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Friday, November 21, 2008

SEC to discuss mark to market accounting

The SEC has a panel discussion today on mark to market accounting. Obviously with the marks to market driving major financial institutions into default, there's a big lobbying force that would like to change the rules.

Changing the rules would further obfuscate the problem. The main problem in a credit crisis is confidence. By changing the rules, an element of disbelief will continue to pervade perceived other party risk. If you have 10 things that are trading for 5 and you say they're worth 10 anyway, I don't care... they're worth 5, you delusional fool. I'm not going to give you credit on that basis. In fact, it's going to make me even more suspect of the other 100 you have because I know they're probably worth less too.

The fact of the matter is these credit problems were brought about by over-leverage. Margin requirements need to be raised to restore confidence to the system, not lowered to enable broken portfolios to survive... but raising requirements would be a death knell. Instead they want to try to soften the blow and call insolvent solvent.

All of these efforts to lessen the downturn will only elongate and exacerbate the situation. Cycles have to play out to complete.

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