(Taken from Raghu-nomics Volume 7)
“Mark-to-Market now created the third wave of undervalued securities and assets to be sold off way below their true market value. First it was the Securitized mortgages and Credit Default Swaps that were pushed within pennies of their value. Then blue chip companies had their stocks dumped into artificially low prices by automated –robo-trading software. This was followed by this mark-to-market rush on assets. Banks now sold their best assets at close out prices to meet their financial obligations. This created the third wave of assets forced into fire sales. Trillions of legitimate value and assets with solid financial performance were suddenly forced into artificially low appraisals at fire sale prices because of these 3 accounting mishaps.”
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- Mark-to-Market Accounting: Wrote of same debt multiple times
Mark-to-Market accounting did more to multiply the mass bankruptcies of the FINANCIAL industry than most any other factor of the real estate crisis. Mark-to-Market requirements demanded companies to reset the value of their portfolios to the markets going rates. Let’s say a home fell from $300,000 to $100,000. Mark-to-market would have this property re-listed on the books as worth only $100,000. This was required even though the homeowner was still paying their monthly mortgage with no indication they would stop. Mark-to-market would than require the bank to put in the $200,000 cash difference from their own coffers to offset this loss. It’s like your taxes. You take money out of your paycheck and hold it on the side to pay your taxes at the end of the year. This capital write-down also had to be made by the end of the year.
Banks and other investment firms did not have this extra cash on hand to make these ‘write-downs.’ This left them to sell off good assets at fire sale prices. This pushed stocks and other asset values down even further. Most of these institutions knew that the going market price for their assets were artificially low and would rebound once the market scare wore off.
Banks asked for a longer time frame to make these write-downs. The gov’t objected while critics called it another banking corruption to weaken regulations. It seemed a fair request to me. These were not short term, one year investments. Mortgages have a 30 year shelf life. A 5 year window to re-appraise and write down a performing asset seems like a legitimate request. Markets could have stabilized by then and so reducing the amount that had to be written down. Many banks did not have these massive capital pools or other asset buffers. They went bankrupt trying to meet these insane capital requirements. Over a thousand banks were forced into bankruptcy over the last 6 years – in large part because of these capital requirements of the mark-to-market rules.
Mark-to-Market now created the third wave of undervalued securities and assets to be sold off way below their true market value. First it was the Securitized mortgages and Credit Default Swaps that were pushed within pennies of their value. Then blue chip companies had their stocks dumped into artificially low prices by automated robo-trading software. This was followed by this mark-to-market rush on assets. Banks now sold their best assets at close out prices to meet their financial obligations. This created the third wave of assets forced into fire sales. Trillions of legitimate value and assets with solid financial performance were suddenly forced into artificially low appraisals and fire sale prices because of these 3 accounting mishaps.
This crisis was not due to a housing bubble, but due to a new system that created the perfect storm of financial confusion and misperception. These combined to destroy the integrity of sound investments and solid assets. These accounting mistakes had little to do with the operation and function of these assets.
All the corruption of the real estate fiasco was still confined to a small segment of the US economy. It would not have derailed the economy at large had it not been for these ‘accounting mistakes.’ These mistakes created a whole new set of phantom crisis throughout the rest of the country. It was a surreal economic version of the Terminator. This Terminator was set into motion by accounting shortfalls rather than out of control technology. It took on a life of its own and destroyed viable performing sectors all beyond the hand of man. It’s a tale of technology and economics getting ahead of man or at least the experts. It’s a case of old models and outdated ideologies fuelling such problems by ignoring these new dynamics of a fast changing 21st Century World.
And yet, something quite extraordinary was taking place. In our example (from the previous chapter), the rental car had 7 different counter party institutions all holding policies on that same car. 5 of these policies were insurance. 2 of them were in ‘loans,’ (one was the bank, the other was the rental company). Here’s the amazing thing about this. Mark-to-market accounting required each of these (7) companies to make a write-down on their ‘portfolio.’
Say each of these 7 companies took a 25% write down. It means they paid off 150% of the asset backing those policies. Let’s also say that two of the companies took a 100% write-off. We now have a write-down that could be 200% or more of the cars original asset. Say each of them took a 10% write-down. We would still have a 70% write-down. This is the kind of exponential debt reductions created by this mark-to-market accounting requirements. This would be on top of all the bankruptcies that wrote them down further. Now you may see why I’ve been jumping up and down all these years to show the country that we don’t have a debt crisis, but this vast accounting mistake.
Part 1 & 2 of 7
Part 3 of 7http://quadrust.com/article/section-3-of-7-securitize-mortgages
Part 4 of 7
Part 5 of 7
Part 6 of 7
Part 7 of 7: