Marked to Market-The Emperor’s New Cash
The talking heads on the financial channels are arguing about “marked to market”. It’s a sanctioned form of deception that lets financial institutions value the worthless and worth-less assets they’re holding at the prices they paid for them.
And it affects us all.
Let’s go through this using a rough layman’s analogy:
You bought 50 shares of General Electric stock at $30/share. Your original investment was $1,500.
GE’s stock price has gone down. For the sake of round numbers, let’s say it’s gone down to $20/share.
Your original investment is now worth, on paper, $1000. Your brokerage or 401K statement would say it’s worth $1000. If you had to show your assets to a car dealer or mortgage broker in order to get a loan, your GE stock would have that same current value of $1000. Pretty simple.
The financial institutions bought another kind of asset, not a stock like GE, but bonds, which turned out to be toxic, because they had sub-prime mortgages wrapped inside them like a cockroach in a burrito. Let’s say they bought, for argument’s sake, a million dollars worth of this asset, like you bought $1500 of yours.
To clarify, whether a stock or a bond, the principle of valuing an asset is the same.
Citigroup unloaded some of their sewage at 22 cents on the dollar. Their original million was dumped for $220,000. A loss of 78%.
However, the banks, hedge funds, and other players still holding the bag (in the form of the toxic paper) are currently allowed to value it at the price they originally paid. In the case of the Citi example, had they not thrown out the trash, they’d have their $220,000 worth of bonds valued on their books as being worth the original million they paid for them.
The Emperor’s new money. The Emperor’s new balance sheet.
This is creating the illusion of solvency for many of these operators. And this illusion is a large part of what’s holding the markets up.
Even more nauseating is that these are the assets that we, the American taxpayers, are, under the terms of the bailout, supposed to buy at prices closer to the fiction that is marked to market than what they’re actually now worth. This allows the banks to continue to operate rather than take the gut punch they’ve earned, while holding hostage the credit America has always needed to lubricate its financial.
The con men claim that if they’re not allowed to operate as if the bogus numbers were true, they’d shut down, and so would the national economy.
Times would be hard, probably very hard for a while, but maybe all of us, up and down the ladder, need a swift kick in the pants to get our heads out of the sand.
We’ve got what we’ve got, no more, no less.
Work your budget accordingly. Whether you’re a family, a company, or a nation.
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This is the single greatest article that I have found on the internet on this subject. We are in a large part to blame for this crisis. It is a result of crappy systems on top of crappy systems. Throwing money at it will do nothing. Let us go through some tough times and just stop paying farmers not to farm and w will eventually come out of this.
very much appreciated. tried to describe the situation in way that made sense to me, and hopefully others. the dollar may have to be backed up not by gold or the faith and credit of the US government, but by the work ethic of the American people.
LK