I've been intrigued as to why banking directors haven't resorted to the age-old method of "director's valuations" to value their hard-to-value MBS and CDOs. And apparently, as I found out today, it is because the accounting standards do not allow them to do so. And mark-to-model is last in the accounting hierarchy of:
1) market price; 2) last traded price of similar instrument; or 3) mark-to-model.
My understanding is that because Merrill Lynch sold a bunch of CDO holdings at fire sale prices a few weeks ago, NAB had to follow suit and revised the value of similar holdings down (see number 2 above). That's just a vicious cycle.
This is just stupid. If governments can suspend short-selling and delay trading on a public exchange for an hour (as they did in Australia today), why can't they suspend mandatory mark-to-market for 12 months until the market stabilises (with a clear definition of stability)? Instead, governments are pumping billions into money markets and U.S. taxpayers will be on the hook to the tune of a trillion dollars to bailing out failing/flailing financial institutions.
The more I think about it, the more I think the world isn't going broke, if by broke we mean that the "true" value of assets are less than the "true" value of liabilities. At the moment, no one is trading any of the "toxic instruments" we are terrified of. As a result market prices are opaque and being further muddied by stupid restrictions on short sales and accounting mandated write downs that are forcing dead positions to be crystalised at silly prices (starting the whole cycle again). And lets not forget lots of panic.
The other note I would like to make is that we haven't heard a cogent argument from Paulson or Bernacke about why their massive bailout is needed. Why the rush? Why the size? Someone explain? For example, late this afternoon (Sydney time), Bloomberg was reporting that Treasury had requested that it be able to use the $800bn to buy whatever they liked (rather than it being restricted to mortgage related securities). Oh and they would like more money thanks. No explanation. Nothing. The government mandates that publicly listed companies continuous disclose to the market material information. But apparently it doesn't apply that them.
Implementation of the Paulson plan is going to be a mess. It is going to be a great opportunity for lobbyists and lawyers to make a lot of money. Who are the financial magicians Paulson is going to hire [to run the massive $800bn behemoth]? Are they from Wall Street? If they’re from Wall Street, aren't they the very people we are saving? And doesn’t that mean that we’re using the taxpayers’ money to hire people to save their friends with even more taxpayer money? Won't this inevitably lead to crony capitalism?
Where's the reset button?