Friday, June 18, 2010

Reader Comment to "The Hand of Soros?"

Blogger won't allow comments longer than 4096 characters, so I publish this as a post from reader Wendy...

----- Begin comment -----
Nice find and good question, Robb.

When the financial crisis happened, I made a serious inquiry into its causes and determined that the mark-to-market accounting regime was the absolute and sole cause of the crisis, that factor without which there would have been no financial crisis. The evidence is overwhelming. I won't go into the model here because I hope to publish it in more detail soon on It is true that mark-to-market is just an accounting method, there is nothing wrong with it per se, and it is appropriate for certain types of situations. The problem is that it was made mandatory on the private sector and encompassed a significant portion of all securities. The regime causes a positive feedback loop of financial losses, which is essentially synonymous with a self-reinforcing contraction of the credit supply. The IMF has done a simulation of the regime and verified this effect as well.

I regard every other model of the crisis, including the housing bust, the Fed, the GSEs, the CRA, deregulation, etc., to be phony, irresponsible, and extremely damaging to the cause of capitalism. It is widely believed among actual market players that the mark-to-market regime was responsible for the crisis, but the incompetariat has largely ignored the story (with some notable exceptions, including Steve Forbes). Here is a history.

The Financial Accounting Standards Board (FASB), a quasi-autonomous non-governmental organization, is the authority which sets the accounting rules and put the mark-to-market regime in place. It operates under the aegis of the SEC, which enforces the accounting dictates uncritically on the financial industry. Early adoption of the regime was effective for all years beginning after September 2006, i.e., starting January 1, 2007. Most of the major commercial and investment banks did adopt it early out of reputational concerns, apparently oblivious to the threat. Asset prices began dropping immediately, and though most big banks gamed the new regime fairly well that year, a credit crunch still ensued. You may remember the sudden market plunge on August 19 of that year as institutions sold off assets in a scramble for capital. The regime became mandatory for everyone on November 15, 2007. Then there was serious trouble. Sometime in Q2:2008, losses began to exceed capital raisings in the financial system. The financial system as a whole was effectively insolvent. The critical event occurred when John Thain decided to look out for his investors and sell the failing Merrill Lynch's assets for 22 cents on the dollar in the last week of July 2008, forcing everyone else to mark down their assets to the same catastrophic level. A crisis was formally recognized when Lehman collapsed a little over a month later, causing between $100 and $200 billion in lost value.

Mark-to-market as a method has been around for ages. I haven't researched its history yet, but I do know it was in effect as a regime during the Great Depression until Roosevelt suspended it in 1938. It was enforced by the New York Federal Reserve in those days. Given that the Great Depression and the Great Recession seem to belong to the same category of crisis based on their characteristics, I highly suspect that the mark-to-market regime caused the former as well, although there were certainly other aggravating factors brought into play, including the Smoot-Hawley Tariff Act.

The mark-to-market ideological movement revived several decades later and has been taking hold since at least the late 1980s. Alan Greenspan among others warned against it in 1993, so when the FASB decreed mark-to-market in effect in 1994, the moral force was not with them. They thus had to concede the practical execution to the pro-market factions, who quickly adopted a discounted cash-flow method, used to reflect the long-term economic value of the asset, on the theory that since markets are efficient, market prices should be the same as the economic value anyway. When leftists try to tell you that mark-to-market has been in place since 1994 and hasn't caused any problems so why would it be responsible for the crisis, remember that leftists shamelessly lie like rugs. This is out-and-out deception on their part. They can call it whatever they want, but it was a discounted cash-flow method, not mark-to-market, that was in place prior to 2007.

Mark-to-market was eased significantly when Congress intervened and threatened the FASB. When conditions became undeniably hopeless during Q1:2009, the anti-regime factions, both among the financial industry and the general public, gained political momentum. Warren Buffett, previously a cavalier supporter of the regulatory state, had become noticeably more humble as he watched his investment in Goldman Sachs inexplicably going toward zero. Despite the Goldman Sachs CEO's psychotic and suicidal support for the mark-to-market regime, Buffett decided to face reality and, along with other key players, testified against it to Congress. On March 10, 2009, Fed Chairman Bernanke reversed his previous unconditional support for the regime, announcing that substantial improvements needed to be made. These developments caused the sudden reversal of the crisis seen in March 2009 as markets began pricing in relief and write-ups.

The ruling and the market reversal precipitated a bout of existential rage among the left, who had been hoping for a total collapse and who wanted to use a collapse as a pretext to nationalize the banks. The humiliated FASB, headed by a malicious crypto-Marxist named Bob Herz, quickly determined to bring mark-to-market back with a vengeance in 2012-2013. It is a religion for them, and a FASB board member has actually labelled it as such. The FASB intends to force not only all the securities that were previously covered back into the regime, but all loans as well. Combined with the worldwide implementation of the new Basel II capital accounting regime, I can say in all seriousness and with no exaggeration that if they succeed, it will cause the collapse of Western civilization.

George Soros cannot possibly be ignorant of the effects of mandatory mark-to-market, and neither can the FASB. I do not know if they have some sort of closet relationship, but because they share the same ideology, they can probably be counted on to cooperate in this endeavor without a word spoken between them.


1 comment:

  1. I found Wendy's comment to be fascinating but I have one reservation. She says:

    "I regard every other model of the crisis, including the housing bust, the Fed, the GSEs, the CRA, deregulation, etc., to be phony, irresponsible, and extremely damaging to the cause of capitalism."

    This is confusing because she uses the word "model" but does Wendy mean that fiat currency, Fed currency manipulation, subsidized mortgages, CRA type regulations, ect, played no part in the economic meltdown we witnessed? I was under the impression that all of those things as well as the mark-to-market accounting rules played a role. That is the explanation that BB&T Chairman John Allison has given (his talk is available for fee at ARI's website).

    Doug Bandler


Comments must be polite and well-reasoned, but passion is allowed when directed at the subject matter and not someone who posts -- violate this, and your comment doesn't get posted. Comments may not post immediately -- I'm pretty busy and don't live on the web.