Evaluation Time

Wall Street’s high about the Fed’s $200 billion intervention was replaced by more rational thinking in that some of the main concerns like weak housing and continued credit concerns had not been really resolved but still remain a serious problem to be dealt with.

The markets retreated and received no support to the upside with oil prices topping $110/barrel. While the Fed’s decision most likely was the right one, it will not solve the underlying problem that many banks and financial institutions are drowning in a sea of ever declining mortgage assets that simply can’t be liquidated.

On that subject, a reader commented to my Tuesday post “Feeding The Bears” as follows:

The Fed is merely attempting to unlock a jammed market and we can only hope that they will succeed. The dimensions of the problems in the financial market are to a larger measure a result of an accounting convention known as mark to market which makes only sense in a highly liquid and efficient market. Once a market jams, mark to market account perpetuates a downward spiral we are seeing today.

While the reader is correct, I have to add that lack of marking assets to market via off balance sheet entries as well as “mark to model” or “mark to fantasy” accounting gimmicks has greatly accelerated the credit crisis most institutions are currently in. Banks brought the current problem on themselves by not marking to market earlier on as is customary in the financial industry.

Whenever a company decides to avoid reality, they can use the available (legal) tools to do so. This would be no different than if I as an investment advisor were to contact my custodian and ask to mark my client’s assets to my model, because we had a bad month, and I don’t want clients to see that at this time. Yeah right, for me (and my custodian) to do so is illegal—if it weren’t, I’m sure that would go over real well with my clients, if there were any left.

Allowing financial assets not to be marked to market contributes to abuse and the hiding of losses. This may work for a company and allow it to stay afloat temporarily but, during the unwinding of the largest credit/real estate bubble the world has ever seen, it will merely postpone the inevitable.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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