Economy

[Steele Huss]

What are your feelings on the bailout? Do you think this will change anything? Do you think more government regulation is a good thing? How will this affect our future? Who is really getting a bailout?

[Matt Andrews]

This is the beginning of the end for things. This is the start to more government involvement in our daily lives. I was trying to understand what the $700 billion is really going to do. I lack the knowledge of how securities work and how buying securities to free up the debt is any different then giving these business' straight cash... If the government wants to bail someone out why don't they send $700 billion out to every U.S. citizen who pays their taxs. Now that is a bail out. Every citizen would obviously get a nice chuck of money and they can do what they want with it. If they use it to pay on mortages then that will help naturally free up the credit. If they blow it then it goes to the economy and that will help weed out the irresponsible from the responsible. Maybe I am an idiot and don't get it but $700 BILLION is alot of money to just create. What is backing this money? What if these mortage companies were foreign and they required U.S. money exchanged into foreign currancy? Would that devalue the dollar due to the massive influx of printed money? Maybe this is a reason why they don't give it to the people....?? inflation or whatever it is called..

Who is to blame..? We all are. Moderation is key. We live in a MORE MORE MORE society. Mass consumption.. Gluttony. Too much food, ipods,music,movies,sex,drugs,and information, BUY BUY BUY CONSUME!!!!

We as citizens need to practice more fiscal restraint and resonsibility... So when you have a plan that works let me know I will join up. lol

[Steele Huss]

If this bailout does what the politicians say it will do it will only perpetuate the problem. If this bailout makes everybody feel as though it is business as usual we will have the exact same problems in the future. This bailout is just another in the long line of government irrational responses to problems that would solve themselves if only the people, US, would stop and take a breath. We need to have some personal responsibility in our lives. When we make mistakes and poor judgments, we need to take our medicine. That is the only way we learn, if it hurts bad enough we will not do it again. We need to remember, it is NOT a right to own a home. We earn the privilege, we work and save and struggle to earn it and it is that struggle that makes us fight so hard to not lose that home once we have earned it. When credit is handed out like candy on Halloween the value of what we have is lost.

[Steele Huss]

This is a fantastic article written by Daniel back in April, It puts a lot in perspective.
What is Mark-to-Market?
Submitted by lpin on Thu, 10/02/2008 - 21:09 |

* bailout
* economy

Reprinted from Slate, published first in April 2008.

WASHINGTON, D.C. -- According to a small but powerful group of America's financial decision-makers—mostly supply-siders and those in their thrall—the chief cause of the credit market meltdown is not folly, or reckless lending, or the demise of America's financial management. It's an accounting rule.

"Mark-to-market" is a seemingly innocuous term for the requirement that companies, banks, hedge funds, mutual funds, and the like report the market price of the financial instruments they hold and trade. Mutual funds that own stocks make such a report every day. Publicly held firms like Bear Stearns must do so at the end of every quarter, and hedge funds must do so on a rolling basis to reassure their creditors that the assets they've put up for collateral are still worth something. Mark-to-market is thus crucial to the functioning of transparent markets.

For mutual funds, marking to market is a simple affair. But for those who hold thinly traded assets or assets for which there isn't a ready market (mortgage-backed securities, corporate debt, venture capital investments, etc.), doing so is more of a challenge. In these cases, managers mark to market either by comparing analogous assets or by estimating "what market participants would use in pricing the asset or liability."

In the past five years, Wall Street firms created huge volumes of new kinds of complex securities, such as subprime bonds and collateralized debt obligations, which are investment vehicles built out of subprime bond securities. These securities lacked long trading histories or deep markets. To value them, many outfits slipped the surly bonds of mark-to-market and assigned a value to them based on so-called mark-to-model. (In other words, educated guesses based on algorithms.)

When credit started to go bad, market participants had to write down the value of such assets. For institutions holding onto bank loans—an asset for which there is an active secondary market—marking to market was relatively simple. If markets priced bank debt of companies with a particular credit rating at 85 cents on the dollar, banks had to write down 15 cents of the value of each dollar of the loan. This process helped drive the massive write-downs seen at banks like UBS and Citigroup.

But for the complex new financial instruments, the valuations became far more unstable. Many hedge funds and financial institutions had borrowed huge sums of money to buy assets for which there wasn't an active market. When that debt started to go bad, it triggered a chain of unfortunate events. In many instances, funds were forced to sell assets to meet margin calls. Occasionally, creditors would seize assets and sell them. (That's what happened to the Bear Stearns hedge funds that failed last year.) This spiraling activity had the effect of further depressing prices for such instruments. In some instances, buyers disappeared entirely. The valuations of these new instruments also plummeted because of market psychology. In establishing value for assets, funds and banks often relied on newly created indices, such as the Markit ABX indices. Since those indices are actively traded by investors, they can be driven up and down (mostly down) by speculation and fear. The end result: The banks and funds holding subprime bonds (which is to say, pretty much the entire global financial complex) have been forced to massively cut the mark-to-market value of their holdings because those values are based on the incredibly pessimistic indices.

In recent weeks, some have been arguing that just as Abraham Lincoln suspended habeas corpus in a time of war, perhaps regulators should suspend mark-to-market in this time of crisis. Paul Craig Roberts, a veteran supply-sider and former Reagan administration official, wrote on March 11 that the mark-to-market rule "is imploding the U.S. financial system by requiring financial institutions to value subprime mortgages at their current market values." His solution: Suspend the rule, let financial institutions "keep the troubled instruments at book value, or 85-90 percent of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time." In other words, let's assign an imaginary happy value to these assets until the seas grow calmer. Steve Forbes echoed the sentiment in his column in Forbes, calling for a 12-month suspension of mark-to-market in "exotic financial instruments (primarily packages of subprime mortgages)." The reason: "It's preposterous to try to guess what these new instruments are worth in a time of panic." This line of thinking quickly wormed its way into McCain's big economic speech. He put it more anodyne terms: "First, it is time to convene a meeting of the nation's accounting professionals to discuss the current mark-to-market accounting systems. We are witnessing an unprecedented situation as banks and investors try to determine the appropriate value of the assets they are holding, and there is widespread concern that this approach is exacerbating the credit crunch." For its part, the Securities and Exchange Commission issued an opinion letter, in which it told firms, "[I]t is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale."

The language is technical, but the arguments here are simple and really quite silly—especially coming from folks who value market indicators over all else. These folks are saying that when markets are volatile and irrationally pessimistic, it's just not fair to force people to act as if the market prices are real.

But you'll notice that they never made that argument back when markets were irrationally optimistic, as they were from 2003-2006. No hedge fund manager ever told a bank that it should lend him less money because the value of the collateral he was putting up was clearly a product of unwarranted optimism or that he shouldn't collect management fees based on the assets under management because their value was clearly inflated. Nobody ever complains about the market's ruthlessness and inefficiency when it's making them money.