David R. Henderson  

Mark to Market

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Individualism, Institutions, a... Productivity Measured in Goods...

Economist Jeff Hummel sent out the following to a large e-mail list. I'm reprinting the whole thing here and appending my comments.

Jeff's e-mail:

Mark-to-market accounting has received a lot of criticism during the
current financial crisis. But a recent email from Less Antman, a CPA and
financial planner, offers the best explanation I've seen of why
government-mandated capital requirements are the real source of the
problem. Economists now realize that reserve requirements, designed to
make banks more LIQUID, have the unintended reverse impact during a panic,
tying up cash that banks need to pay out in order to stem the panic. As a
result, reserve requirements are fast disappearing as a tool of bank
regulation. Similarly, capital requirements, designed to make banks more
SOLVENT, also have the reverse impact during a crisis. What follows is
Less's analysis:

"Any discussion of mark-to-market accounting must differentiate between
the beneficial effects of honestly reporting assets at what they are
actually worth and the destructive impact of inflexible regulations that
utilize the principle. Current discussions have blurred the distinction.

"(1) The Financial Accounting Standards Board (FASB) determined that
securities held by a company which it intends to sell when funds are
needed for another purpose ought to be reported at fair market value
rather than historical cost. This seems eminently sensible to me.

"(2) The FASB allowed an exception for debt securities which would
eventually mature at a fixed price, and which the company had the positive
intent and ability to hold to maturity. Mark-to-market accounting is
specifically not required when the company elects to classify the security
as one to be held to maturity.

"(3) In spite of ignorant comments to the contrary, 'market' doesn't mean
that the last trading price of a security must always be used, nor that a
security whose market has virtually disappeared due to unusual
circumstances must be valued at zero or near zero. The FASB EXPLICITLY
permits the use of alternative market measures in such circumstances, such
as the complicated derivative pricing model known as Black-Scholes. For
instance, Berkshire Hathaway (Warren Buffett's company) has $8.1 billion
(at cost) of derivatives on its books, all carried under mark-to-market
accounting, but none of them currently priced based on the non-existent
market for those derivatives.

"I am fully supportive of the use of mark-to-market accounting on balance
sheets. It is clearly the most honest way to report derivatives. So what's
the problem with mark-to-market accounting? I see the following
government-created problems associated with them:

"(1) Mark-to-market was adopted by regulators as the basis for determining
minimum capital requirements. Creating an inflexible regulation based on
an inherently volatile measure was always an accident waiting to happen.

"(2) While foresighted bank executives might have chosen to maintain
capital in excess of regulatory requirements so that a decline in value
wouldn't trigger a crisis, it would have made no business sense to do so,
since it would have reduced their lending income and ability to pay
competitive rates on deposits or offer other benefits to attract
customers. In a free market, they would have been able to do so, since
they would have gained a reputation advantage from their greater safety,
but with FDIC insurance protecting all deposits, customers don't shop
based on safety, as they assume they are protected by the government from
the loss of their deposits. Thus, only the rates and benefits offered by a
bank matter to a customer, not the reliability of the bank, thanks to the
FDIC."

(JRH interjecting: I might add that Less's point here is well supported by
the historical record. Prior to government deposit insurance, U.S. banks
voluntarily maintained capital-asset ratios in the neighborhood of 10 to
20 percent, way above current mandated levels.)

"(3) With banks thus always seeking to keep only the minimum required
capital, the problem was further exacerbated by the Basel capital
requirement formula, which requires less than half the capital if kept in
the form of AAA securities compared to high quality individual mortgages
(as I discuss in my article on Credit Default Swaps, forthcoming in the
April 2009 issue of THE FREEMAN). This caused an explosive increase in the
worldwide demand for AAA securities as a result of the needs of regulatory
arbitrage.

"(4) With capital of virtually every international bank invested as
heavily as possible in AAA securities critical to the financial
competitiveness of the bank, the problem was further exacerbated by the
ratings cartel created by the SEC in 1975, which effectively mandated that
companies obtain a rating from Moody's, S&P, or Fitch, who were thus
effectively insulated from the destructive effects of reputational damage
by a system that made it impossible for them to be put out of business by
more accurate upstart rating services. This also prevented better methods
of risk measurement (such as Credit Default Swaps) from replacing ratings.

"(5) Fannie and Freddie fed the supply by creating AAA securities in
gigantic sums, initially from the securitization of high-quality
mortgages, then from lower-quality mortgages that had components
artificially improved in quality from the creation of 'tranches,' and
finally from lower tranches artificially improved in quality as a result
of Credit Default Swap protection from AAA-rated companies such as AIG
(also discussed in my CDS article). AAA ratings that were, in many cases,
undeserved.

"(6) It is also possible, although I haven't thought this through, that
the mortgage lending boom itself was stimulated by the need for AAA
securities to satisfy regulatory arbitrage needs worldwide, and once it
was clear that low-quality mortgages could be turned into AAA securities,
the lowering of lending standards was inevitable, even absent the CRA and
FHA mandates.

"So, thanks to various government interventions, banks operated with the
minimum capital required by the mark-to-market application of the law,
consisting almost entirely of artificially created AAA securities
benefiting from artificially high market pricing resulting from sloppy
ratings. And then reality bit, and an honest revaluation of these
securities based on mark-to-market accounting, linked to inflexible
government regulations, brought down the banking industry. And that is the
extent to which I believe mark-to-market accounting can be blamed for this
crisis. "

David's addition:
Jeff's comment above reminded me of George Kaufman's article. "Deposit Insurance," in the first edition of The Concise Encyclopedia of Economics. Note the following statement in the article:

In the thirties, before deposit insurance, banks held capital of almost 15 percent of assets. (Capital, which consists of money put up by shareholders, is the "cushion" to absorb losses.) Moreover, bank owners had personal double liability. They were liable not only for the amount of their investment, but also for an additional amount up to the par value--the price at which the shares were initially offered--of their shares. By the late seventies bank capital ratios had fallen to only 6 percent of assets and double liability had been abolished.

Comments and Sharing


CATEGORIES: Finance , Monetary Policy



COMMENTS (26 to date)
Don the libertarian Democrat writes:

I need some help with this. Maybe I'm missing the point.

The point of adding capital as a bank is essentially downgraded is to keep people from attacking the bank for money. As long as they're adding money as they go down, there's no panic.

If I hear that, as my bank is getting worse and worse off, its reserves are going down, I'm immediately heading to that bank, since the bank definitely cannot fulfill all claims.

The only problem arises when they can't get any more capital, at which point they will indeed have problems. You might keep your money in a bank bleeding capital, but count me out.

The problem of the Calling Run is based on uncertainty. Since no one knows what the assets are worth, investors call in the money, if they can, before the business goes bust. Again, in a Calling Run, you might be willing to value assets based on a predicted future, but count me out. I want to know what we can get now.

malavel writes:

What bank regulation is US using right now? Basel I, II, or something else?

Kevin writes:

This post nails it. No fudging the issues here.

I'd spotlight, as Arnold has in the past, that the real policy question here is whether the capital requirements should be flexible or not (or, if you like, whether they should exist at all). Point 1 above calls the inflexible requirements an accident waiting to happen, and this is accurate, but there are good arguments for allowing flexibility in the capital requirements.

Wm. Isaac--head of the FDIC in the 1980s--hardly qualifies as ignorant of banking issues, and he's very much convinced that the mark to market revival (it was suspended between 1938 and 2007) is very much a problem.:

WILLIAM ISAAC: Well, let me deal with that in a second, but, first, I want to address -- Paul really misquoted me. I didn't say these banks are in fine shape. I said they're in better shape than the major banks in this country were in the 1980s. And I'll guarantee you they are.

Every one of the major banks, if they had had to follow mark-to-market accounting in the 1980s, would have been insolvent, and clearly insolvent. So what I'm saying is that these banks are doing relatively well in a very difficult environment.

Of course they need help. And mark-to-market accounting has destroyed $600 billion of capital in the banking industry, which is $6 trillion of lending capacity. And it's been a major, major cause of the crisis we're in.

Bill Woolsey writes:

"(3) With banks thus always seeking to keep only the minimum required
capital, the problem was further exacerbated by the Basel capital
requirement formula, which requires less than half the capital if kept in
the form of AAA securities compared to high quality individual mortgages"

This was unclear. Bank assets in the form of AAA mortgage backed securities require half the capital of Bank assets in the form high quality individual mortgages.

So, the capital requirement scheme made holding AAA mortage backed securities especially attractive. The regulators considered them less risky and so made holding them less costly.

Rather than regulators discouraging what turned out to be bad investments, or taking a "laissez-faire attitude and feeling they had no role in influencing bank portfolio decisions, they were interfering and promoting these poor investments.

My only criticism of Antman's analysis is that it doesn't apply to "nondepository" institutions, especially investment banks that were in the thick of the problem. Further, the money center commercial banks, like Citibank, are not much funded by insured deposits.

Jeff Harding writes:

I agree with the general comments that MTM is not the villain here. MTM strives to define the asset base of a bank. Perhaps flawed in some circumstances, but a valid concept. There is a lot of blame placed on MTM as government interference in the market which led to the collapse of banks. This is not true. Bill Isaac, Brian Wesbury, and others beat this drum over and over but miss the real point.

What Jeff Hummel should make clear is that all the damage was done to banks when they bought overvalued securities, not when they were revalued according to MTM. I have pointed out on my blog the causes of the current crisis as starting with the Fed and finishing with Fannie’s and Freddie’s missteps. So, for the purposes of this discussion, and considering the nature of this forum, let’s accept that fact.

Assuming there was no government regulation of banks, we would probably still have private voluntary regulation. Say that private deposit insurers existed because of consumer demand for extra protection. I would guess that the insurers would come up with MTM rules similar to FASB 157 or Basel II. Or if no insurers, perhaps banks would do this voluntarily to assure depositors of their safety. So, would the existing MTM rules be substantially similar to free market alternatives? Don’t know, but it’s likely.

The AAA rules of Basel II are interesting and I agree that would have caused a tilt toward high grade securities. But is there anything wrong with that? At least in our current context where banks don’t have a gold asset base, high grade securities would be preferable to …?

I'm certainly not suggesting more regulation as the solution, but I think we also need to place major blame on our bankers. Assume that no one in their right mind would lend on a mortgage with no confirmation of income, 90%+ LTV, etc. unless they were guaranteed by the government. Why weren’t bankers, the experts, leery of subprime securities that were essentially lower grade instruments, despite what Moody’s and S&P said? We can lay a lot of blame on government, but where was the individual responsibility of the professionals? Why should we let them make the mistakes and then not suffer the penalties? The sooner we let these institutions fail, the sooner we’ll recover. Bankers are not geniuses. They bought into Keynesian economics and the belief that the government would never let what’s now happening, happen. Surprise, fellas.
http://dailycapitalist.com

Marc in Asia writes:

This post is significantly below the quality of most on this blog. I'm not sure where to begin.

First, it's not clear to what extent the writer blames mark-to-market (as opposed to capital regulations) and what he wants to change. He correctly defends mark-to-market against some of its more overstated critics. However, the criticisms are mainly about capital rules. While mark-to-market does effect capital rules (by influencing how much capital the bank is given credit for having) it is not at all clear how this effects the criticisms. This is important because if the problem is that AAA rated bonds get too low a capital requirement, the response should be to change the AAA capital requirement, not to suspend mark-to-market.

Next there are factual errors which kill some of the points of argument. Point (2) argues that with the ability to raise FDIC insured deposits, banks hold only the minimum capital requirements. This is not true, banks in the US have long held capital far in excess of the Basel minimum requirement, indeed most large banks, including those now in big trouble, held pre-crisis capital beyond the "well capitalized" standard. In addition, as Bill Woolsey points out, the large banks need to get a lot of funding from sources other than FDIC insured deposits.

In its most substantive parts, the post criticizes many elements of capital regulation, without proposing an alternative. This is critical, because in many cases there are no ideal solutions, and any alternative will have its own problems. Don't like the effective oligopoly that Moody's, Fitch and S&P have? Well we could loosen the standards for recognized rating agencies, but then how do we stop someone from setting up "AAA 'R US" and giving the bankers whatever rating they want. Suspend mark-to-market and you still need a value for those assets, so what will you use original purchase price?, bank's estimate?, appraiser (who is that?,)regulator's estimate (do they have the capacity?) The capital requirement for AAA securities is below that for home mortgages. First, this isn't so unreasonable, as long as AAA wasn't being given out like candy. If it is a problem which do you support? The requirement for AAA was set low because banks were shunning high quality, low yielding assets in favor of high yields. Raising the capital for AAA securities would drive these back out of bank's balance sheets. Is that what you want? Lowering the capital for mortgages doens't seem right at a time when even prime mortgages are having record delinquency rates.

The article criticizes mark-to-market's use in capital adequacy as adding volatility. It then suggest using CDS as an alternative to rating agencies to determine capital requirements. A plausible idea, but have you seen CDS volatility? It is much worse, and a CDS based capital requirement would create much more volatility and pro-cyclality than anything mark-to-market has been blamed for.

Finally, there were many causes of the crisis. All of these need to be addressed, and it is important to balance them and to understand the tradeoffs between fixing one versus fixing another. Saying "This is the cause" can only lead to sub-optimal solutions.

Finally, I am very wary of any arguement which points to one thing and says "

Lance Cross writes:

Oops.

Mark-to-market losses on securities, at least those expected to go back to par, are excluded from deduction for Basel I capital. See, eg., Bank of America's 10k:

"
Net unrealized gains (losses) on AFS debt securities, net unrealized
gains on AFS marketable equity securities, net unrealized gains (losses)
on derivatives,... are excluded from the calculations
of Tier 1 Capital and Leverage ratios."

AFS means available for sale, which is the stuff that gets marked-to-market.

The post is an elaborate attempt to find the fault for the crisis with the government. Finding the cause of the crisis in government action doesn't need to be an elaborate exercise in this case.

Methinks writes:

This is a great post. Wonderful explanation.


Don,

capital requirements can be thought of as leverage caps. If the value of the assets declines, all else held constant, then the bank is in violation of its maximum allowable leverage. thus, I believe that even if it has the funds to give to the depositors demanding the funds, it can't because of regulatory requirements. That would serve to increase panic, I think.

Bill Woolsey,

As far as I'm aware, the SEC mandated investment banks had to comply with Basel II. The capital calculations for investment banks were supervised by the SEC and all I-banks were in compliance as the crisis hit. So, I don't think the analysis is limited to banks who take deposits.

Marc in Asia,

Your post is meant to criticize the analysis, yet you end up strengthening Jeff Hummel's argument by pointing out just how difficult it is for rigid regulation to have its intended effect and to avoid very negative externalities. Regulation is meant to prevent crisis. It can't. Regulation is meant to increase confidence. It can only achieve the illusion of the safety required to achieve that level of confidence.

Less Antman writes:

@ Methinks

Thanks for being clearer than my original email to Hummel on several issues.

@ Lance

I can see why you think that disclosure nullifies my argument, but if you look at the numbers on the Bank of America 10k you referenced (I'm looking at the 10K filed on 2/27/09), you will see that the dollar amount of the adjustment in the reconciliation of Tier 1 Capital to GAAP Equity is dwarfed by the total dollar amount of securities on the balance sheet, or even Tier 1 capital itself. At December 31, 2008:

Tier 1 Capital = $120,814

Adjustment = $5,479

The calculated Tier 1 capital ratio only increased by 0.41% as a result of the adjustment.

Basically, most securities are handled identically (and AFS securities are not the only ones carried at market, since trading securities are carried at market as well), but the regulatory rules are slightly less restrictive than GAAP in allowing classification at amortized cost instead of market.

Slightly.

@ Marc

This was a brief email, not an entire article (which is forthcoming in a future issue of THE FREEMAN), and was a response to a question of whether I thought mark-to-market accounting was responsible for the banking crisis, as Steve Forbes and others are claiming. This was more an outline of an argument than the argument itself and, as you indicated, needs to be developed. I'll review the errors you believe I made so that I don't embarrass myself too much with the final product.

@ All

Both the positive and critical comments are very helpful to me in developing my thesis and article. Thanks.

Carl The EconGuy writes:

In a nice steady-state, mark-to-market is indistinguishable from net present value of future income stream accounting, both give the same result. But in a severe present disequilibrium, boom or bust, they don't. Markets tend to overreact up and down to short term expectations. Hence, right now, the market value of a mortgage portfolio may be significantly less than the PV of future mortgage payments, due to faulty risk assessment in the current market and short term speculative activity. I don't see how Black-Scholes would fix that -- that formula is explicitly disavowed in out-of-sample situations. It works in nice equilibria, but not in severe disequilibria. The fundamental problem in all asset evaluations is still estimating the future price. No accounting formula known to man can get that right in all circumstances. Mark-to-market may have very nice characteristics in some situations, but may contribute to volatility in others. So, what do you propose instead? Black-Scholes is definitely not the answer.

gnat writes:

Jeff
I think that you are missing the story. You may want to look at "One Bad Bond"
http://www.time.com/time/magazine/article/0,9171,1881974,00.html for part of the answer. It was (is) not possible to disintangle the CDOs so that it always was a disaster waiting to happen. Once you added toxic assets the fuse was lit. The investment houses always pushed for adding more subprime risk/high return to the brew to goose the return. The key was AIG's incredible willingness to take the risk and insure the mess. The banks are insolvent. The only question is who is to bear the cost.

L Burke Files writes:

Mark to market was an invitation to failure if the market place failed, and it did. It does not recognized the underlying value of the assets.

Also - you assume the Auditors and Regulators will take a balance view of the assets - ha ha ha ha. Their view is always the most pessimistic. Auditors get sued, and Regulators are dragged before Congress, if there calculation are over value the assets, but rarely if they undervalue. The market incentive is for the Auditors and Regulators to undervalue the assets.

Sad actually...

Barkley Rosserr writes:

Pretty clearly the problem is both. Mark to market would not be a problem if the down marking did not crash against capital requirements, thereby triggering selling of assets, which then further lowers their value, thus triggering more insitutions to crash against capital requirements, triggering them to sell assets...

bill writes:

Would just add this link to the conversation.

http://bankstocks.com/ArticleViewer.aspx?ArticleID=5701&ArticleTypeID=2

Mark to market has exacerbated the downside and the upside. It's a procyclical policy that is disastrous.

I would also echo the comments about accountants. In theory they can use alternate valuation metrics but in practice they will always uses mark to market.

Methinks writes:

There's an assumption among some of the posters that Mark-to-whatever-you-want is better. In the absence of marking to market, the market will handicap the marks anyway in the belief that the marks are too generous. The market will mark to market even if banks won't. The disastrous thing about mark to market is the interplay between it and capital requirements, not the mark to market itself.

bill writes:

Methinks,
How about don't take a loss on the mortgage until it goes into default? Maybe the market will handicap in a bad manner but it would be substantially better than having common shareholders worry about whether they are going to be diluted to nothing as the banks they own are subjected to different standards depending upon the whim of the regulator.

First it was Tier 1 capital ratios, so the banks went out and raise a huge amount of Tier 1 capital. Now a new treasury secretary comes in and says that no, Tier 1 is no good, we need to measure tangible common equity changing the rules of the game at halftime and killing the banks.

The banks, except for Citigroup, are not insolvent. They are just being driven into the ground because of the uncertainty of the regulatory regime. The last time the U.S. used mark to market accounting was during the Great Depression. If it had been in use during any of the bank crises we had in the early 80's or 90's every single big bank in America would have been driven into the ground.

Jeff Harding writes:

If the AAA securities were, say publicly traded bonds, then we wouldn't be having this conversation because we know what the value is at any minute of the day. The issue is: did MTM cause banks to fail because it unfairly requires the bank to write down assets below their actual worth, and does it unfairly make banks financially unstable or insolvent?

First, how do we know Citi is not insolvent? MTM has been around for a long time and is not something new. See http://www.city-journal.org/2008/eon0925ng.html. How would you figure it out without MTM? This rule wasn't changed overnight, the banks knew about it and agreed to it.

The problem is subprime securities, not mortgages. If Citi just had mortgages on their books, they could easily determine the value of the underlying property--appraisers do this all the time. But they have subprime securities, not mortgages.

Subprime securities are something else. Take 6,000 mortgages from around the country, grade them on a risk formula from high grade to low grade, put them in a big trust, and then sell them in slices of varying risk and returns.

It would depend on what Citi owns--AAA tranches are basically the most secure because the returns of all the lower grade tranches in the trust are subordinate to the AAA tranche. Most of these trusts are still paying the AAA guys; it's the bottom guys that aren't getting paid.

Citi can go to Markit and get a value on them or use some formula (don't know if Black-Scholes would do it). If they decide to hold them to maturity, they can value them at par, unless they know that their trench is tanking.

What the problem is, is that banks invested in bad securities, didn't understand the risk they were taking, and now are whining about it. It's not procyclical. They made their mistake when they bought these instruments--they helped create the cycle. The fact that they may be worth less than they paid is not a reason to hide the ball from depositors. They are going broke because of bad investments, not MTM.

Lance Cross writes:

Less,

That the mark-to-market add back is small shows nothing. Whatever the size, since it's added back for AFS you wouldn't have an effect on regulatory capital from mark-to-market, in the first instance. The effect of the market decline is nullified by design.
You are right about mark-to-market securities in trading books. I didn't want to get into that because it's an unnecessary complexity. Even without regulatory capital, perhaps especially, a leveraged firm with a trading book will be marked-to-market by debt holders.

Separately, another possible explanation for what's happened. As a result of regulatory forbearance regarding honest accounting early on, the banks were able to avoid raising equity until it was too late. Perhaps those banks deceived themselves more than anyone else. Those banks that had more room for hiding their losses failed first, and with the lowest equity raised to loss ratios among the banks. Like many frauds, it started small and innocently enough and grew, with the participants hoping each day that it would shrink, but grew instead.
For evidence of dishonest accounting, pick a large bank and look at credit allowance additions in the third and fourth quarters. Then see SFAS 5 and SFAS 114 for what those numbers are intended to represent.

Less Antman writes:

@ Carl

I wasn't arguing for Black-Scholes, only pointing out that marking to market did NOT automatically mean using the last trading price, as some people blaming M-T-M for the crisis have asserted or implied.

As for policy changes, the situation could be improved by repeal of the various government interventions I mentioned (government-determined capital requirements, FDIC insurance, special legal incentives for the holding of AAA securities instead of direct loans, SEC protection of the rating cartel, government-sponsored mortgage trading and origination pressure) each of which added to the overall problem in different ways. I wasn't pointing to any one thing (and explicitly was trying to argue against the people blaming M-T-M as the one thing).

Ultimately, a freed market in banking would be far more reliant on reputation instead of regulation. Combined with elimination of the moral hazard of failed companies getting infusions of tax dollars, I expect that good money handlers would drive out the bad [as Gresham might have put it ... or not].

James Kennelly writes:

I stumbled across this site via a google search for "Mark to market." Did I read correctly that this post seems to consider FDIC insurance for individual bank depositors as excessive and/or mistaken government intervention?

Others here theorize about a private form of depositor insurance and the level of capital it likely require--what? Like the wonderful private Credit Default Swap counter party agreements that we got after 2000's "modernization" of the financial services industry? You remember those CDS's--all $62 trillion of them?

They were the private, government regulation-free "insurance" for all those wonderful mortgage-backed securities that helped foment the housing bubble on the way up and are now at the heart of the international financial system's collapse. AIG has a whole division devoted to providing this kind of "government-free" insurance without rules and surprise--with icky government required assets to back it. Turned out just great, huh?

Heck since they're all private agreements, proudly free of any Big Brother's apparatchiks overseeing them, no one even knows which entities are involved with them and for how much. And thus trust between banks is gone. Ouch. How can more freedom produce that outcome?!

How about those rating agencies for all those MBS's that the CDS's "insured" ? No stalinist-style government entities they--nope, just good ole' freedom and profit loving private companies, getting their compensation from the companies whose bonds they rated!!!! Oops ...

Good god, Galbraith observed that it took 50 years between panics because all the people who lived through one had to die first. You're all still in the middle of one and calling for LESS regulation? Haven't any of you brilliant classical liberals learned anything yet? Capitalism needs the stability and yes, the sometimes frustrating inflexibility of government regulation provides to sustain free markets over time.

The wealthy can survive the gyrations of a market governed by the weak bands of professional self regulation and "moral hazard." Summner Redstone may have lost $15 billion of his $16 billion, but he won't be in the streets over it.

But deregulated capitalism wipes out average people. And they end up in the streets. That's what FDR was trying to save all of you pure free marketeers from --being hung by the noose Lenin said you sell on the last day of trading.

Color me Ellsworth Tuey, if you wish, but all you Howard Roarks, Hank Reardons and John Galts of the financial world are out of your collective minds.

Joshua Lyle writes:

James,
I think the post argues (convincingly) that FDIC insurance is part of an overall complex pattern of regulation that contributed to the failure of regulated financial entities. To the extent that combination of regulations contributed to undesired behavior of financial entities those regulations failed.

From the implication that status-quo regulation failed because its effects were too complex to be understood except in hindsight one may hypothesize that simpler regulation would be better, and that an overall pattern of regulation that consisted of less regulations might be a good way to achieve that. Note that having less regulations is not the same as having less regulation -- we could, after all, design a system with fewer but deeper reaching and more easily understood rules.

Perhaps your position would be better off arguing for better regulations instead of blovating about evil capitalist boogeymen.

Methinks writes:

Bill,

How about don't take a loss on the mortgage until it goes into default?

It doesn't matter when you book the loss. Markets are forward looking. If the housing market took a dive, would you pay the old (higher price) for the house you want to buy? You would factor in the market conditions and offer less for the house. In the same way, the buyers of mortgages discount the price of the mortgages by the increase in the probability of default. The shareholders have taken a loss whether they have booked it or not just as the owner of the house has taken a loss whether his listing price reflects it or not (unless he finds a fool - but, that's another story). Booking a higher number is just a lie.

The rest of your post in not really an argument against marking the mortgage book to market but an argument against current idiotic regulations. You're sort of proving the point of the post - idiotic regulation is the problem, not mark to market.

Rich writes:

For me it's hard to believe the technophiliac narrowness of most of these discussions, including the original post. How can you really think letting the banks operate without government regulations would work (for any but a tiny percentage of the world's population)? But it's very clear that the welfare of the vast majority of the people doesn't concern you folks; I guess that's true by definition. Let me ask: could there be larger, international economic forces at work, of which the banks' various problems right now are only surface effects? Could the effects of policies of and events in US banks be far less determining than your remarks consistently imply? Could other aspects of the world's complex economy, aspects none of you mention at all, be in play here? (I know, I know, you have ready answers for any questions like these; shouldn't you be distrusting that very readiness?) Personally, I wish we had Glass-Steagall back. Your always-blame-the-government ideology blinds you, I think, to the actual nature of the economic problems that our country, and the world, face today, and thus of course cripples your ability to discern possible effectual responses to these problems. Didn't you have your best run when Greenspan was at the helm? That's over now.

I'm a middle-class man who was born near the end of the Great Depression (so-called). I'm extremely happy that my family savings, and those of my ninety-two year old mother-in-law, are in FDIC insured accounts, and that I've relied on treasuries to save for my grandchildren's college education. I'm also happy that my modest retirement pension is backed by the state government (although, because of the malfeasance of major elements of the private sector it may eventually be compromised, too), and that I can count on my (small but still welcome) Social Security check. There are more things on earth than are dreamt of in Ayn Rand's novels.

Norb writes:

Lessons in Leadership
If you’re tired of a lackluster stock market, there are a few things you can do:
First, get FASB to impose Mark to Market accounting rules; these don’t work so well in a down market.
Next, make banks loan money to people with no money and wait for the loans to go bad and get investment banks to package these loans so their actual value cannot be determined.
Next, pull all your money out of the stock market and wait.
Next, head for a down market and sell short on stocks you don’t even own.
Next, let security values go to zero according to your Mark to Market rule to create a liquidity freeze.
Next, give $ trillions of taxpayer dollars to your friends and benefactors, who are holding the investments your Mark to Market rule made worthless. Do this for 6 months. Let the stock market drop at lease 50%.
Next, relax your Mark to Market rule, announce that you and your friends are going to buy these worthless assets; then buy stocks at half their original cost make a lot of money and become a hero.

Sheldon Richman writes:

David, what a great service you have done here. Bravo!

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