Archive for September, 2008|Monthly archive page

The End of Mark-to-Market

Despite resistance by accounting firms, the SEC and FASB have issued a statement today easing restrictions on mark to market accounting.

Via the Washington Post:

“When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.”

So what does this mean? Previously, a firm was forced to value an asset based on what that asset would currently sell for. This can create problems on a firm’s financial statements by making the firm appear more or less valuable than it really is.

The first situation is best illustrated by the example of Enron. Using mark to market accounting, Enron recognized revenues that would not actually be realized for several years, making the company’s assets appear much greater than they actually were. Warren Buffet referred to this kind of abuse of the mark to market concept as “mark to myth,” deliberately inflating the earnings of a company based on highly speculative future values of current assets.

The second situation is one currently being experienced by banks and other mortgage lenders throughout the United States: because no one is willing to buy mortgages and mortgage-backed securities, their values are basically zero, even if based on a loan that is in good shape and currently generating revenue. For example, if a family has a $300,000 loan for their home, both parents work and make their mortgage payments on time every month, the loan is still counted as worthless under mark to market even though the bank who issued the loan is earning interest income. This significantly reduces the net worth of the bank and has contributed to bank failures in the last few months.

The statement from the SEC and FASB above is meant to alleviate the second situation. It allows mortgage loans and mortgage-backed securities to be valued based on the income currently being generated, taking into account the time value of money. It helps keep banks from failing, and it doesn’t take $700 billion dollars to do it.

Update: Added relevant links and tags.


McCain Slams Obama on Fannie Mae/Freddie Mac Bailout

All I can say is it’s about time.  Holding back on this has only given Obama time to capitalize on the negative economic news this last week when really he should have been the one hurt by it.

Via HotAir:

Two years ago I warned this Administration and Congress that regulations for our home loan agencies, Fannie Mae and Freddie Mac, needed to be fixed…

But nothing was done.

Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Mae’s CEO who helped create this disaster in charge of finding his Vice President. Fannie’s former General Counsel is a senior advisor to his campaign. Whose side do you think he is on?

Astute readers may note that two years ago was also the time the Democratic party obtained Congressional majority. I worry that McCain was ignored because the newly-elected majority didn’t want to publicly agree with Republicans on anything and risk upsetting their supporters on the extreme left.

Thanks to Good Lt. for the video:

What Incentive Would Oil Companies Have to Lower Their Prices?

Oregon congressman Peter DeFazio was on the Lars Larson show yesterday claiming that oil companies are sitting on drilling leases because the companies are making record profits.  “You’ve taken economics classes,” DeFazio told Lars, “what happens when the supply increases? The price goes down. What incentive would they [the oil companies] have to do that?” note: not an exact quote because the show archives are pay only — if any one can provide the exact quote, I’d be grateful

Using this same logic, what incentive does any company have to lower prices?  Why do we have sales?  Because, as those economics classes would have taught Mr. DeFazio, supply is only one part of the equation.  The other is demand.  If you can increase your demand, you can increase your revenue beyond the amount you lost by lowering your prices.

For example, let’s say (for the sake of simple math) that each month you sell 1,000 units of a product that sells for $1 per unit.   You believe that if you decrease the price of your product by 5%, your sales would increase by 10%.  So you would be selling 1,100 units of product at $0.95 per unit, which means total revenue would increase from $1,000/month to $1,045/month.

Now let’s ask DeFazio’s question: what incentive is there to lower the price? Bigger revenues, and if the oil companies are the hideously evil greed machines I’ve been led to believe during my time in Oregon, revenues will give them incentive to do just about anything — including lowering the per barrel price of oil by increasing the supply.

Of course, the more cynical answer would be simply to say that just because there’s more supply and lower overall cost to the companies doesn’t mean they have to pass that savings on to the consumer.  I occasionally refrain from being that cynical, however.

Palin’s Invitation to Rally Canceled Due to Democrat Complaints

Via Politico, it’s not as bad as it sounds at first when you realize that the organizers have decided to disinvite all American political figures:

In order to keep the focus on Iranian threats and to ensure that this critical message not be obscured, the organizers of the rally have decided not to have any American political personalities appear…We acknowledge and deeply appreciate those American political leaders who have been and remain prepared to stand with us as we collectively address the dangers of Iran’s nuclear program and its support for terrorism globally.

The problems with this are twofold.

  1. The mass disinvitation was prompted by Democrats who didn’t want to give Palin a platform. Supposedly they didn’t want it to appear that the non-partisan group was aligning with the Republicans.  Strangely, I don’t remember hearing any complaints that Hillary Clinton speaking at the rally making it appear that the non-partisan group was aligning with the Democrats.
  2. If there was ever a time for the United States to appear united, this is it. The letter sent out from the groups hosting the rally states that this is a cause on which “Americans stand together.” It’s really hard to show that if our elected leaders won’t attend because they’d be in the same general vicinity of someone from a different political party.

Parting shot: how worried would Ahmadinejad others like him have been if both parties had made a strong showing here? Do you think they’d still be looking for a Democratic victory in 2008 if this rally had shown that it wouldn’t help them in the least bit?

Factchecking the Palin Smears

Off to an appointment with a new client.  Something to mull over while I’m gone:

Vodpod videos no longer available.

H/T Ed Morrissey