Why Has the Credit Crunch Been so Bad? Blame Washington.
Posted by Heidi N. Moore, September 22, 2008
Excerpt: Consider two regulatory changes that may not have started the credit crunch but amplified the effects: the move toward mark-to-market accounting and the abolition of the short-selling uptick rule. Mark-to-market accounting: This rule was officially put into place last November, though some banks adopted it earlier. As broker-dealers, Morgan Stanley and Goldman had to “mark to market,” or determine the market value of all its assets every quarter, even assets for which prices would be hard to determine. FAS 157 required all banks to mark their assets to whatever price other banks were selling similar assets. So if you were holding a mortgage security and another investment bank sells a similar mortgage security at, say, 22 cents on the dollar, you must value your mortgage securities at 22 cents on the dollar, too. Imagine that you are trying to sell a 2006 BMW. Your neighbor sells his ‘87 Taurus for $1,000. Under the mark-to-market rules, that 2006 BMW would be on your books at $1,000, too. As bank holding companies, though, Morgan Stanley and Goldman can account for their assets on a “held to maturity” basis.
Comment: The clumsy BMW vs. Taurus example above is a major stretch for anyone who has read FAS 157.