8216;time&#8217; to pass &#8216;and&#8217; the values of their respective mortgage-backed securities portfolios has been going DOWN with every passing day. Again, this *Mortgage/Foreclosure/Banking/Wall Street/Financial/Credit Crisis* has been perpetuated by the same people who orchestrated the 9/11 attacks &#8216;and&#8217; *this Economic Implosion Scam* is being carried out very much ON PURPOSE; so the regular 'market' rules go right out the window. The U.S. and Global Economies are *definitely going to CRASH*, because that is exactly what *these &#8216;inside-job&#8217; bad guys* have been planning since before many of you were even born (Gary Allen's Book = free online).  



editec said:


> How can banks establish a value to those toxic assets when there is no market for them?



They call up the local property appraiser and obtain an appraisal like everybody else. The banking institutions claim that *there is &#8216;no market,&#8217;* when the appraised value is &#8216;lower&#8217; than they want to see. Here is a little tip for the bankers: 

1. Never lend money in a housing market where the Government refuses to *&#8216;enforce&#8217; Immigration and Employment Law* (Wiki) introduced to protect their mortgagees! 

2. If the Government is going to allow *20 Million Illegal Alien Foreign Nationals* to run around loose EVERYWHERE &#8216;displacing&#8217; your mortgagees from your properties, then carry your business somewhere else to avoid the coming economic catastrophe that raises its ugly head from *the refusal of our Government to &#8216;enforce&#8217; the Rule Of Law*. 

3. If the Government is going to allow *record &#8216;Outsourcing&#8217; of JOBS in your area*, then refuse to lend out one nickel to anybody about to see his job shipped overseas by unscrupulous U.S. employers; because soon there will be *&#8216;no market&#8217; for those houses* and the Government will leave your bank holding *the &#8216;bad paper&#8217; bag*. 



editec said:


> And if the government (as it appears to have been doing) is declaring banks insolvent based on unknowable valuations of their assets, then we appear to be shooting off our own feet by making banks fearful that their assets values will be established by the government without having a REAL MARKET to test those valuations against.



We agree. The problem is aggravated by the fact that the same Government *refusing to &#8216;enforce&#8217; the Employment Laws* is handing Billions of dollars to the banks and telling them to go out and make the same stupid mistakes all over again! Suppose you have 250 Billion Dollars of freshly-printed FED dollars at *five percent interest* sitting on your desk right now and here comes Bob and Sandy all ready to buy their new home. Just how much of your TARP money are you willing to hand over to Bob and Sandy on their $450,000.00 home, when the thing will be worth only $350,000 by the end of the year?  Giving money to the banks is *NOT going to &#8216;enforce&#8217; the Rule of Law* that allows *20 Million Illegal Aliens to &#8216;displace&#8217; U.S. workers from JOBS* &#8216;and&#8217; the bank has no way of knowing if *both Bob&#8217;s job and Sandy&#8217;s job will be Outsourced* by the time they close on this brand new loan. 

All of this talk about eliminating mark-to-market valuation methods is *&#8216;hype&#8217; having nothing to do with the real problem at all*. This chatter is nothing but* a smokescreen and a tricky ploy* to give people something to talk about rather than address *the &#8216;real source&#8217; of these problems* that have more to do with JOBS and our Government refusing to enforce the Rule of Law than anything else. 

GL,

Terral


----------



## Skull Pilot (Mar 5, 2009)

Ravi said:


> editec said:
> 
> 
> > Skull Pilot said:
> ...



it means that a loss would not be a loss until it was actually realized as a loss and not just a write down


----------



## manifold (Mar 5, 2009)

Not a bad idea.

Anyone old enough to remember might know that mark to market rules was a big reason for the Savings & Loan failures in the 80's.  They had to mark their high yield (aka junk) bonds to market but the market was artifically depressed (yes, to all you market worshippers out there, sometimes it's out of equilibrium).  And the lower valued bonds triggered other regulations that required they unload them, at artificially depressed prices and they took a bath.  In the end, the taxpayers got screwed, and the buyers of the junk bonds made a killing when very few actually went into default.  You know, when companies like Microsoft, Dell and Intel didn't go out of business like so many thought they would.


----------



## DavidS (Mar 5, 2009)

Golly gee - more regulations. Unbelievable. If there was ever a case against de-regulating this market, this financial crisis is it. No more "oh but that was way back when" or "oh we should remove regulations to help the economy." No more of this insane economic philosophy where less regulation means better business, higher stocks and a better economy.


----------



## Tech_Esq (Mar 5, 2009)

Ravi said:


> wimpy77 said:
> 
> 
> > there's not communistic about it. most economist agree that he should be suspended for at least a year.
> ...



I don't think it's mark-to-market or nothing. The testimony I listen to on CSPAN, the "experts" seemed to think using a 5 year average valuation would be better than using mark-to-market. Then there would still be some fluctuation with the market but the peaks and valleys would be flattened out. This seems like a much better valuation method to me.


----------



## wimpy77 (Mar 5, 2009)

the SEC at this point would have to say its ok. like i said they are having a hearing next week.


----------



## Ravi (Mar 5, 2009)

Tech_Esq said:


> Ravi said:
> 
> 
> > wimpy77 said:
> ...


Maybe...but what is the benefit to letting the banks fudge the books?


----------



## wimpy77 (Mar 5, 2009)

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


----------



## Ravi (Mar 6, 2009)

wimpy77 said:


> 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?


----------



## Terral (Mar 6, 2009)

Hi Ravi with Tech_Esq mentioned:



Ravi said:


> wimpy77 said:
> 
> 
> > 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
> ...



Ravi is on the right track to seeing the fraud associated with eliminating mark-to-market valuation methods from *the distressed property appraisal equation*. Tech_Esq mentioned that *the experts seem to think using a 5-year average valuation would be much better than using mark-to-market* in Post #18, but that is Washington D.C. Lobbyist talk preparing We The People for a royal screwing if anything like that is implemented during this Mortgage/Foreclosure/Financial Crisis. Take a look again at the chart showing the recent 2003  2007 Housing Bubble (here) to realize that going back five years will give us a much-inflated value with no basis in Market Reality whatsoever. Can anyone here tell us just how far down the house prices will tumble in the current Deflationary Housing Market where unemployment is increasing and home prices are going south? :0) 

These lunatics in Washington D.C. are deciding among themselves just how much more taxpayer money to hand over to the banks to bridge the gap between the original mortgage amount ALREADY THROWN AWAY and the fair market value that these distressed properties can bring on the real Open Market today. These government officials are trying to find some way to remove these toxic assets from the bank balance sheets where We The People are left holding the bad paper bag. The problem is that the fair market value of these distressed properties CONTINUES TO GO DOWN, which means the real value of their mortgage-backed securities portfolios is also GOING DOWN with every passing month and every passing quarter. The government is dumping trillions and trillions of taxpayer dollars down a bottomless debt hole and now they are trying to figure out a way to cover their stupid behinds for being suckered into this stupidity in the first place. 

Throwing away the mark-to-market valuation methods will only work to lower the credibility of these retards in Washington D.C. and the banks and the insurance companies like AIG who stupidly insured the bursting housing bubble in the first place. The Bush Administration and now the Obama Administration and both houses of Congress have allowed far too much OUTSOURCING of JOBS and far too many Foreign Nationals to displace far too many legal U.S. workers from identities and JOBS and now the banks left holding the bad paper bag must pay the piper. Period. Ravi is right and two wrongs do not equal one right and the U.S. Economy is IMPLODING right now no matter what anyone says or does in Washington D.C. or anywhere else . . . 

GL,

Terral


----------



## Skull Pilot (Mar 6, 2009)

A timely piece from the WSJ

Steve Forbes Says Barack Obama&#39;s Economic Policy Repeats George W. Bush&#39;s Mistakes - WSJ.com


----------



## wimpy77 (Mar 6, 2009)

thanks for the article skull


----------



## Ravi (Mar 6, 2009)

Skull Pilot said:


> A timely piece from the WSJ
> 
> Steve Forbes Says Barack Obama's Economic Policy Repeats George W. Bush's Mistakes - WSJ.com



If the banks have more capital than they did a year ago...why are so many of them insolvent?

From what I understand they are already not using mark to market for valuing their assets...and that is the only thing that is keeping them from declaring bankruptcy.

How does valuing something at market value boost the banks capital, as Forbes claims?


----------



## Toro (Mar 6, 2009)

I used to support m2m but have changed my mind.  I think it is contributing to the downward spiral in the financial system.


----------



## Ravi (Mar 6, 2009)

Toro said:


> 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?


----------



## Toro (Mar 6, 2009)

Ravi said:


> Toro said:
> 
> 
> > 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.


----------



## Ravi (Mar 6, 2009)

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.


----------



## Toro (Mar 6, 2009)

Ravi said:


> 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.



If the banks truly cannot pay off their liabilities over a given period of time, they are truly insolvent.  However, if they are caught in a death spiral - whereby they have to issue equity to cover losses, which causes the equity to fall even further, meaning they have to issue even more equity, and they fall even further, and so on - then allowing a bank to repair itself over time is a better solution.


----------



## Paulie (Mar 6, 2009)

Toro said:


> Ravi said:
> 
> 
> > Toro said:
> ...



That, plus the elimination of the uptick rule.  Even I can realize the positive value of that rule.  The shorters are literally sinking this market into oblivion, and they'll be the first ones to scoop up the cheapest prices when they decide to quit shorting and go long again for the ride up.  In my opinion, the whole thing is being calculated by some big names.  Who, I couldn't really tell you but I could venture some guesses.


----------



## wimpy77 (Mar 6, 2009)

that was cramers outrage today the uptick rule, but isn't the sec the only people that could change the rule.


----------



## editec (Sep 13, 2011)

Going to be damned hard on the banks if they do.


----------

