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Politics : The Obama - Clinton Disaster -- Ignore unavailable to you. Want to Upgrade?

To: pompsander who wrote (3856)	12/26/2008 10:08:41 PM
From: DuckTapeSunroof	Respond to of 103300

I have heard some of the same sort of stories from other quarters.... 'Mark to Market' is a worthwhile and sensible principle in financial accounting, but the IMPLEMENTATION of this principle is increasingly brain-dead. 'Mark to Market' necessarily assumes that there IS A FUNCTIONAL MARKET from which appropriate price cues can be taken. But, in a financial panic, 'liquidation sales' are prevalent, and the market is often dysfunctional. For example: margin calls have been massive in this last quarter (and have hit some of the markets LARGEST PARTICIPANTS, such as Hedge Funds and other Institutional Investors who regularly account for the bulk of trading volume). Hedge Funds often process redemption requests on a quarterly basis (while ordinary open-ended Mutual Funds typically have more frequent redemption periodicities), but both must often SELL their strongest positions to cash-up sufficiently to meet these redemption requests when the tidal wave of "get me out NOW!" requests hit. All these margin calls overwhelm their ordinary cash reserves. With redemption requests at historic highs they big institutional investors are forced to sell out BOTH their weakest positions (the ones it might seem imprudent to hold any longer, based on fundamentals) and their STRONGEST POSITIONS (because the relatively stronger investments are where the cash value is still to be found!) This creates the panic pricing of even strong (but perhaps, less liquid) investments, as you note, but 'Mark to Market' propagates that mispricing out to other participants in the market --- which builds up a feedback loop that acts to further depress 'market' prices. There needs to be some sort of ability written into the accounting rules to RECOGNIZE when special 'panic conditions' such as we are experiencing now have taken hold in the markets... (even if the SEC just temporarily, and by fiat, amends the mark to market rule until the normal deliberative processes can consider the best options). I do not want to throw the baby out with the bath water (mark to market is still very valuable and healthy under normal conditions...) but I ALSO to not want to let idiocy rule the day, and blind adherence to imperfect regulations actually DEEPEN our financial collapse. Where, oh where, in our government are the 'wise men'? (It has also come to my attention that some banks have actually HELD ON to very toxic securities because they DID NOT WANT to sell any into this market --- even if dumping the securities would otherwise be a wise investment decision --- because if they sold they would then be FORCED to mark to market similar securities that they still owned... and this could cause big pressure against their reserve ratios.) In this example... the rules that are supposed to promote accurate pricing are actually guaranteeing INACCURATE and frozen prices.