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« Seeking Balance from Bloggers and Media | Main | Investors Look at the Wrong Information! Why? »

February 16, 2008



Maybe - Perhaps I don't understand your comment. The banks do not make a choice about marking the assets to market. They are forced to do so by the accounting rules. The choice they make is to keep the assets on their books rather than to sell at distressed prices. It is not the same as some hedge fund examples that had forced liquidations from redemptions.

I think the accounting rules are fine -- a good thing -- but that investors do not understand the impact. Write-downs on illiquid securities might be exaggerated if the markets improve. In addition, it is incorrect to view all Level 3 assets as "marked to myth".

I certainly agree with your point about Japan -- an approach that makes no sense.



You could be right, but remember that the banks chose to mark these assets to market as trading assets. And the reason for that is that we've seen time and time again where unrealized losses flip to real losses very quickly as people move to hedge positions and unwind.

The write-downs taken now are the result of 5 years worth of possible real losses (I use 5 as the duration for mortgages) taken in a single day. But if you are deciding to enter into 30 year contracts with a bank, wouldn't you want to know if they had potential low cash flow (and hence negative value) investments that will drag them down for the next 5 years?

Or should we do what the Japanese do, and sit on it at cost and hope things pick up. I don't think so. Without taking the losses, capital won't turn over. Without capital turn over, economic recovery will stall. Think Japan 1990's.

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