The Next Big Stink, The killjoys are back. What do they have in store for us?

[Lurker]

You should actually look at tax revenues and which portion of the population pays how much.  Under Reagan the total percentage of taxes paid by the rich rose.  Their rates went down but so did the rates for lower incomes as well as larger brackets for those lower rates.  EVERYBODY got a tax break under Reagan.  The surpluses in Clinton's admin was due to the tax cuts as well as spending cuts that Reagan & his gang pushed through.

The poor got anywhere from a 3% decrease to a 15% INCREASE.

The middle class America got anywhere from a 3% increase to a 12% decrease

The wealthiest Americans got a 44% DECREASE.

Yea, that seems fair.

Based on tax rates or based on actual taxes paid to the government. 

It doesn't mean much if your TAX RATE goes up but the amount of income subject to those rates DECREASES.  If you look at who pays the taxes, the percentage of taxes paid by the wealthiest 10% has increased since Reagan.

[Ted]

Based on tax rates or based on actual taxes paid to the government. 

It doesn't mean much if your TAX RATE goes up but the amount of income subject to those rates DECREASES.  If you look at who pays the taxes, the percentage of taxes paid by the wealthiest 10% has increased since Reagan.

Don't bust WoW's chops on taxes. He's got people. And I'm not talking about H.R. Block.

[Ted]

Quite a list though I didn't see anything about deregulation and Mark-to-Market accounting (Enron, Worldcom, Arthur Anderson, etc.)  

Blips on the radar screen (except for Mark-to-Market, you're right on there). Enron? Worldcom? AA? Drops in the bucket. We're talking about trillions Skander. You're talking about billions.

Hard for me to believe corporations and financial institutions driven by the profit motive needed coaxing by lefties to play fast and loose.  When it comes to things like banks, I have to believe GREED plays a large part.  I think GREED is more powerful than Bill Clinton and Barney Frank, but you can disagree.

Not hard. Uncomfortable. Inconvenient maybe. Democrats are on record (on tape) applauding themselves for making no-interest, no-money loans available to millions of people who never before had access. They took credit for the boom behind the collapse. Would you take it from them? 

[Lurker]

Quite a list though I didn't see anything about deregulation and Mark-to-Market accounting (Enron, Worldcom, Arthur Anderson, etc.)  

Blips on the radar screen (except for Mark-to-Market, you're right on there). Enron? Worldcom? AA? Drops in the bucket. We're talking about trillions Skander. You're talking about billions.

Mark-to-market is just a valuation tool.  It didn't create the toxic assets...it just was a way for accountants to attempt to value those "investment" vehicles.  If you were to buy a company would you rather the "value" be determined strictly by historical cost?  Is that land really the same value 20-30 years later?  Would you want to buy a mutual fund that values Bank of America stock at the $50/share purchase price or the current $5/share value?

[rickortreat]

Quite a list though I didn't see anything about deregulation and Mark-to-Market accounting (Enron, Worldcom, Arthur Anderson, etc.)  

Blips on the radar screen (except for Mark-to-Market, you're right on there). Enron? Worldcom? AA? Drops in the bucket. We're talking about trillions Skander. You're talking about billions.

Hard for me to believe corporations and financial institutions driven by the profit motive needed coaxing by lefties to play fast and loose.  When it comes to things like banks, I have to believe GREED plays a large part.  I think GREED is more powerful than Bill Clinton and Barney Frank, but you can disagree.

Not hard. Uncomfortable. Inconvenient maybe. Democrats are on record (on tape) applauding themselves for making no-interest, no-money loans available to millions of people who never before had access. They took credit for the boom behind the collapse. Would you take it from them? 

Ted, you had it right, but you started too late with your history.  This blown up bubble was the 2nd one, or did you forget the 2000 crash? The first time it hist the stock market. the 2nd time it hit the housing market and stock market together.  Pay attention to Ziggy. It is all about money supply and how they screwed it up by pandering to what was happening in the real economy and not paying attention to assets and the inflation they were creating.  Of course, you have to include China and the rise of the Asian economies, the loss of American businesses and everything else, but it all comes down the the ability of the FED to create money out of thin air. Which is the initial FRAUD!

Everything that comes about in finance is based on that FRAUD, so it shouldn't be surprising to see businesses trying that game for themselves and making up values for the assets they were holding - irrespective of the true market value. I.E. FRAUD.

Politics is about the distribution of wealth.  Any given society is able to produce so much value, so many bushels of this, so many tons of that... The more it produces, the more wealth there is.  But it is never distributed evenly. The owners get the most of it, the workers get some of it, and the tax man gets some of it. Everyone else pays them.  Politics defends the lines between the haves and the have nots, and pretends that through it's laws ensures fairness and equity.

Capitalism, Socialism, Communism, all different ideas about how to control the distribution of wealth. Some ideas work better than others. If you have to enforce your system through brutal represson, that is much less efficient than people going about their business because they WANT to, or feel they need to.  Likewise if you have to rely on FRAUD to achieve the distribution you want there is a price to be paid....  When money is based on nothing it is a FRAUD, and everything valued in it is subject to drastic changes in value.

[ziggy]

Hard for me to believe corporations and financial institutions driven by the profit motive needed coaxing by lefties to play fast and loose.  When it comes to things like banks, I have to believe GREED plays a large part.  I think GREED is more powerful than Bill Clinton and Barney Frank, but you can disagree.

Not hard. Uncomfortable. Inconvenient maybe. Democrats are on record (on tape) applauding themselves for making no-interest, no-money loans available to millions of people who never before had access. They took credit for the boom behind the collapse. Would you take it from them? 

Coercion is a very powerful tool to wield, and don't for a minute believe that it wasn't wielded regularly and high-handedly.  The town I live in is small and lower on the socioeconomic scale.  We were a CRA community.  We are 15 minutes from an Indian Reservation, and that is figured into our economic base, which set higher than normal goals for CRA implementation.  No bank would loan for a home on the reservation, because it is on sovereign nation land, and they could not go onto the the reservation and move forward with foreclosure proceedings if needed.  That meant that low-income loans had to be made at a far higher rate off reservation.  There was significant federal pressure to meet CRA goals, with the threat of fine, and branch closure if you failed.  There were a great many loans that would not have happened, no way no how, if not for the coercion brought to bear by the CRA.   So greed is a powerful tool, and Barney Frank's greed coupled with his power of coercion assured that banks made bad loans, that they knew would default, and they knew that in the end it would be a net cost of doing business.

[rickortreat]

Hard for me to believe corporations and financial institutions driven by the profit motive needed coaxing by lefties to play fast and loose.  When it comes to things like banks, I have to believe GREED plays a large part.  I think GREED is more powerful than Bill Clinton and Barney Frank, but you can disagree.

Not hard. Uncomfortable. Inconvenient maybe. Democrats are on record (on tape) applauding themselves for making no-interest, no-money loans available to millions of people who never before had access. They took credit for the boom behind the collapse. Would you take it from them? 

Coercion is a very powerful tool to wield, and don't for a minute believe that it wasn't wielded regularly and high-handedly.  The town I live in is small and lower on the socioeconomic scale.  We were a CRA community.  We are 15 minutes from an Indian Reservation, and that is figured into our economic base, which set higher than normal goals for CRA implementation.  No bank would loan for a home on the reservation, because it is on sovereign nation land, and they could not go onto the the reservation and move forward with foreclosure proceedings if needed.  That meant that low-income loans had to be made at a far higher rate off reservation.  There was significant federal pressure to meet CRA goals, with the threat of fine, and branch closure if you failed.  There were a great many loans that would not have happened, no way no how, if not for the coercion brought to bear by the CRA.   So greed is a powerful tool, and Barney Frank's greed coupled with his power of coercion assured that banks made bad loans, that they knew would default, and they knew that in the end it would be a net cost of doing business.

A prime example of how the government F's up the economy.  Interfering with Free-market decisions.

[ziggy]

Quite a list though I didn't see anything about deregulation and Mark-to-Market accounting (Enron, Worldcom, Arthur Anderson, etc.)  

Blips on the radar screen (except for Mark-to-Market, you're right on there). Enron? Worldcom? AA? Drops in the bucket. We're talking about trillions Skander. You're talking about billions.

Mark-to-market is just a valuation tool.  It didn't create the toxic assets...it just was a way for accountants to attempt to value those "investment" vehicles.  If you were to buy a company would you rather the "value" be determined strictly by historical cost?  Is that land really the same value 20-30 years later?  Would you want to buy a mutual fund that values Bank of America stock at the $50/share purchase price or the current $5/share value?

I take Lurkers point to heart, as it has some validity.  I would though like to give an example of the problem with MtM that I see.


I know of a plant in Chile, with a 2 sawmills, dry kilns, cogen biomass energy center, and secondary processing plant. It was valued at xx million. They were forced into default by their bank, when wood prices collapsed, and the Chilean Peso appreciated in value 30 to 35% in less than a year. The bank took the assets, and attempted to sell the entire facility, as a whole and operating business. They advertised it to many potential buyers in many countries, but no one was interested in buying.

They then decided to liquidate it piecemeal through auction. They set up the auction and advertised it, and on the day of the auction NO ONE came. No one had any interest in any of the assets. Shocked they regrouped and tried again, advertising far and wide through out all of SA. They held the second auction and surprise! no one showed up.

So the book value was xx million. The NPV of the expected future cash flow was zero. The value of it in an open market sale was zero. The value of it at liquidation was zero.

What value should the bank place on this asset? They should value it at zero. That is a reasonable application of MTM.

About 1/4 mile from this mill is another similar, though larger complex. Same basic operation, just larger in capacity. It is still operating, generating cash flow. Under the principles of MTM, the market value of this kind of operation in this location, processing these kinds of logs, and making this kind of finished products is ZERO, especially if the bank wrote down the value of their asset. So the company operating the facility that is generating positive cash should write down their asset to ZERO under MTM. The market price for that kind of an asset in the open market is zero, so write your asset base to zero.  That is absurd.

Now the company has 20 other similar complexes on their balance sheet. Since you have one complex you have been forced to write down to zero, because of MTM requirements, should you not also be forced to write each and every other one of those other assets to ZERO? That would be 20 complexes with a net asset value of perhaps $700 million to $1 billion marked to zero. If that was to happen then the company would lose $1 billion in assets, and also $1 billion in equity. In all reality they would be functionally insolvent, and the bank would then be able to force them into default, even though they are profitable, and are generating net positive cash in excess of their debt requirements. That is the arbitrary and absurd nature of mark-to-market.

Just because someone else sold an asset;
that is not a highly liquid asset
into an opaque market where price discovery is very difficult to discern
the asset is not absolutely identical in form, function, and make up to my asset

Then that price/value should not have any influence on the value I place on my asset on my financial statements.  Use those 3 criteria for a share in Microsoft, and you get a different answer, and as such adjusting the value of my asset to what someone else did is fair and reasonable.

[Lurker]

Quite a list though I didn't see anything about deregulation and Mark-to-Market accounting (Enron, Worldcom, Arthur Anderson, etc.)  

Blips on the radar screen (except for Mark-to-Market, you're right on there). Enron? Worldcom? AA? Drops in the bucket. We're talking about trillions Skander. You're talking about billions.

Mark-to-market is just a valuation tool.  It didn't create the toxic assets...it just was a way for accountants to attempt to value those "investment" vehicles.  If you were to buy a company would you rather the "value" be determined strictly by historical cost?  Is that land really the same value 20-30 years later?  Would you want to buy a mutual fund that values Bank of America stock at the $50/share purchase price or the current $5/share value?

I take Lurkers point to heart, as it has some validity.  I would though like to give an example of the problem with MtM that I see.


I know of a plant in Chile, with a 2 sawmills, dry kilns, cogen biomass energy center, and secondary processing plant. It was valued at xx million. They were forced into default by their bank, when wood prices collapsed, and the Chilean Peso appreciated in value 30 to 35% in less than a year. The bank took the assets, and attempted to sell the entire facility, as a whole and operating business. They advertised it to many potential buyers in many countries, but no one was interested in buying.

They then decided to liquidate it piecemeal through auction. They set up the auction and advertised it, and on the day of the auction NO ONE came. No one had any interest in any of the assets. Shocked they regrouped and tried again, advertising far and wide through out all of SA. They held the second auction and surprise! no one showed up.

So the book value was xx million. The NPV of the expected future cash flow was zero. The value of it in an open market sale was zero. The value of it at liquidation was zero.

What value should the bank place on this asset? They should value it at zero. That is a reasonable application of MTM.

About 1/4 mile from this mill is another similar, though larger complex. Same basic operation, just larger in capacity. It is still operating, generating cash flow. Under the principles of MTM, the market value of this kind of operation in this location, processing these kinds of logs, and making this kind of finished products is ZERO, especially if the bank wrote down the value of their asset. So the company operating the facility that is generating positive cash should write down their asset to ZERO under MTM. The market price for that kind of an asset in the open market is zero, so write your asset base to zero.  That is absurd.

Now the company has 20 other similar complexes on their balance sheet. Since you have one complex you have been forced to write down to zero, because of MTM requirements, should you not also be forced to write each and every other one of those other assets to ZERO? That would be 20 complexes with a net asset value of perhaps $700 million to $1 billion marked to zero. If that was to happen then the company would lose $1 billion in assets, and also $1 billion in equity. In all reality they would be functionally insolvent, and the bank would then be able to force them into default, even though they are profitable, and are generating net positive cash in excess of their debt requirements. That is the arbitrary and absurd nature of mark-to-market.

Just because someone else sold an asset;
that is not a highly liquid asset
into an opaque market where price discovery is very difficult to discern
the asset is not absolutely identical in form, function, and make up to my asset

Then that price/value should not have any influence on the value I place on my asset on my financial statements.  Use those 3 criteria for a share in Microsoft, and you get a different answer, and as such adjusting the value of my asset to what someone else did is fair and reasonable.

MtM does fail when the market is illiquid.  That is why for example with real estate accountants look towards other appraisal methods.  Same for valuing a going business...cash flow is a very good indicator for determining value.  In your example the "good" business could look at other ways to value their sawmill.  The problem arose when there was absolutely no other way to value an asset than by the current market value...especially with what was considered a highly liquid asset.  What caused MtM to accelerate the crisis was the fact that the entire market for these exotic financial instruments went dry overnight.  No one knew what they worth any more and no one was willing to step up and buy. 

Banks were caught in the squeeze because they are...under federal regulation...required to maintain a certain ratio of assets to liabilities.  When their assets started to lose value then they ran into regulatory problems which if released to the public would cause a run on the banks.  Would you have felt better if Lehman was still cruising along with all that worthless paper on their books?  How could any investor feel comfortable buying stock if they couldn't determine what the true underlying value of the company is?

[rickortreat]

Here's a link academicians like Ziggy will really appreciate.

http://tinyurl.com/5n5mln

[ziggy]

MtM does fail when the market is illiquid.  That is why for example with real estate accountants look towards other appraisal methods.  Same for valuing a going business...cash flow is a very good indicator for determining value.  In your example the "good" business could look at other ways to value their sawmill.  The problem arose when there was absolutely no other way to value an asset than by the current market value...especially with what was considered a highly liquid asset.  What caused MtM to accelerate the crisis was the fact that the entire market for these exotic financial instruments went dry overnight.  No one knew what they worth any more and no one was willing to step up and buy. 

Banks were caught in the squeeze because they are...under federal regulation...required to maintain a certain ratio of assets to liabilities.  When their assets started to lose value then they ran into regulatory problems which if released to the public would cause a run on the banks.  Would you have felt better if Lehman was still cruising along with all that worthless paper on their books?  How could any investor feel comfortable buying stock if they couldn't determine what the true underlying value of the company is?

I understand your point Lurker.  Would I have felt better?  Well that is rhetorical, but I can definitively say that I would not have felt worse.  At the same time if you are going to ask that question about Lehman, then you also have to ask if they were truly insolvent, or if MtM forced them into insolvency by placing arbitrary values on assets, forcing them to liquidate those assets at a price lower than they would have otherwise.  If that was the case with Lehman, then I would feel better if they were still operating.


This is my logic.  There are 4 ways to value an asset.

1.)  Value it for what you paid for it, less whatever depreciation has been applied if that is appropriate.
2.)  Value it at the NPV of the expected future cash flow.
3.)  Value it at the open market price, in a liquid and transparent market, and where the asset is fundamentally the same as the asset sold in that market.
4.)  Value it liquidation value.

What is the best way?  In my mind the best method is the method which yields the highest value.  Why?  Because that it is the most economically rational decision to make.  Why value something at a loss if you are not going to sell it?  If you do sell at a loss then take the loss at the moment of sale, because that is the only time the loss actually exists.

Now not all assets are the same.  If you have an asset like a share of stock in a publicly traded stock, I am OK with valuing always like #3.  If it is a share of stock in a private, not publicly traded firm you can not use #3.  You should also not use the value per share of Microsoft to determine that value.  In my mind to use the highest value of the 3, or you use one method and not change that method from accounting period to accounting period.

If you have a MBS that has a default rate of 15%, and it is earning 8% on the rest of it, and prime is 5%, then I would value it at the NPV of the expected future cash flows with a discount rate of 5%, based upon 85% paying interest.  If Merrill chose to sell their similar asset at 50 cents on the $ then so be it that was Merrills choice, not my choice.

[Lurker]

MtM does fail when the market is illiquid.  That is why for example with real estate accountants look towards other appraisal methods.  Same for valuing a going business...cash flow is a very good indicator for determining value.  In your example the "good" business could look at other ways to value their sawmill.  The problem arose when there was absolutely no other way to value an asset than by the current market value...especially with what was considered a highly liquid asset.  What caused MtM to accelerate the crisis was the fact that the entire market for these exotic financial instruments went dry overnight.  No one knew what they worth any more and no one was willing to step up and buy. 

Banks were caught in the squeeze because they are...under federal regulation...required to maintain a certain ratio of assets to liabilities.  When their assets started to lose value then they ran into regulatory problems which if released to the public would cause a run on the banks.  Would you have felt better if Lehman was still cruising along with all that worthless paper on their books?  How could any investor feel comfortable buying stock if they couldn't determine what the true underlying value of the company is?

I understand your point Lurker.  Would I have felt better?  Well that is rhetorical, but I can definitively say that I would not have felt worse.  At the same time if you are going to ask that question about Lehman, then you also have to ask if they were truly insolvent, or if MtM forced them into insolvency by placing arbitrary values on assets, forcing them to liquidate those assets at a price lower than they would have otherwise.  If that was the case with Lehman, then I would feel better if they were still operating.


This is my logic.  There are 4 ways to value an asset.

1.)  Value it for what you paid for it, less whatever depreciation has been applied if that is appropriate.
2.)  Value it at the NPV of the expected future cash flow.
3.)  Value it at the open market price, in a liquid and transparent market, and where the asset is fundamentally the same as the asset sold in that market.
4.)  Value it liquidation value.

What is the best way?  In my mind the best method is the method which yields the highest value.  Why?  Because that it is the most economically rational decision to make.  Why value something at a loss if you are not going to sell it?  If you do sell at a loss then take the loss at the moment of sale, because that is the only time the loss actually exists.

Now not all assets are the same.  If you have an asset like a share of stock in a publicly traded stock, I am OK with valuing always like #3.  If it is a share of stock in a private, not publicly traded firm you can not use #3.  You should also not use the value per share of Microsoft to determine that value.  In my mind to use the highest value of the 3, or you use one method and not change that method from accounting period to accounting period.

If you have a MBS that has a default rate of 15%, and it is earning 8% on the rest of it, and prime is 5%, then I would value it at the NPV of the expected future cash flows with a discount rate of 5%, based upon 85% paying interest.  If Merrill chose to sell their similar asset at 50 cents on the $ then so be it that was Merrills choice, not my choice.

In short, I agree with you ziggy.  And your heirarchy of valuation is pretty much the standard when trying to prepare FMV financial statements.  The MtM went bad not because the methodology changed or the underlying assets.  What changed was the market.  I argued with some friends when the whole thing started going south that there should have been a switch in valuation methods.  You are right that those assets lost their market (not market value) and that alone shouldn't have changed the value.  There was...and is...some intrinsic value in those assets unless 100% of the underlying mortgages went into default.  Even then there is still some value because the lenders then take possession of the properties and last time I checked real estate values had not dropped to zero.

[Joe Vancil]

Oh yes, we all know what the founding fathers wanted.  These were men which (with very little reason mind you) saw fit to revolt against their government over a tax system that was the LOWEST and MOST LENIENT in the entire British Empire.  These guys hated two things:  1) government and 2) taxes, you'll get no arguments here.  So they tried stripping national goverment of all power and invested most of it in the states in a document called the "Articles of Confederation".  I'm hazy, Lurker, can you tell me what became of that whole experiment . . . .

I'm not sure why you feel we can't understand the desires of the Founding Fathers;  after all, they *DID* write down what they wanted in a document you might have heard of, called the Declaration of Independence - something that PRECEDED the Articles of Confederation that you like to continually harp on.  And they then followed up the Articles with something called the CONSTITUTION, because they didn't like the squabbling between states under the Articles, and even then, nobody wanted the Constitution at first, either - not until 10 Amendments that were to spell out exactly what this potentially-too-powerful Federal Governement was supposed to be protecting. 

And what you call "little reason" is one of the very things that *YOU* railed against during the first bail-out package - YOUR wishes not being represented by the government.  As I recall, your words were, "I don't know why this isn't triggering a revolution."  Well, back then, they referred to that kind of situation as "TAXATION WITHOUT REPRESENTATION."  As far as I'm concerned, being forced to pay for something I don't want is about as good a reason for revolution as I can come up with.

1 out of 5 of your tax dollars goes to ONE department.  1 out of 6 of your tax dollars funds every social program (save SS and HC), that every filthy democrat saw fit to fund by the gov't.  And that's if you actually BELIEVE the deception.  Most groups have the number at 1 out of 2 of your tax dollars goes to ONE department, while at most 1 out of $10 funds gov't programs (and that number incl. SS and HC). 

Why is the government budget a lie?  They don't take into account interest owed on past borrowing to fund ginormous military budgets.     

Well, according to the document I referenced earlier, "...That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed...."

In other words, and I think Lurker will back me up on this, military spending SHOULD make up most of the federal government's budget, because defending the rights of those governed under it is 1) its primary purpose, and 2) about the only thing it has historically proven to be any good at doing.

I simply want to know why Obama's stimulus is a putrid representation of all that is filthy about liberal free-spending idealogy and Bush's stimulus was necessary for our economic survival if you read 3rd rate conservative hacks like the guy who wrote your article.

And I simply want to know why you defend the second, but bash the first.

I can at least claim to hate *BOTH*, although I'm more inclined to give PARTS of Obama's spending a chance.  Some criticisms that Republicans have made aren't valid;  they represent spending that will be done under the current Federal budget, but lay those dollars out in a "building-for-the-future" way rather than the same-old same-old.  I personally find that clever.  However, I expect parts of the current Federal Budget to be cut as part of the process.

[Joe Vancil]

A correction:  in reading Skander's following posts, he was *NOT* in favor of Obama's stimulus plan, apparently, and from what looked to me to be a defense of it, I assumed Skander was in favor of it.  My mistake.

[WayOutWest]

You should actually look at tax revenues and which portion of the population pays how much.  Under Reagan the total percentage of taxes paid by the rich rose.  Their rates went down but so did the rates for lower incomes as well as larger brackets for those lower rates.  EVERYBODY got a tax break under Reagan.  The surpluses in Clinton's admin was due to the tax cuts as well as spending cuts that Reagan & his gang pushed through.

The poor got anywhere from a 3% decrease to a 15% INCREASE.

The middle class America got anywhere from a 3% increase to a 12% decrease

The wealthiest Americans got a 44% DECREASE.

Yea, that seems fair.

Based on tax rates or based on actual taxes paid to the government. 

It doesn't mean much if your TAX RATE goes up but the amount of income subject to those rates DECREASES.  If you look at who pays the taxes, the percentage of taxes paid by the wealthiest 10% has increased since Reagan.

Tax Rate, the rich got a 44% reduction in their tax rate.  They removed a lot of "deductions" for everyone across the board but then they gave rich people a huge discount and the middle class and poor a minor discout while increasing their taxable income.  Rewarding the rich at the expense of the middle class sounds all to familiar and all too recent.