Friday, October 03, 2008

Mark to Market, the big shaft

Lets say you had a bar of gold that's worth a thousand dollars today but all of a sudden nobody was trading gold for a few months. Is your gold worth zero? Not really, it's worth something close to a thousand dollars when people are buying again.

Here's the rub with banks and mortgage companies. Nobody these days wants to buy any mortgage, good or bad so they are forced to value the whole lot of them at zero even if only a few percentage are defaulting. The problem is that by valuing the mortgages that they are already holding at zero even though they will mostly be paid, the banks have 10 times less money to loan because of the way they're structured with leverage.

So 500 billion dollars of mostly good mortgages are marked down to zero even though most of them are worth most of their full value and thus 5 trillion dollars of bank liquidity is gone instantly. Thus explains why overnight so many banks collapsed.

How stupid is it that such a simple rule fucked up the entire dynamics of the economy and how stupid of the people who could do something about it a year ago didn't start until this week.

It's called Mark to Market regulations and you'll be hearing about it for a long time.

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