The: Mark-to-Market Absurdity and 2008 Financial Meltdown

                         

I have mentioned in earlier blogs how 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  value was impossible to determine.

                       

There were defenders on Wall Street for this sham. Some insisted that rules were rules to be defended in emergencies as if cast in stone. After all, the rules became a boon for Wall Street short sellers and the avalanche of traders who 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 values. And it produced volatility that makes for tremendous trading profits among short-term traders who predominate the financial community.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The Mark-to-Market Accounting and Financial Menace

                     

U. S. financial breakdowns usually have to do with governmental “experts” reacting to problems in a panic mode. I’m referring to the Great Depression and our current Near Recession.

                       

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, in the past, “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 were not some usual product that accountants usually measure on 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. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Complicated Dodd-Frank

                     

You have heard how complicated, arcane deals undermined global finances? Because those “greedy” bankers, intent on “obscene” profit-making schemes used them to the detriment of all.

                       

After lengthy investigations were made, and our politicians completed their pious, populist speeches, Congress made its conclusions.

The result? Perhaps some insights were finally gained on derivatives really work and their purpose. The upshot of all the nattering? Draconian regulation in the form of Dodd- Frank,

                       

This piece of legislation is still a work in progress, but the unintended consequences are slowly but surely unfolding day by day. I comment on them as they periodically occur.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Lending ETFs to Traders for Profits

                       

ETFs are different than mutual funds, in that they are traded on exchanges. Mostly they are indexes that are not managed by advisers.

                                           

From time to time, their securities may be lent for purposes of short selling, It’s a source of added income. The stock lending profits of such ETF funds can be substantial.

                       

Do earnings go back to shareholders of the ETF, or to its managers?

                       

In some funds, almost all go to the shareholders; in others as little as half may be returned to holders.

                       

You should check your ETF investments, to see how your managers treat these earnings.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

The “Independent” Federal Reserve

                       

Central banks were set up for independent banking functions, on the premise it’s best for a country to keep its financial system from political influences.

                       

Politicians have always had a tendency to produce

financial and economic pressure to change any banking independence during stressful economic times.

                       

How are major central banks doing with regard to their current national financial crises?

                       

The Bank of England has been relatively independent until recently. The Bank of Japan has often has been politically directed.

                       

Congress, which always loosely supervised the Fed now wants audits and more disclosure, which exerts pressure.

                       

However, the Dodd-Frank Act  has the Fed go more deeply into the American economy than it had before, and the present Fed head,  has had a tendency to lean more to administration policy.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Use of Derivatives

Remember the hullabaloo about securities derivatives,

such as interest rate swaps and credit default swaps? And their connection with subprime mortgages and collateralized debt obligations? With their role in the 2008 financial meltdown?

                       

Many railed against derivatives; that CDS (credit default swaps) caused the financial meltdown in the mortgage market.. But there was a much larger market in interest rate swaps, and there was no problem with fixed income assets.

                       

And there was an even larger market In foreign exchange swaps, than in CDS, and there was no problem in the currency markets.

                       

So derivatives were not the main cause of the financial meltdown. Example: AIG lost $39 B on derivatives but also $24 B on mortgages with no derivatives. Their counterparties on derivatives were paid off 100 cents on the dollar.

The problem was the housing market.

                       

Government excesses, such as poor monetary policy, produced economic problems, not bankers who become bystanders by necessity and happenstance.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

                       

Investing Behavior

                                                

Research on human investment behavior indicates how personal psychology has lots to do with the way securities markets operate.

                       

I have mentioned in the past my studies and evaluations of over 1,600 investment strategies, and their pros and cons. In addition, I have always said there is no one that I have found to be better than any other. What makes for

investment success is strict discipline of strategy use. Psychology controls discipline.

                       

Furthermore, discipline can be mastered, with proper personalized control over psychological hazards.

                       

I would suggest investors look at the work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)