Mark-to-Market Scapegoat

Schwarzman and Blackstone are attempting to blame poor investment decisions on Mark-to-Market accounting.

I disagree.

It was the excessive leverage that destroyed Bear Stearns, Lehman, Citigroup, AIG, Bank of America, Merrill Lynch, etc., not mark to market rules, evil short sellers, or hedge fund bets via Credit Default Swaps as discussed in Is Debt the Lifeblood of the Economy?

Furthermore, the only way 45% of the world's wealth could vanish in a year is if it was a mirage in the first place. That wealth was perceived, not real, and it vanished right along with a forced reduction of leverage that is still underway.

Moreover, neither leverage nor earnings are coming back anytime soon because attitudes of banks towards lending and consumers towards borrowing and spending have changed for good.

Mish

Portfolio.com

The Aleph Blog

wonky

The Big Picture

They were made up numbers to begin with. It never existed... It was a freaking mirage.

http://agonist.org/tina/20090311/rich_list_hit_by_economic_crisis

William D. Cohan | March 11

NYT(op-ed) -... Many smaller firms — including Evercore Partners, Greenhill and Lazard — took one look at those risky securities and decided to steer clear. When I worked at Lazard in the 1990s, people tried to convince the firm’s patriarchs — André Meyer, Michel David-Weill and Felix Rohatyn — that they must expand into riskier lines of business to keep pace with the big boys. The answer was always a firm no.

Even the venerable if obscure Brown Brothers Harriman — the private partnership where Prescott Bush, the father and grandfather of two presidents, made his fortune — has remained consistently profitable since 1818. None of these smaller firms manufactured a single mortgage-backed security — and none has taken a penny of taxpayer money during this crisis.

So enough already with the charade of Wall Street executives pretending not to know what really happened and why. They know precisely why their banks either crashed or are alive only thanks to taxpayer-provided life support. ..

_{I feel the American worker has been sacrificed to the capitalist idols in the ancient Mayan fashion. - Sue Lamb, NYT reader}

Mr. Schwarzman took Blackstone public and suddenly had to use mark to market for his shareholders to get any idea how the fund was doing. Prior to that he could operate in the shadows like any other hedge fund, hide his losses for years, nurture his gains quietly until he was ready to sell his holdings, pretend all his revenue was really interest income deserving of a 15% tax rate, and leverage himself 30:1 or higher.

Maybe the world lost 45% of their wealth in one year, but Blackstone shareholders lost around 90%. By this standard, Mr. Schwarzman is one of the most incompetent managers of his time. Wouldn't he just love to hide his incompetence? Abandon mark to market and he could do just that.

of course in the guise of just reporting on it

Thoughts on Walking Away From Your Home Loan

NYT -
...
YOUR CREDIT A short sale, deed in lieu or foreclosure itself will almost certainly damage your credit report and score, and the black mark will last for up to seven years. But the amount of damage it does will depend on how much other credit trouble you’ve gotten yourself into with other lenders.

Todd J. Zywicki, a law professor at George Mason University, predicted that FICO may have to adjust its credit scores to lessen the impact of a foreclosure or similar incident. “It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he said. “To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”

Craig Watts, a spokesman for FICO, said that was an interesting idea. “We try not to get involved too much in psychobabble around what is and isn’t predictive,” he said. “If the numbers show that foreclosure is less predictive, then we’ll take it into account in future redevelopments of the formula.” That would take a minimum of two to three years, though.

Some lenders aren’t waiting that long to initiate their own foreclosure destigmatization programs. The Golden 1, one of the nation’s largest credit unions, now has a mortgage repair loan for people who have lost a home to foreclosure but want to buy a new one.

It’s hard to imagine that there won’t be a parade of insurance companies, credit card issuers and mortgage lenders in Golden 1’s wake, even though Fannie Mae and Freddie Mac may be unwilling to guarantee the mortgages of such borrowers for several years. In fact, Aaron Bresko, the vice president of lending for BECU, another large credit union based in Washington State, is putting together a panel called “How to Lend to the Newly Credit Impaired” for a conference later this year.

“Good people have bad things happen to them, so how do you find those people and reach out to them?” he said. “As the year progresses, it’s going to be an emerging market.” more -
_{I feel the American worker has been sacrificed to the capitalist idols in the ancient Mayan fashion. - Sue Lamb, NYT reader}