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Mark to Market Explained : Accountants 15 Minutes of Fame March 12, 2009

Posted by aetiusromulous in Economics, news, politics, Video, YouTube.
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When is a Duck not a Duck?

So let’s say you bought something, like a house. What’s it worth? The house is worth what somebody else is willing to pay you for it. Not that much anymore, but it is easy to fix the value of the house because there is an active market of millions of house buyers and sellers pretty much all working the same system. It’s a good, well used, reasonably accurate system for fixing the value of the house.

Now however, you buy something really stupid – like thin air. Thin air called mortgage backed derivatives. What are they worth? Same thing, whatever another idiot is willing to pay you for them. Except, not too many people understand the damn things, and there is no regulated, fair and open market on which to trade them, and it requires millions and millions of dollars to simply get in the game. And finally, because they have absolutely no value to anybody in a collapsing real estate market – let alone billionaires, banks, and massive financial institutions – your mortgage backed derivatives are worth exactly what people will pay you for toxic waste…nothing. Zilch. Zero. Nadda.

So there you are, all your money tied up in worthless derivatives, and virtually no way to beg, borrow or steal more. If only you could set aside that damn rule that says your toxic derivatives are worth more than what any thinking human would consider fair. Then you could sell them,’ cause, you know, they now have a value.

But of course, if you lie about their worth and it’s obvious you did so, what makes you think there will be anybody stupid enough to pay more than they would yesterday, when all you did was change a stupid little accounting rule called “Mark to Market” – the rule that says something is worth what the market says it is.

Welcome to Finance accounting.




1. Shawn Gray-Fleek - September 14, 2009

I wrote a very similar column today. I like your take on this.

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