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Wednesday, February 11, 2009

Here Comes the Sun

Blog of the Day Awards for Wed, Feb 11, 2009

A Blog of the Day Award goes to Here Comes the Sun


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Thank you,

Bill Austin

1 Comments:

Blogger Johny RockIt said...

Taken From: http://wallstreetblogspace.blogspot.com/


Marked-to-Market Acounting
Senator Dodd of Connecticut has been quoted as saying that as part of the financial bailout plan the government will be getting rid of mark-to-market accounting. If this is in fact true, the stock market will jump many hundreds of points when this news is officially released.
What is marked-to-market? Essentially it is an accounting technique that allows you to value your assets based on the going market price. huh? Let us suppose you buy 1000 shares of company A for 10$, it subsequently rises to 20$, you get to mark it on your books as $20,000. Thats great as all of you day traders out there know, your margin gets increased and you have more buying power. the same thing happens with big banks. Lets say that a bank has a bond for par (even) at 100 (lets say its a mortgage for a home worth $100,000). As the prices of homes had kept rising in previous years, the price of the bond kept rising as well, say to 150. This meant that banks had on there books $150,000. Now the same principal you use on your day trading was being applied to big banks, when their investments went up they were able to use more leverage (margin) to make more loans, which in turn increased in value....etc etc. in a neverending cycle. and all this was well and good when the price of homes kept rising. (obviously this is an oversimplification but you get the picture).
So now home prices have fallen off a cliff because too many people bought too many homes with fake money that banks loaned them when they really didnt have the money either. So the market collapses and now that same bond we were talking about early's value is now say 50 ($50,000). Now the bank has to right the loan down on their books to reflect that they only have $50,000 from said bond. Imagine getting a margin call but on a massive scale and with much more leverage than us lay people could ever get; yea its not pretty but that is exactly what has been happening and is what has been causing the collapse in the financial system.
So basically the banks used this marked-to-market accounting princple to their benefit in the good years but it has absolutely killed them in the past few months. Imagine now that said accounting princple is repealed, guess what these banks can now value these loans at a higher value than what the market is currently willing to pay for it (and actually closer to the true value of the bond; the market tends to get overly pessimistic just as easily as it gets overly optimistic). So basically the banks will get to use another accounting trick to pump up their assets but no one is going to argue that this does not need to be done. It must be done, even though these financial institutions absolutely brought all the troubles on themselves without them this country would be cast into another depression. Marked-to-market must be suspended immediately, and it appears it will be, and this will do wonders for the values of financial stocks as soon as it happens. When you hear "Marked-to-Market is being suspended" i can gurantee you are going to see a tremendous upsurge of stock prices.

2:29 PM  

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