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Friday

Forbes on Mark to Market

Steve Forbes is just plain wrong when it comes to the issue of mark to market accounting. The reason the banks and insurers are in death spirals is because they took assets that have depreciated well beyond the original amount of a mortgage or policy. The reason mark to market account is hurting these companies has nothing to do with paper losses but more to do with what ensuring the companies have adequate reserves in case strong economic downturn. The reality is now being seen by everyone. The banks were horrible at forecasting real estate values have been overly involved in MBS and CDS markets. It doesn't matter if someone is paying or not on a loan that is 300,000 underwater because that particular loan is a powder keg waiting to blow. It is a toxic asset regardless of the payment history. If the collateral doesn't matter and we should do away with mark to market accounting my question is this: Why do banks take collateral at all then? If we are willing to not care whether the collateral is equal to that of the debt being serviced or if the collateral is worth 5o% less than the amount borrowed then banks could lend with out collateral. There is no reason to not mark to market unless you want to keep bad institutions alive. It is quite clear that banks have no business trying to make predictions on who will pay and who won't pay. Just look at current results and you have your perfect argument for mark to market accounting. The banks are over exposed and now they want to get a way with making mistakes. This is not about the homeowner or the few that have defaulted. It is about banks rolling the dice on real estate. How about if anyone who wants to sell their home gets to price it at a future value? A value that no ones knows is realistic or sensible but lets just do it because it will really hurt their financial position if they have to actually value the property at today's prices. This is what the banks want to do because some how they have convinced people that if they just hold out a little longer everything will be fine.

I have heard Steve Forbes comment on a lot of things over the years and he seems very knowledgeable. However, this idea is ridiculous and if congress suspends market to market our economy will be in even greater jeopardy.

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