BAILOUT [strike]STRUCK DOWN[/strike] PASSED DOW PLUMMETING!

Man, this stinks. I shudder to see how the rest of the world reacts today.

Jam it back in, in the dark.

That survey stated that the majority favoured some action, but different from the Bush proposal. There is no inconsistency between that and the House Republican actions.

There's nowhere I can't reach.

No, I think this fall is actually driven by fear - so the valuations here are not entirely rational, and there may be undervalued companies by now.

Sure, Gech won't be buying at the bottom. But you can bet your booties it's nowhere near the top. Sure, there'll be a lot of see-sawing before we get out of this mess, but any intrepid investor who bucks his fear and goes for a value play will be richly rewarded in the long term.

Let's restart the Investopedia contest, chaps. We'll see who picks the most undervalued company!

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My understanding is they were going to fund the Paulsen plan by issuing some bonds (which is all moot anyway till Congress passes something else). At this point, people are fleeing stocks, and may very well snap up any new federal treasuries.

Do this enough, however, and the value of the country's debt becomes less guaranteed. Once that happens, you're going to have to offer a higher interest to compensate for the risk. If your credit rating goes down sufficiently, no one wants to hold dollars, and we're all screwed. I can't imagine what capital flight out of the United States and any dollar-denominated assets would do to the world economy.

One thing I can't understand is, why do so many people look at the $700 billion and immediately say it's an expense item? It's not - it's an asset, albeit a highly speculative one. Something that could conceivably appreciate in value once the mess is over. There's a chance of it going all the way to zero, losing taxpayers more than just the $700 billion, but what's the chance that the underlying asset of those securities - which are mortgaged houses - would actually go down to zero?

I am a dolphin, do you want me on your body?

True, balance of payment issues may crop up in the future. Though, that's one of the things America ought to address - its twin deficits (trade/current account deficit and fiscal deficit). Problem is, habits are hard to change. Try telling the people who elected you that you want them to lower their standard of living to levels they can afford

The beauty of the dollar's value being floated is that this will ultimately counterbalance in the medium-term. As oil prices become intolerably high, Americans would start using less oil. Thus, reducing the import bill, and ultimately the price of oil.

Regardless, I agree the short term effect would inevitably be a weak dollar coupled with higher inflation.

I was speaking idiomatically.

Given what's happened, I find it funny that the Dow plummets when the bailout was struck down. And it also plummets after the bailout is approved.

What kind of toxic man-thing is happening now?

How can you say it didn't work, when it hasn't even started yet?

FELIPE NO

Originally Posted by Shin

The main barrier to amalgamating European and American standards is the US's use of fair-value accounting, rather than asset value accounting. Over here, if you buy a machine, it goes in your accounts at the price you paid for it, which is depreciated over the life of the machine. In the US, the value of the machine is not what you paid for it, rather it's based on the revenue you expect to derive from the machine over it's lifespan.

I know I'm kinda nitpicking, but I'm pretty sure that is not the case. US GAAP requires you to capitalize all costs related to preparing the fixed asset for its intended use. While you are free to adjust the cost downwards (impairment of assets), US GAAP prohibits upward revaluation.

Depreciation is a different matter altogether. You're allowed to depreciate the said long-lived asset based on the revenue you expect to derive from it over its lifespan.

Quote:

When the American banks gave away all that money in the form of sub-prime mortgages, the loans were not valued in terms of how much was loaned out, they were valued at how much the banks would eventually get back. All these financial institutions had their balance sheets propped up by theoretical future revenue streams from dodgy loans they were never going to get back, but this was entirely in line with standard US accounting practices.

To the casual observer, the banks were hugely solvent and all was fine. It was only once the loans started getting written off that it became apparent just how badly propped up they were and many quickly found themselves on the borderline of insolvency.

I disagree here. FASB Statement No. 157, effected November 2007, redefined fair value for financial instruments by mandating a mark-to-market rule. The asset must be valued at the exit price, the price you can get if you sell it on the open market.

It's all peachy when there's a market, but when you get a credit crunch like this, leveraged investors are forced to dispose of these financial instruments at low prices. The mark-to-market rule means everyone now has to revalue their asset holdings to these low prices. The writedowns eventually impact equity capital.

To comply with capital adequacy requirements, banks then have to raise capital. Some lucky banks received infusions from sovereign wealth funds, while others were forced to liquidate more of their assets. You get another round of revaluations and writedowns. The downward spiral continues until some banks face the prospect of bankruptcy - of which the mere rumor of such a possibility will trigger a massive run by nervous depositors.

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You know, the unfortunate thing is, the value of these financial assets are based on real estate mortgages. The underlying collateral being actual houses. Given enough time, housing prices would probably go right back up, and whoever's holding the paper at that time will make money. Too bad this is time the banks don't have.

Which is why the main gist of Paulson's proposal was for the US government to buy up some of these financial instruments from banks, sit on them for a while, and subsequently resell them once the air clears. Unlike your run of the mill bank, Uncle Sam has all the time in the world.

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Originally Posted by Watts

The SEC has suspended it's marked-to-market accounting rules. This was a part of the Paulson bailout. Essentially helping the financial institutions lie about their overall value to investors. Which is what I originally meant when I said accounting laws are not being enforced.

"There's value here! I promise!" *waves magic wand* "Just as much as when we packaged these mortgages!" *flails magic wand*

I think the intent of the Paulson bill (it's not really a bailout man, not unless Treasury pays large premium for those financial assets) was to staunch the bleeding.

Mark-to-market does not work in these unusual circumstances. There IS not market to mark to - disposing of assets at what can be considered fire-sale prices is hardly a 'fair' value. If your neighbor is selling off his perfectly operational car at say, $100 due to desperation, should you write down the value of your car to $100? Yet that's what mark-to-market essentially means, and it's basically the mechanism that starts the dominoes tumbling.

In sum, I disagree with your assessment that this is an example of non-enforcement of accounting rules.

Jam it back in, in the dark.

Let's say you have a perfectly usable car that you can't sell to the market at any price. You can still ride it around, drag race it around the freeway and stuff like that. Does it mean that the car's value is zero?

I would argue that the market assigning a value of essentially zero to the car, is a failing of the market and not the car.

There's nowhere I can't reach.

What Shin described is NOT mark-to-market. Mark-to-market operates the way you interpret fair value - as the liquidation value of a certain investment. In accounting, only financial instruments are valued in this manner, or any entity where the going concern does not apply (firm that is winding up). The concept of fair value being mark-to-market falls apart when the market freezes, like what we're seeing here. It is not FAIR for you to assign a VALUE of zero to instruments whose values are tied to assets (in this case, mortgages backed by US houses) that still have value. Unless, of course, you're telling me American houses are REALLY worth the fire-sale prices they're going for now...

Basically, I agree with the suspension of mark-to-market in this scenario. There is no market. Hence, the government is trying to step in and create one. The Paulsen plan is trying to address the reason why everyone's running around dumping the financial assets willy-nilly. How? By giving the market enough time to figure out exactly what kind of assets are backing these securities - hence the need to buy them up and hold them for a while. Consider that a bunch of mortgages have been lumped into mortgage-backed securities, and these securities were sliced, diced and merged into collateralized debt obligations. This financial engineering makes specific identification very difficult. But once these assets are identified, then hopefully the market will start to value them fairly again.

And then you can have your precious marked-to-market fair value accounting re-implemented!

This thing is sticky, and I don't like it. I don't appreciate it.