[Vision2020] [spam] Debate about the bailout

[Kenneth Marcy]

On Friday 26 September 2008 11:15:39 Andreas Schou wrote:
> > By the way, efforts to throw the blame on the accounting rules are bunk -
> > Mark to market was the means by which this whole house of cards was
> > revealed.  Had we not had mark to market rules in place, this whole mess
> > might have been undetected for some time and the consequences even more
> > severe.
>
> Oh, hell. It pains me to say it again, but -- again -- I agree with Jeff.
>
> If banks had been allowed to use a 'mark to model' valuation of their
> CDO assets, which essentially means to put them on their books as
> being worth what the bank predicts them to be worth, the crazy
> debt:asset ratios that banks are carrying would never have come to
> light. The fact that they're forced to put them on their books at the
> actual cost the market will pay is  shining sunlight on the problem,
> not creating it.

Mark-to-market is merely an inventory valuation methodology used specifically 
for financial assets; thus, it is analogous to first-in-first-out (FIFO), or 
last-in-first-out (LIFO), or various weighted average methods used for 
physical inventory, and can hardly be blamed for an industry-wide confidence 
shortage. Other factors need to be sought and examined.

If one asks the question "Why are some not confident in their investments?" 
part of the answer seems to be that the investors don't really know of what 
their investments consist. Really? Why not? Don't we have accounting rules 
that specify the necessary parameters to identify and to value an asset?

Well, as it turns out, for some of these newly-invented financial instruments, 
the answer may be no. Sad, but true. If that is the case, we have been here 
before (in the early 1930s, before securities regulation) and, after better 
accounting rules were adopted for the prevalent assets of that time, those 
who wanted to value firms for investment purposes had better tools with which 
to do so. Here we are again, and what do we need? Better rules to identify 
the nature of these new types of assets, so they can be valued appropriately.

In the 1930s, the word computer applied to a person whose job it was to do 
arithmetic work, regardless whether it was in a large engineering office or 
some other computationally intensive employment. A mechanical, or an 
electromechanical calculator may have been available, but an electronic 
computer was not. In the twenty-first century we assume that computer refers 
to a digital electronic device, and many people who regularly work with 
computers assume that they are connected to one or more networks comprised of 
many other computers. 1930s computers worked at the speed of thought; 21st 
century computers work at speeds many orders of magnitude faster, with more 
accuracy, precision, reliability and predictability, given that their 
software is thoroughly debugged and well-maintained.

We should be using these 21st century computers to better identify and value 
financial instruments. How so? Modern financial instruments have many 
characteristics because often they are composed of many other financial 
instruments sliced, diced and divided into different portions for the purpose 
of repackaging various levels of financial characteristics of the underlying 
levels of financial instruments. If one goes to the grocery store and picks 
from a shelf a box of some foodstuff, one can read a label on the box that 
indicates of what the foodstuff is composed. An analogous action prior to 
purchasing a complicated financial product is often not possible to do. I 
suggest that with the power available in 21st century computers, we can 
determine the ingredients of a financial product as it is designed and 
packaged, and we can keep track of those ingredients' characteristics as the 
product is offered for sale, and as it progresses through its financial life.

In my view there is no reason why, save for the not-yet-developed software, 
financial instruments cannot be tracked from cradle to grave, so to speak, 
and information about those instruments can be made available either 
individually, or in any collection, or part of a collection, that an analyst 
or investor may wish to consider. The necessary computational hardware is 
available, if not necessarily yet installed where it would be useful, and the 
necessary algorithmic theory is available, if not yet packaged in appropriate 
application software. What is needed is the design vision, the project 
management, and the research and development funding to create, test, and 
implement intra- and inter-firm, and intra- and inter-governmental systems to 
better accomplish the various financial transactions of the 21st century.


Ken