More Marketing "Mark To Market"

I talked about "Mark To Market" accounting yesterday, and today over at Big Picture they have, well, an even better explanation of FASB Rule 157.

Now that the garbage is on the books, no one wants to admit the original error of purchasing this class of assets. Its not just that the trade has gone bad, its the original buying decision was so flawed even if the trades were not such giant losers.

Recent actions of corporate titans in the financial sector are essentially an admission that their business model was deeply flawed. No one would invest any capital for a ROI of 50 bps per year. They of course knew this -- so they leveraged up that 50 bps 35X or so, creating the false appearance of more attractive returns. This higher risk, potentially higher return paper was part of that misleading process.

Suspending FASB 157 amounts to little more than an attempt to hide this broken business model from investors, regulators and the public. Its not just getting through the next few quarters that matters; Rather, its allowing the market place to appropriately reallocate this capital to where it will serve its investors best. That is what free market capitalism is, including Schumpeter's creative destruction. (A WSJ OpEd today get this issue precisely wrong).

I have been steadfast over the past 2 years about why I did not want to own any of the financials that held this paper on its books. The key was that we could not figure out what the liabilities were relative to the assets. That is investing 101.

If FASB 157 is suspended, I would advise our clients and the investing public that owning any financials that failed to disclose their holdings accurately were no longer investments -- they were pure speculations, with more in common to spinning a roulette wheel than owning Berkshire Hathaway (BRK) or Apple (AAPL) or Google (GOOG). Indeed, I know of no faster way to end up on the DO NOT OWN list than to hide from your shareholders what is on your books.

If investors cannot trust the valuations of what is on a firms books, they simply cannot invest in these firms PERIOD.

In other words, banks get to lie for fun and profit. Not only are other banks not going to want to loan money to them as I said yesterday (liars don't trust other liars they know HAVE to be lying) but the BP guys bring up an excellent point: investors are also going to assume these banks are lying and are not going to want to invest money in them.

Seems to me this is more disasterlicious fun, and why Chris Cox is allowing this to ha...OH WAIT HE'S A REPUBLICAN WORKING FOR BUSH never the hell mind.