I remember the mark to market rule change and was thinking, gee if they can just change an accounting rule and the market rallies like this , "shit's rigged." Obama also said "It's not a bad time to buy stocks" the month of the bottom. I don't like Obama but I'll give him that bottom call.
Wrong in some respects but interesting. It was TARP that saved banks, but it was Mark to Market that caused the need for TARP. But Mark to Market was in no way the root of the crisis. The reason Mark to Market is used at all is that it is the most reliable, and easiest, way of assessing value at a particular point in time for any liquid asset, and the least subject to hanky pank. That is because the most objective measure of value for a liquid asset is by definition what you can actually sell the asset for in a free market. The reason the guy's house on the beach example isn't a good one is because houses in general are not liquid assets. The problem for the banks arose because the market for CDOs dried up so their assets were no longer liquid and mark to market then did not make sense; yet the reserve requirements in place at the time required mark to market. Because bank assets became illiquid the banks could not meet their reserve requirement. In stepped the Federal Reserve and said, tell you what, we'll have our accountants look at your CDO inventory and decide what we think its value will be once this crisis blows over and if we think there is still enough value in your inventory to meet your reserve requirements under our accounting rules, we will buy your CDO assets at the price we determine is fair, credit your reserve account, and then you may be able to meet your reserve requirement and stay in business. By law, had the Fed not stepped in, those banks that could not meet their reserve requirement would have had to go into receivership with the FDIC stepping in, long before Congress rolled the Mark to Market rule back the following April. As it was, there were many banks that could not meet the reserve requirement using the Fed's evaluation of their assets and these banks did fold. The problem with bank solvency was certainly not entirely due to loss of liquidity because even with TARP in place many banks could not meet their reserve requirement. Mark to market is not a bad idea, but if it is used by banks than there must be a fall back accounting provision in the case of a sudden loss of liquidity. There was no such emergency provision in place when the crisis hit, as apparently no one at the Fed had any inkling that those CDOs contained junk and therefore were really not Triple A. Although it is unlikely that Triple AAA will become illiquid, it wasn't at all unlikely that pseudo Triple A, i.e., low and high risk in the same bundle, would become illiquid once the high risk junk was discovered. The guys main theses is 100% wrong. Once it was discovered that what was sold as Triple A wasn't, the crisis would have occurred even if mark to market had not been in place; there were trillions of dollars of insurance sold on those CDOs and layers of synthetics beyond that. Insurance that could not be paid on. Yikes! _____________________ I had a big fight with my county assessor. I maintained that the current value of some investment property I bought was what I paid for the property as a disinterested buyer. She insisted it was worth more. She won, but in my opinion she was wrong.
Lucifer's Banker: The Untold Story of How I Destroyed Swiss Bank Secrecy Hardcover – November 1, 2016 by Bradley C. Birkenfeld (Author)