Reader Mail
On Your Mark
Not buying Newt’s accounting. Gore knows no rules. Prepared for duty. A Boogeyman sighting. Plus more.
MARKET SANITY
Re: Newt Gingrich’s
Time for Real Accounting Change:
As much as I have always admired and respected Mr. Gingrich’s views on all things cultural and political, his public hostility toward “mark-to-market” accounting is as confounding as it is misguided. It is certainly the case that the solvency of our nation’s banking system has been deeply compromised, but the sad fact of the matter is that this has not been the result of FAS 157, as Mr. Gingrich would have us believe. It has occurred because of a systemic problem relating to the origination, structuring and pricing of securities, principally (but not exclusively) credit-linked securities that was intellectually flawed from inception. In order for Mr. Gingrich to assert that what we are now seeing is an irrational “breakdown” in credit markets, he must also assert that these securities were correctly priced to begin with. They weren’t.
As a professional participant in credit markets for over 20 years, I can most assuredly state that what we are now seeing with respect to the downward re-pricing of credit instruments, and its attendant negative impact on bank balance sheets, is a return of market sanity — not the other way around. Perhaps one of the most disturbing and dangerous assumptions being disseminated by opponents of “mark-to-market” accounting is that, given time, these massive pools of structured debt instruments will, somehow, return to their original “values” and that, voilà, the banking crisis will be solved. The plain fact of the matter is that it is highly unlikely due to the fact that the underlying cash flows of these securities has not only deteriorated dramatically over the past 12 months, they continue to deteriorate on a month-over-month basis. Those who are actively involved in the buying and selling of these instruments know this and are responding to these deteriorating fundamentals not with panic but rationality.
Just as with any investment, when the fundamentals change, so does the price. So, to suggest that we should just ignore the actual facts, ignore this very real and very measurable value impairment and continue to permit banks to just hold these investments at some fictitious price (or “mark”) will simply not lead to the outcome that Mr. Gingrich desires just because it will make bank balance sheets “look” better. In fact, it will lead to greater uncertainty and mistrust on the part of the marketplace.
No, Mr. Gingrich, in the case of asset carrying values, Pandora’s box has been opened and all of the assertions to the contrary about their “true” values (read: the values the banks, and presumably you would like them marked at) will not change that fact. In addition, contrary to the self-serving assertions of Messrs. Paulson, Bernanke, Kashkari, and Buffett, the American taxpayer will likely NOT receive any kind of return on their investment of these securities. We’ve gotten our first peak at that fact with the roughly $9 billion write-down the Federal Reserve has had to take with respect to the financial backstop provided to JP Morgan for its acquisition of Bear Stearns. Stand-by taxpayers…more write-downs will be forthcoming.
Unhappily, the dirty little secret that people will just have to
accept (and in time they will) is that these securities were
structurally flawed when they were first conjured together in the
basement of the Wall St. Sausage factory. They were then
shamefully mis-rated by the rating agencies. Finally, they were
served up to a marketplace whose desire for a few more basis
points of “return” clouded their better judgment. And the outcome
was made that much worse because all of it was bought with
obviously imprudent amounts of leverage. In this whole tawdry
mess, every principle of sound banking and finance was “thrown
out of the window.” By permitting our financial institutions to
“price” their assets as they would prefer will not change that
fact. Indeed, it would be like letting the fox guard the hen
house.
— Thomas J. Donatelli
GORACLE VS. REALITY
Re: Paul Chesser’s
Truth,
Economics, and Politics:
If Al Gore is convinced that human-caused global warming is a
threat to the planet, why does he still consume more electricity
in one month than I do in a full year?
— David Shoup
Whatever in the world has happened to the principles of
science?
Consider this: …the planet has increased in temperature by one degree in the past 100 years [or two degrees, or three degrees — whatever arbitrary number they’re using nowadays].
Have we not acquired more accurate temperature-measuring devices in 100 years? Is it not possible that our measurements are just more accurate now? By one or two degrees?
Are we not measuring and reporting temperatures around the world at many more locations than we did 100 years ago? Would that not tend to improve the accuracy of the “average” temperature? By one or two degrees?
Who measured temperatures 100 years ago? With what instruments? Who averaged the temperatures 100 years ago? From what scientific data? Where can we find that data?
Who measured it last year? With what instruments? Who averaged the temperatures last year? From what scientific data?
And whatever has happened to the margin of error? A margin of error of less than 1 percent? If the media took a poll of 897 not-so-randomly-selected persons on which candidate 302,561,550.5 Americans believe will be our next President, a margin of error of 1 percent would be considered a dream come true.
Letter to the Editor View all comments (8) | Leave a comment
More Articles From Reader Mail
http://spectator.org/archives/2008/12/15/gore-knows-no-rules
Follow us:
ADVERTISEMENT
Current Issue
- Obama’s Drone War
- Ailes: A Voice for the Silent Majority
- Wincing at Cumberbatch
SPONSORED LINKS
FLASHBACK TO: 1995
-
Pope Culture
A man of faith in a godless age is hitting Americans where it hurts.
-
Why the GOP Does Not, Like, Totally Suck
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
-
Dames at Sea
-
In the Absence of Guns
In Britain, defending your property can get you life.
-
The Metaphysical Martini
-
Counting the Costs of Clintonism
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
-
Chuck McHagel
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
-
The Legacy of Old John and Mother Fresh-Roasted
-
It’s the Best Time of the Year
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
-
The Bush Crack-Up
Was the President done in by the economy, or by the politics of the economy?
Clip of the Day
ADVERTISEMENT
frost| 12.15.08 @ 9:38AM
Thom Bateman nailed it. Period. Good stuff.
iamse7en| 12.15.08 @ 10:31AM
via my buddy, John Lott:
"The SEC (very) partially solves the mark-to-market accounting rule problems."
http://johnrlott.blogspot.com/2008/12/sec-very-partially-solves-mark-to.html
Thomas| 12.15.08 @ 10:40AM
An excellent assessment by Mr. Bateman. Just don't look for anyone in the Federal Government to listen.
David Govett| 12.15.08 @ 12:11PM
We have become a people of the government, by the government, and for the government.
Michael L. Hauschild| 12.15.08 @ 12:31PM
RE: David Shoup
Here is the problem with the global warming alarmist models. Most “weather stations” are now where they have always been, now encompassed by municipal heat islands. A typical example of this is official temperatures being taken ten feet from the exhaust vent of an air conditioner. There really is no overall change in the average temperature, just an anomaly in the local distribution. Heat is being generated but it is at the source of the power plant. No rational meteorologist would place a recording site on the top of a cooling tower.
Second, and this is the most significant, is the model itself. Historical temperatures “averages” are linear, simple lines on a graph. It is ironic that the adage, “climate is what is supposed to happen, weather is what occurs,” is ignored. The global warming school will use changing (+) temperatures to write headlines but not allow cyclic climate change to be deemed relevant within the prediction models.
Meteorological science is just now beginning to get a handle on the two-dimensional aspect of “weather.” In some locations prediction is relatively simple. For instance weather stations in San Diego could be staffed by a third grader with a radio, just call a ship four hundred miles off the coast to the west, ask that ship its ambient air temperature, barometric pressure, wind direction and velocity, humidity and precipitation conditions. Write that up, hand it to some very attractive on air personality and bingo, twenty-four hours later astounding accuracy.
The wrench in the works occurs the closer you get to the center of a continental area with those long “reaches” where air move across mountains, hot areas where solar radiation penetrates to the surface, cool areas where the surface is either obscured by clouds or lighter colored and less absorbent. All this convergence makes these areas a virtual battleground of factors, what happens fifty miles away from a weather station quite often bears little resemblance to what is happening to actual the observer. Accurate prediction at such a site is measured in hours, not days. This “map” two-dimensional model is the stage of our learning curve, if you do not believe the “weather” forecast for the next day how could you place any credence in the ability of anyone to predict the climate for the next decade or century?
Furthermore, any model being used for “prediction” is only as accurate as the data it is based on. The hundred thousand feet of atmosphere above the surface in which these variables occur is a virtual unknown. The interface at the earth’s surface is the only place in this vast virtually transparent volume that can be measured easily. Weather balloons, hurricane planes, and other instrument platforms traversing this “volume” still only report basic “linear” cross-sections. The energy and matter transfer exchanges that occur in this dynamic area are so vast and unmonitored that virtually every month someone comes up with a new (and often contradictory) explanation for a process.
Mankind someday will develop an extensive set of tools to measure the millions of cubic miles of atmosphere involved and a matching computer powerful enough to store and evaluate that data. As of yet, nothing exists with that processing capability, much less the ability to build a reliable model for prediction. Until that happens take all this “doomsday” rhetoric with a grain of salt.
Bryan St. James | 12.15.08 @ 2:13PM
Re: Paul Chesser's Truth, Economics, and Politics
There is a host of basic facts that make the theory of recent-term human-driven carbon dioxide output warming as impossible:
1. Over the last 6000 years, there have been 6 universally documented warming and cooling periods with several having more severe highs and lows than today’s changes. How could these have occurred if there was a dramatically smaller human footprint and NO industry to speak of? This indicates a natural forcer of climate.
2. From the 1940’s to the 1970’s, during the peak of human growth and industrial spread, we went through a period of Global Cooling. See Newsweek’s April 1975 alarmist article on impending global cooling (not to be confused with their spate of 2006-2008 global warming catastrophe articles).
3. There has been no cooling since 1998. What happened to continued catastophic warming due to the measured climb in carbon dioxide levels?
And when you look at the above, is it warming OR cooling from what magic temperature? In a 5 billion year old planet, do we think the average temperatures of the last 5, 20, or 250 years are close to meaningful? There have been periods ranging from hundreds to thousands of years where the temperature was several degrees Celsius warmer or colder than today.
If you are interested in open debate on this topic, check out a recent body of scientific evidence by Henrik Svensmark that makes sense with ALL the major aspects of our climatic history. You can read on the internet on his work about the interplay of the sun and cosmic rays and its global effect on cloud cover and therefore, global temperature change. He also has a book out with Nigel Calder called “The Chilling Stars”.
Regards,
Bryan St. James
Blog: The Practical Philospher (http://pracphilosblog.wordpress.com/)
In Minnesota; Current temp: -8 F, windchill -26 F
James M. Mulcahy| 12.18.08 @ 10:32AM
RE: Market Sanity
Mr. Donatelli's make a number of excellent points but misses the fundamental issue. That issue is whether or not the use of MtM accounting in times of financial panic help or hinder the equilibrating process. The idea that using MtM allows investors to get a more accurate picture of a firm's true value is shown to be wrong during gridlocks such as we are currently experiencing. If the goal of MtM is to inform investors then make it mandatory to disclose it in the footnotes to the financial statements and require firms to explain differences between balance sheet amounts and the MtM ones. The investing class will have as much information as before but capital accounts won't be devastated due to a panic situation. The current writedowns imply that the whole subprime market will default and all assets have zero value. Does anyone seriously believe that? While the assets clearly aren't worth 100 cents on the dollar, they are worth much more than they are being carried at.
Making this one simple change: MtM in the footnotes, not on the balance sheets and income statements; would do more to unfreeze the capital markets than everything else done so far, or contemplated doing in the future.