Monday, March 9, 2009


I always enjoy reading Ben Stein. Maybe it is because I can hear his deadpan voice and see his face when I read his articles. Today's NYTimes has a very good piece on three steps that can be taken to stop the negative financial feeding frenzy.

First, SFAS 157 which sets forth the rules for mark to mark accounting must be changed to make it less stringent. I agree totally with this and post as such back in December and January. The current rules exacerbate the problem because too many financial assets have to be marked to market to the current market value which is defined as what the last sale price was or what someone will pay today.

The problem is that many of the sales are being made by forced sellers to bottom feeder buyers. It should be based on a willing seller to a willing buyer and today there are very few willing sellers. Some say, no that will lead to market values based on a model. I say, 'bullocks', ( I am in London). The current market values are more liquidation values than market values.

The SEC studied mark to market accounting in the fourth quarter of 2008 and concluded no change was required. Thank you Christopher Cox for your unending efforts to help the situation. The SEC was very proud that it issued the report a couple of days early. Perhaps they should have taken the extra time to come up with something useful.

Second, Ben says, put the uptick rule back in and get rid of naked shorting. The uptick rule requires an uptick in the share price before a short sale can occur. And naked shorting allows one to short a stock before owning/borrowing the shares. These measures put enormous downward pressure on equities and should have been fixed in September 2008 when the short-term ban on shorting financials went into place. This uptick rule was suspended a couple of years ago by the SEC. Thank you Christopher Cox, again.

Third, Ben says stop the practice of allowing the issuance of credit default swaps to parties that don't hold the underlying debt and therefore do not have a direct insurable interest. I wrote about this practice last week under the AIG post. Had this been in place AIG would have had much fewer credit default swaps and would be in better financial condition today. I am not famaliar with the SEC stance on this one.

Fourth, Ben didn't say this because it is too late, but the SEC in 2004, or there abouts, relaxed the requirement that the investments have 12 to 1 or less leverage. The investment banks then moved to 25-35:1 leverage in the past few years and so, here we are.

Cheers, Mike


  1. Joyboy I couldn't agree more with everything you the real Stein said.

  2. Joyboy, I couldn't agree more with everything you and the real Mr. Stein said.

  3. Down with FAS 115, 157 and 159!! However, despite the numerous public outcries to modify mark to market rules, nothing has been done. I think it's unfortunately too late and most of the damage has been done. What would be helpful is if the FASB allowed companies that have already written down assets to write them back up if the market recovers. If those companies are still around....

  4. Mommamac, thanks for your vote of confidence. I think I will leave it to Geithner.

    Anon, be careful, I may send Bookman after you.

    Anon 2, Mark-to-market could be relaxed a little which will help because the financial institutions have not hit bottom yet. There are still commercial real estate loans, corporate loans, CDS's, CDO's and CLO's to hit balance sheets. I wish I was wrong. What do you think?

  5. Dear future Secretary - I unfortunately think you're right - there's a significant amount of commercial debt that is teetering on default. But will the current mark to market rules make it inevitable? If the underlying holdings of many CLOs and CDOs were evaluated individually and a cashflow analysis was performed rather than relying on an "active market" frought with fear, we might find that a substantial portion of these securities are performing as originally anticipated. Are we forcing a domino effect?

  6. Anon, I believe that the current application of mark to market is undermining the financial markets and causing a domino effect. It is disappointing to continue to hear the SEC vote for transparency to end of itself. Perhaps I will post on this aspect also.

  7. Mike, I like Ben Stein too, he usually gets it right, and always has the big picure in foucus. Thanks for the blog post (and this proves I found it! I read several especially the F Generation management piece--so true!) Regards, Reilly.