In case you might have thought I was an expert in economics? I’m totally not. No, really. So for all I know, it’s perfectly reasonable that — faced with the prospect of cascading losses at financial firms who’ve been valuing their assets based on those asset’s prices on the open market (Mark-to-Market accounting), the SEC is encouraging those same institutions to just go ahead and make shit up:

In the last couple of months, there has been increased worry that mark-to-market accounting leads to the operation of a destructive “financial accelerator.” As prevailing values go down, banks have to lower the value of their holdings. This leads to a direct hit to their net worth, which will lead them to contract their balance sheets, either by withholding credit or selling assets. More sales in a weak market lead to further declines in the prices of financial instruments, leading to more writedowns and sales of inventory.

Funny how no one had a problem with mark-to-market when asset prices were rising.

But now the SEC has given banks and brokers a huge out. No matter how small or easily absorbed by the market a forced sale might be (think of a hedge fund hit by a margin call), a financial institution can ignore the price realized. In fact, they get to determine what trades constitute a forced sale.

Moreover, we’ve seen plenty of unintended consequences, or worse, backfires, as regulators intervene trying to alleviate the credit crisis. Banks have been reluctant to extend credit to each other precisely because they don’t trust their creditworthiness. That’s tantamount to saying they already don’t trust their public financial statements, since according to their public filings, virtually all major financial institutions have more than the required statutory capital.

So, since nobody actually understands the risk that banks (and fakey non-banks like Bear Stearns) are taking holding mortgage backed securities, the current plan is just to, like, punt, and make up a value for those assets? One which will keep the stock price up? Again, not an economist, but that seems like great thinking to me.

On the other hand, given that these securities are backed in many cases by mortgages where the debtor was encouraged to just write some random bullshit down in the “assets” column (you know, liar loans) I suppose it’s only fair. The only question is who, exactly, are we lying to now?

Wait, what am I saying? The only question is, “How do I get on this gravy train? I’ve got taxes to file!” Sorry; my mistake.

Advertisements