Read For Accounting Basics, Accounting Systems, Financial Accounting, Business Accounting, Business Accounting Software
www.informedtrades.com The third and final lesson in a 3 part mini series on the subprime crisis and specifically the role that mark to market accounting has played.
paolausfq
July 1st, 2009 at 3:32 am
Question… So the fair value of MBS must be done on mark to market instead of market to model. Is this because it falls under the rules FAS 115 and 157?… Let’s say that MBS are HTM even in this terms they need to be valued at Mark to market?
bassthunder
July 1st, 2009 at 3:32 am
if you understand that a home is an “illiquid” investment, you should understand that a bucket full of 10,000 mortgages can be far less liquid. At one time there was a more active market in buckets full of mortgages, but that market has come to a screeching halt. Not many of the mortgages are in default and going into forclosure, but the crisis is due to the associated fear. Mark-to-market rules now force banks to understate the true value of their buckets = bad rule!
shiznaw
July 1st, 2009 at 3:32 am
isn’t mark to market applied to only securities available for sale?
U2BHistory
July 1st, 2009 at 3:32 am
Good Stuff. I wish more people would actually take the time to watch videos like this. It might help them to begin to understand how to get out of the Crisis. I’d be interested to see your views on my video at U2BHistory.
deathwishdn
July 1st, 2009 at 3:32 am
awesome thanks dude, just needed an expert to get me started on my assiginment lol
InformedTrades
July 1st, 2009 at 3:32 am
An understanding of accounting standards is helpful when looking at a companies books to see how they report earnings and where they may be hiding losses or inflating earnings. This applies during times of economic crisis or normal economic times. Best Regards, Dave
deathwishdn
July 1st, 2009 at 3:32 am
hey David
couple of questions
how is setting of standards by the IASB useful for making economic decisions and how is it effective in times of economic crisis
InformedTrades
July 1st, 2009 at 3:32 am
Hi Maryrat23, Yes this is true. A better example would be if you lived in a neighborhood with 10 houses all of which were exactly the same. Then you neighbor goes bankrupt and has to sell his house in 1 day. The price that he gets is probably going to be a lot lower than the true value of the house. Nonetheless following mark to market, the value of everyone elses house in terms of qualifying for loans etc would not be marked down to the price he sold his house for. Best Regards, Dave
maryrat23
July 1st, 2009 at 3:33 am
So, if I understand correctly, in laymen’s terms, if a person owns, say, $100 a share in a Mom & Pop store and that store takes a dive leaving shares worth $1 then every one else that owns shares in other Mom & Pop stores would have to revalue their shares to $1 also?
This is the gist of my understanding.
InformedTrades
July 1st, 2009 at 3:33 am
thanks for the comment and for watching I am glad you liked it. Best Regards, Dave
Mark550355
July 1st, 2009 at 3:33 am
the overview of the entire topic is excellent, very easy to understand and straight to the point, this is the best place to come for info on finance. Well Done
chasleo
July 1st, 2009 at 3:33 am
Well, according to this previous week’s news the Feds ‘kicked’ the proverbial bucket with a string of arrests – apparently some banks were well aware of the situation they were putting the consumer in and are now paying the price for it.
In all reality, lending needs more transparency and tighter regulations around risk assessment to prevent this from happening again.
A problem that occurs is that this no longer becomes simply a ‘writedown’ when homeowners claim bankruptcy.
InformedTrades
July 1st, 2009 at 3:33 am
Hi Charlybrown1000, No unfortunately I wouldn’t even know where to start with something like that as its not only the actual debt but all the derivatives that are tied to that debt. Much of this trades over the counter so I am not sure if much of it is even reported. I may be wrong there though. Best Regards Dave
charlybrown1000
July 1st, 2009 at 3:33 am
David, Do you know where should I start searching If I wanted to calculate the total debt in the market (debt related with banks and subprime)? Couldn’t those numbers help to make everithing more clear. I guess that once that we have the whole numbers the next step can be in calculating the value (not the one marked in the accounting) based in an hypotetical scenario (like a economic forecasting model),
charlybrown1000
July 1st, 2009 at 3:33 am
i.e.: giving a certain amount of loss in the housing market un the US and a certain % of growth in the GDP. (sorry for my poor english)
InformedTrades
July 1st, 2009 at 3:33 am
yeh I’m the same way. I was talking to a buddy of mine who had an interesting thought. Many of these writedowns are related to liquidity issues and not actual issues with the underlying credit, so if you can separate out the banks that whose portfolios are down form actual credit deterioration from the ones who are getting hit on sound debt portfolios that there is simply no market for right now you could see some nice upside there once things hopefully get back to something resembling normal
AirelonTrading
July 1st, 2009 at 3:33 am
Huge ol’ Catch 22.
That’s something I tell people all the time when they want to talk about the new loss a bank had, and they ‘keep losing billions’. I have to say it again and again. A writedown IS NOT A LOSS. It’s more of a continual ultimate drawdown.
Biggest problem I see with Mark to Market is Im also running into people that believe that since it’s not a loss that ‘now we know the extent of the damage’ and we don’t.
Some days I want aggressive, other days I realize the danger.