The "Mark To Model" Lie

The latest load of nonsense is that "mark to market" accounting is claimed to be the problem with our banks.

Let's think about this folks, because there are two sides to every trade, and for every loser there is a winner.

Let's say that I'm "Bill's Bank and Mortgage" (BBM) and I've got a lot of this so-called "toxic paper" that MTM accounting is killing.  That is, I am damn sure this paper is worth par (100) while today, at best, I can sell it in the market for forty cents (0.40); that is, I have an un-realized 60% loss.

What is the logical thing for me to do as BBM, assuming that I'm really sure that I'm right?

Why it is to go into the market and buy as much of this paper as I can, right?  I scrape, scrabble and scrounge to come up with either money or long-term (10ish year) credit and use it to buy every piece of that so-called "trash" as I can find.

When (not if, remember, I'm sure its really worth par) the values come back I will make an unbelievable amount of money.

So let me ask all those who think we should abandon MTM accounting - why isn't this happening?  Why isn't Warren Buffett, the "smartest guy in the room", doing exactly this?  Why isn't PIMCO?  Why isn't Wilbur Ross?  Why is the roughly $3 trillion in cash sitting in hedge funds - all uncommitted cash - sitting there, instead of buying every piece of this paper it can find?

The truth?

MTM account is likely optimistic, not pessimistic.

Never listen to what people say, unless they are backing their mouth with their wallet.  Those who claim that MTM accounting is somehow making banks "insolvent" when they should only be "illiquid" need to have their heads examined.

More than $3 trillion sitting in cash, in hedge funds, and none of these guys agree with the mouth-breathers in the media - and in the banks - who claim that this is all a "mark to market" problem?  None of them are out there buying this crap. 

But $700 billion - one fifth - of the amount sitting in these hedge funds, all funded by the taxpayer (with borrowed money no less!) is going to make it all better?

Being a Congressional representative obviously does not require a brain.

There are, however, a few representatives that have one.  Brad Sherman, D-CA, for one.  Take a listen.

This is how you get robbed to the tune of $700 billion - or more - by foreign interests.

In a time when government schools imparted critical thinking this sort of game wouldn't work.  Unfortunately, 90% of the House and Senate are mouth-breathers, along with 95% of the population of this nation.

The "pitchfork moment", when the people take to the phone and fax to express their outrage, just started to bubble over in the last few days.  In response The Senate added more than $100 billion to the bill to try to assuage public opinion - more money we don't have.  Now this bill has blown up to over $800 billion, and the worst part of it is that this is all current year spending - not "back year" - which means we will see a one trillion dollar or more budget deficit in FY2008.

Let's talk about all the "Commercial Paper" screaming, which was the "root" of what Paulson used to sell the fear in the House and Senate; here's the truth:

Weekly changes in Commercial Paper (CP) Outstanding ($, blns)

Is there a disaster in here?  Yes.  In financial commercial paper, and asset-backed commercial paper. 

These are the firms that are and have been lying about their balance sheet strength and exposure.

Non-asset backed non-financial commercial paper is trading just fine; it shows no sign of trouble at all.  In fact, the coupon being paid - that is, the cost - of non-financial commercial paper is the lowest it has been in five years and is down from just last year by about thirty percent.

Lack of credit?  Where?  For firms (and people) who have crappy credit histories and shaky balance sheets?  Of course.  It should be that way - don't you think whether or not you'll get paid back should be the determining factor on whether or not you get a loan?  If a lender doesn't trust your financials (as a person or company) don't you think its prudent for them to say "no"?

What's the take-away from this?

STOP THE LYING AND THE MARKET WILL NORMALIZE. 

and

UNTIL YOU STOP THE LYING, THE MARKET WILL NOT NORMALIZE.

No matter how much "money" (debt, really) you throw at it.

Finally, if there is such a disaster in our markets and banks, why is it that Wells Fargo came in and swallowed Wachovia lock, stock and barrel, removing a liability that the FDIC had already agreed to backstop when Wachovia was "taken under" by Citibank?

Disaster? 

More like manufactured fear by Paulson and Bush so their cronies, including and especially foreign cronies, can come in and rip you off wholesale.