Wednesday, October 01, 2008

Mark to Market Update...

"Suspending mark-to-market accounting, in essence, suspends reality."
-Beth Brooke, global vice chair, at Ernst & Young

A number of journalists and bloggers are picking up on the mark to market issue. The commercial and investment banks chose to invest in illiquid investments that were hard to value in an effort to improve their own returns. Like I said yesterday, this is the reason you don't put your kid's college education fund in baseball or Pokemon cards. However, an industry wide decision was made to avoid the traditional markets (like stocks and bonds) and instead create new markets for new products. This new market left too little room for error and when everyone ran for the exits the markets locked up.

From the Big Picture -

"Suspending FASB 157 amounts to little more than an attempt to hide this broken business model from investors, regulators and the public.

I have been steadfast over the past 2 years about why I did not want to own any of the financials that held this paper on its books. The key was that we could not figure out what the liabilities were relative to the assets. That is investing 101.

If FASB 157 is suspended, I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately were no longer investments -- they were pure speculations, with more in common to spinning a roulette wheel than owning Berkshire Hathaway (BRK) or Apple (AAPL) or Google (GOOG). Indeed, I know of no faster way to end up on the DO NOT OWN list than to hide from your shareholders what is on your books.

If investors cannot trust the valuations of what is on a firms books, they simply cannot invest in these firms PERIOD."

Here, here. If they suspend FASB 157, these stocks will become toxic. No one with any sense will go near these stocks.

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