A lot of lay people watch banks taking huge writedowns on mortgage backed securities, and the mess in the housing market, and worry that there are even deeper writedowns to come. That isn't the frightening part. The frightening part is that the writedowns are already too deep. The markets in many of these securities have basically seized up, and financial firms are required to use something called "mark to market" accounting for their securities--which is to say that rather than carrying these assets on their books at the historical cost they paid for them, which is the common procedure for assets like factories and delivery trucks, the banks have to update their financial statements to reflect the market price of securities. The problem is, there is no market price. Unable to value their holdings, or other holdings (securities or firm shares) that are dependent on revenue from the illiquid securities, many financial institutions are basically throwing up their hands and saying "I don't know, call it zero."
Wednesday, March 12, 2008
Some Thoughts On the Fed's Latest Move
From Megan McArdle: