5 ms·
I'm surprised no one has already mentioned this series of events: - Enron used "creative" accounting and mark to something style procedures to create fake valu
by alexpotato 4y ago
I'm surprised no one has already mentioned this series of events:
- Enron used "creative" accounting and mark to something style procedures to create fake valuations
- They go out of business.
- Regulators say, "Hey! Now you need to mark to market always!"
- 2008 happens. Markets for things like CDOs and CDSs dry up almost overnight. At the very least most of the liquidity is gone and spreads get VERY big
- B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins
- Post 2008, people realize that "mark to market, always!" maybe isn't the best idea.
- I would imagine, that's why the Govt is saying "Ok, we will pretend that your assets are worth par value". They don't want to trigger the downward spiral.
It's also interesting to note that the Govt made money on many of the assets they bought in 2008 at well below par value. The implication is that those assets were undervalued when they bought them. Again, I would imagine this is a selling point of the idea "the par value is probably not that bad price to pay for these things now".
- lordnacho 4y ago> B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins This is a _good_ thing. We don't want a house of cards that's so fragile as soon as it looks like it it's going to fall down, we pour glue all over it and prop it up with cardboard. Assets need to fall in value so that the next guy can have a chance to thrive. Some bank collapsing is an opportunity for some of the younger folks to buy up a piece, or leave with a team and a book of customers. We should have this happen regularly so that it isn't an earthquake each time.
- skybrian 4y agoIt seems like there are limits, though. Do you really need to contribute to a flash crash [1], or is some longer time period okay? Not getting triggered by a flash crash seems more robust, and getting triggered by it more fragile? Some of the time, anyway. [1] https://en.wikipedia.org/wiki/2010_flash_crash https://en.wikipedia.org/wiki/2010_flash_crash
- lordnacho 4y agoFlash crash came right back and nobody is suggesting settling intraday. But even if you had to check your books monthly, SVB would have had to recognize losses sooner and less catastrophically.
- Scoundreller 4y ago> At the very least most of the liquidity is gone and spreads get VERY big Isn’t this just a way of saying “nobody wants to pay what I want to pay me?”. Unless it’s actually worthless, there’s a buyer, you just may not like the price. The liquidity on my used socks is gone and spreads are very BIG. Why yes, I won’t sell for less than what I paid for them new, but it’s the market that’s failed, not my insane pricing demands.
- funnymony 4y agoHouse of cards is bad, but in the mean time consider such hypothetical situations - gov orders you, that you MUST sell a suburban house: - within next 15 minutes - within a year Each time frame will definitely result in different price. All of them will be what market was willing to pay, but prices are somehow still different. Forced sell does have an impact.