The Mark-to-Market Melee
Is an obscure accounting rule to blame for the credit market meltdown?
By Daniel Gross
Posted Tuesday, April 1, 2008, at 5:53 PM ET
Basically, say the bank has a mortgage worth $100,000 yesterday. Nothing has changed (house is still worth the same, owner is still paying the bills, etc.) but in the crisis no one else is willing to accept the risk. The mortgage can only be sold for $50,0000 today. So the bank, even if it didn't want to sell, has to value the mortgage at $50,000. So the bank has on paper less assets, and thus less money to loan. And if the current assets value is less than its obligations, it becomes bankrupt.
Wednesday, September 24, 2008
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2 comments:
very interesting, so how would you change the rule? How do you value a mortgage or any asset if not by the market? How can you let a bank borrow more taxpayer money without sufficient collateral to back it up?
First of all the Fed should be abolished and the gov't should issue the money not the Fed, which is a private corporation by law, not a central bank like most people believe since our media is lame, second investment banks should have higher reserve requirement than normal banks and both should have much higher reserver requirements.
The market may be very efficient in stocks, where millions of shares in the same stock are identical. But even there, short sellers can put a lot a pressure on a stock.
Houses are each different, ability to repay are different. If no fraud is involved, then a complex formula could be developed. Factors include: are the payments being made, the amount of increase/decrease in resale values in the local market, the local strength of the economy. At best, these values would adjust monthly. Daily calculations can be made on interest rate, e.g. if interest rates decrease, the value of the loan increases.
This would give an accounting basis for the value of the assets. This could be further adjusted by factoring the difference between actual sales and the established accounting value.
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