Steve Forbes says no to mark to market accounting

Here is a quote from Steve Forbes who has been seen lately on most major news channels and in news print advocating for suspension of mark to market accounting:

“Bear Stearns and Lehman Brothers were cash-flow positive right up until their bankruptcy. Losses were paper losses, due to mark-to-market accounting. If we had had mark-to-market accounting in the 1980s, virtually every major financial institution would have gone under. We would have had a Great Depression in the 1990s.”

Now is their any reason that paper losses shouldn't count for this fine institutions? I don't think so! If we had gotten this over in the 1990's maybe it would have been a little less of a disaster before wall street "best and brightest" got their paws on the only thing they hadn't pillaged up to this point: real estate and the mortgage market. I see no logical nor economic reason for large firms to be exempt from mark to market accounting. They used the mark to market as a way to push off so called "paper losses" and hid the true extent of their leverage for years. We all should be so lucky as to use are projected earnings and projected asset values as fact on our balance sheet. I have said it before many times and I still believe that it is completely crazy to let these institutions mark to model. There is no way to accurately project future earnings based on past results. The great minds of wall street forgot to calculate for the real world scenerios that things might not work like the model and that overloading their balance sheets with can't lose mortgage back securities would mean that if there was tiny chink in their armor they would be hung to dry. The government is using tax dollars now to allow the likes of Citi, AIG, Bank of America to get away with mark to model accounting. We are paying for the banks refusal to mark their assets to the market according to the current laws. We are propping up banks that are breaking the laws with government letting them use our tax dollars in the process. We have spent many months waiting for the government to step in and start demanding transparency and true accounting numbers but they have chosen to take a different direction. The magical mystical "stress test" is just a pr stunt that should be labeled "we are trying to buy more time because these banks are toast model". The banks and now the government is prolonging the recession because the banks stared them down and the congress blinked. The banks covered their losses for so long that when they finally came whining for a bailout it caused complete panic in Washington. The banks have fleeced us all and the timing should not be forgotten and every single CEO that used Tarp funds should be fired. They knew they were going down in 2007 and early 2008 but they waited right until the election to grab congress by the short hairs knowing our representatives would not have the courage to resist their desperate pleas. The outcome would have likely been completely different had the same scenario took place in February of 2008 or even July 2008. The bankers have created this idea that they are all to big to fail and the government is buying it hook line and sinker.

Unqualified borrowers: A cause for financial calamity? maybe not

This is a response I had to someone stating that it was unqualified buyers over the past 10 years that were now causing financial ruin around the world.

I think our meltdown is has more to do with the issues around cds and mbs markets then with the small percentage of unqualified buyers. They were plenty of well capitalized and well qualified buyers purchasing things over the past 10 years. The system itself should be able to handle a 3 or 4 % default rate without melting down the world economy in my opinion. I don't know how we can ever expect 0% default rate or function with a financial system that will start a complete meltdown with a 2 or 3 % default rate. I see so many other factors that have contributed to the meltdown on top of the unqualified borrowers and if the unqualified borrowers are the only issue addressed rather than creating a system that can deal with defaults, we will be in for long long recession. I agree with you that many people were pushed through that had no business getting a mortgage, some stories so ridiculous, but I also think we need to have a mortgage and lending system this is better able to handle a higher than average wave of default at any given time.

Warrren Buffet Addresses shareholders at annual meeting

Here is an excerpt taken from Warren Buffet's letter to Berkshire shareholders this weekend at the annual meeting in Omaha.

"Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments."

I know this has been historically true but my assumption is that we may see these statistic begin to change. The "seldom" Buffet refers to has been during less dramatic shifts in real estate and the economy. It is true most people buy a home as a place to live and raise a family but in today's world this very home could be a sinking ship that could take down any dreams of college for the children or financial freedom for the parents. I don't think the majority of people realize just how value the home has been to Americans and the fiscal life blood for USA. I have said it before and I will say it again now: the government, in combination with the financial system, has killed the goose that laid the golden eggs. It was such a great vehicle for improving people's lives and have "potentially" ease the strain on the social security system. The miracle cure for all the ridiculously wasteful spending that goes on in Washington was to be home ownership. The government thought it worked so well for 60 or so odd % of the American people that it should work just as well for 70, 80 or 90%. Barney Frank and his cohorts had their mission: increase the percentage of home ownership in the country. The congress mistakenly believed that owning a home could make every financial problem in the country go away. They set out to make it easier for those people who have historically kept from owning a home because of affordability or lack of a down payment. These policy shifts unleashed a massive assault on the financial system by just about anyone who could benefit financially from this "easing" of credit and increase in home ownership. Congress thought a more socialistic view of home ownership could be implemented by capitalists everywhere. I can't argue with the fact that they really did implement the program but once they were allowed more freedom in doing so creed took over and future consequences were seen as irrelevant as long as the profits flowed freely.

It is historically true that people tend not to walk away from their homes because they are "underwater" with their mortgage. However, unless we see the government put more pressure on the banks to write down the principal on some of these loans when they take the losses, we will be enslaving out future once again to the success of the real estate market. Many people will be forced to leave their home purely to try and get a fresh start putting their funds toward something other than a black hole. So Warren Buffet is right when he says that most people don't leave their home unless they can't make the payment but the extreme conditions effecting housing prices may lead to an asterisk being used for 2007-2012 when siting historical data.