At Last, Steve Forbes and I Agree
At Last, Steve Forbes and I agree: Get rid of onerous mark to market accounting rules, institute the uptick rule for short sellers and enforce rules for naked short selling.
There aren't many topics relating to policy on which Steve Forbes and I agree. But his editorial in The Wall Street Journal today is spot on. There are three onerous rules that were implemented under President George W. Bush that are causing great harm to the banking businesses, accelerating the liquidity crisis and damaging stocks of companies large and small. The first of these is the mark to market accounting rule that was put into place in 2007. Forcing banks , insurance companies and other financial institutions to mark to market assets such as subprime securities when there was no market is a major mistake. It is causing a death spiral downward even for banks and insurance companies that have positive cash flow. Unless this insanity is stopped, we will see the scorched earth scenario played out before our very eyes. This is unnecessary and can be stopped by the Obama administration, if they have the will power to do it.
The second damage residue left from the Bush administration was the eliminating of the uptick rule for short sellers. Removing the uptick rule just allows short sellers to pile on and drive stocks uncontrollably downward at alarming speeds. If you wonder how so much equity was lost in a blink of an eye since September 2008, you will find one very good reason in removing the uptick requirement. The SEC instituted this change in July 2007, and a volatile market quickly ensued. Let's put that uptick rule back in place.
The third policy, this one the Bush administration failed to enforce and is not being enforced today, is the policy against naked short selling. Short sellers are supposed to borrow the stock before short selling it in the market, thereby requiring access to the stock you are shorting. The SEC has failed to enforce this requirement, thereby allowing short sellers to pile on a pressured stock without taking this first important step.
I am 100 % supportive of all three actions. These times demand corrective measures now.
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these mortgage backed securities are classified as trading or available for sale. if you want to eliminate mark to market then reclassify them "one time only" as held to maturity.
and hold them to maturity. how many of you m2m aboliton spporters would agree with that then. let me repeat.
if you want m2m removed for mortgage backed securities, have them reclassify it as held to maturity and DO NOT let banks trade it. EVER. that means banks can hold them on their books at their original cost but cant trade it.
agree?
The big question is: Why has the Obama administration done nothing about the uptick rule and rampant naked shorting yet? These two seem like no-brainers, and are major fuel for market plunges. Yet beyond a comment that the SEC would look at the uptick rule, we have heard nothing more.
Do they like seeing the markets shredded by excessive, at times illegal shorting? Is it not obvious that anything that could restore some stability and trust to the markets would be a good move?
Because there isn't much difference between Obama administration and Bush's when it comes to Wall Street. There is very little new thinking with Summers/Geithner in comparison to Paulson's. And if Geithner was in Paulson's shoes how different would his reaction have been? Not much, that is for sure.
Obama's two major mistakes are: appointment of Geithner and the potential miscalculation on Afghanistan/Pakistan area. Uncorrected, they both have a potential to undo his presidency.
I would hope you would also agree to
ban leveraged (naked)
Credit default Swap Insurance.
Now 90% of the value of the stock market.
Goldman Sach and Morgan Stanley hide BILLIONS in assest from Investors off the balance sheet and off the tax rolls.
While they write off GOOD WILL and tax bailout money Billions in Assest in Eroupe bought remain off the balance sheets and Investors get no Dividens or very little.
http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=9307
That was a good one. Thanks!
Perhaps M2M should suspended only when markets freeze?
If the long term value of a security exceeds the current value, the long term value should suffice.
Elaboration on the uptick rule would have been nice.
.
http://online.wsj.com/article/SB122878208553589809.html
uptick rule and why it is important.
Show some outrage about Morgan Stanleys recent plan to short the sale of Ford motor stock.
They intentionally set out to drive down the market price of this stock for personal greed.
With our economy in crisis in general, the American auto industry in particular, and Ford the only company that has a chance to suceed without a bailout. !!
Once upon a time banks were banks, Savings & loans were savings & loans, stock brokerage firms were stock brokers, investment bankers were investment bankers, and hedge funds were viewed with suspicion like any other circling vulture.
In short before the deregulaion craze started by Reagan, unfortunately continued through Clinton, and greatly accelerated by Bush II we would not be in this mess.
The functions of each, indicated by their charters made it much more difficult to violate sound principles of banking.
Banks and savings and loans were conservative, and we accepted lower returns in exchange for greater safety. Most of us did not realize that the risk takers were put in charge, and that there goals changed from conserving our investments, to betting our money on ever more risky ventures.
Put the wing nuts under the spotlight.
if enough of us begin to challenge their unsupportable specious arguments some sanity can be restored to the asylum.
When they were all lumped together, and outrageous bonus' were offered to encourage risky behaviour, this crisis became inevitable.
There is fantasy, too, at the heart of mark-to-market, and that is to treat every security at all times as if it has just been put on sale and sold, when in truth, not every security has just been put on sale and sold. In fact, if every every security was really put on sale at the same time, who would buy it, nobody would buy it, the market would collapse.. like it did.
There is something else that needs to be done. Borrowers and creditors should have a unique relationship so that the two parties are the only two parties involved in the contract. it should be made patently illegal for contracts to be bundled and packaged and resold as if it were some sort of product.
A mortgage should not exist for any other reason than to provide a home for a borrower.
Same with credit card debt or any other type of loan.
When this new law is enacted exporting debt to the rest of the world and causing world wide recession will go away.
I would also raise capital gains taxes to pre 2003 levels to discourage speculative investing which necessarily over inflates the price of homes.
M2M account needs to stay.
otherwise there is no trust left between counterparties. its like saying, i would value my junk at whatever "i" want.
There are other, standard methodologies that can be employed. It wasn't exactly like we had not trust before 2007.
Plus, if we had mark to market during the S&L crisis we would all be living in caves now....
In the absence of mark to market you have more nonsense on the balance sheet. The WSJ has its audience, same as Forbes but my goodness.. "we loved it while asset values are rising, but please take the chains off from this death spiral" is the cry when values go the other way. If this was a small business.. we eat what we kill and take the losses that go with good times but in the parlance of wall street, this kind of rational transparency is no good. They are now losing so let's change the rules. The answer - let's create some more rules intended to hide the junk values and replace them with artificially inflated values designed to prop up insolvent balance sheets. Now, that will inspire even greater confidence. Perfect! Ok you go first, let's invest Sir Malcolm's inheritance along with your 401k in these guys. Let me know how well you did. ;-))
After the dot com bust during the early 90s, Apple Computer stock fell to one dollar. it was a gamble but those that picked it up were handsomely rewarded as it rose to over 20 dollars in a couple years. There were some other bargains that came and went.
What stock in today's market will be the next apple?
M2M accounting caused massive asset value increases on the way up.
A decision to revert to an "original cost" accounting norm is seriously problematic.
The original cost of ALL the assets that changed hands over the past five years, for instance, are valued at their M2M original cost, so how do we deal with unwinding ALL of that balance sheet appreciation?
Do we restore pre-M2M values for all those holdings.
To me, the only rational M2M change is to create a class of asset that MUST be held to maturity, therefore having no current market price.
And this solution only deals with that small minority of holdings.
I know a lot of market players now admit both the naked short-selling and the uptick rule fiasco were wrong.
Again, very few complained on the way up.
Or, nobody refused its benefits.
Actually the stock market is an abhorrent place for people that really understand how money works and how greed works.
Poised on the sidelines today are those with the bucks to bet down the whole shebang.
And should that play out, we would say that the system is thus set up so that we would consider that normal market activity.
Yes, you lost your retirement and the kids' college fund because somebody bet that you would, and they were right.
Sorry, pal.
You didn't KNOW your money was at risk?
Damn, you oughta take some courses.
Next?
When average americans invest in the market via their companies 401k plans, they should educate themselves with some basic investment knowledge, however all those plans are administered by companies that should have their investors backs, so to speak. The average 401k investor should not have to worry about some groups looking to gain from a down market, that should be the plan administrator's business. Otherwise why bother having 401k or other similar plans
401ks in many companies cases are the only pension offered, and many companies are killing off even that.
Removal of the "mark it to market" accounting rule injects back into the financial system "fantasy" accounting. The Obama Administration has to arrive at an acceptable way to value these illiquid securities in a very short period of time. They can't wave a magic wand and turn them into liquid assets by eliminating the “mark it to market” rule. They are going to have to monetize at least a portion of the securities by nationalizing parts of the financial system until it gets back on its feet. The remainder of the subprime securities will have to be sold-off to private entities able to unwind them so that the gold is separated from the dirt. The Administration will have to come up with ways for the US government to share in the value derived, again a difficult task to undertake. It will not be easy. What is required more than anything else is that the market (and the American public) understand that the facile free-market arguments of the last 30-years were used to cover-up egregious structural deficiencies in the US economy. Luckily we have the most intellectually competent President in the last 70-years to guide the process.
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