Preventing Financial Meltdowns: Mark-to-Market

Further to my comments about a common thread in U. S. financial breakdowns: They usually have to do with governmental “experts” in the past reacting to problems in a panic mode.

I feel the rescuers had come from the financial community, attuned only to the short term, and thus could not see how caution and avoiding panic would overcome problems. Nor did they truly envision the danger of acting in haste.

Example: The value of collateralized debt obligations, CDOs. or their derivatives, were “marked-to-market,” under so-called fair value accounting. The latter is part of the Generally Accepted Accounting Principles (GAAP) rule in place since the 1990s.

But that rule could have and should have been suspended for the emergency. CDOs are not widgets or some other product that accountants usually measure in balance sheets.

As a result, bank and investment company net worth figures were daily being devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine. The rescuers were blinded by their own personal and business backgrounds.

Thus, there were defenders on Wall Street for this sham. Some insisted that GAAP rules were rules to be defended as if they were cast in stone. And after all, the rules became a boon for Wall Street short sellers and the avalanche of constant traders that make up the financial community, The folks to which the media give far too much attention.

Ever-lower values were thereby being created for securities with little or no true market with which to establish real market values. And it produced volatility that makes for tremendous trading profits among short-term traders who predominate the scene.

This created havoc among all other small and large investors in pension and institutional funds, who look to the long-term and are not interested in daily or even weekly pricing. All true investors got run over by this mark-to-market onslaught.

I have always felt that there are two kinds of investors. Traders who need daily quotes which can be unrealistic. And long-term investors who get misled and potentially hurt, if they act on those abhorrent, volatile short-term quotes.

The financial meltdown was certainly an error by Government appointee “experts” thinking too short-term and subject, therefore, to panic–driven decisions.