Have you ever seen any research, a chart, etc. looking at the market (S&P 500) versus major tax or legislative decsions? For example:
– consider the 70’s – 80’s… high taxes (70%) = no incentive, no market growth.
– ERTA 82 (8/13/1981) – tax rates go from 70% to 50% = presto, incentives to work, market goes up for 18 years…
– TRA 86 takes away passive loss deductablity on real estate, and presto, commercial real estate tanks along with the lenders (S&L’s)…. could that be part of the 87 Crash???
– 1999 Preparing for Y2K overstimulates the economy, leads to the March ‘00 collapse.
– 9/11/2000 – Attacked by Islamic Terrorists
– 3/2001 – Attached by White Collar Terrorists and the collapse of Worldcom, Global Crossing, Qwest, Enron, oh and then those trusted CPAs Arthur Anderson…
– the decade of the 2000’s – Can anyone trust the accounting ??? Maybe that is why the market is lower today than 10 yrs ago…
– 3/30/2009 – Mark to Market “suspension” – Presto, the market climbs again, maybe freeing from a self-inflicted accounting rule…

I wonder if anyone has put together a graphic or looked at this more thoroughly ???

Welcome your thoughts –
steve.booren@lpl.com

The very nature of the phrase ‘financial liquidity’ implies movement or albeit life itself. It is an intelligent multidirectional flow with a purpose in mind. Imagine 5 people in a room who represent the entire population of the world. Person ‘A’ is a farmer. Person ‘B’ is manufacturer (tractors and anything else needed). Person ‘C’ produces raw materials (steel and wood). Person ‘D’ is a Home Builder; Person ‘E’ is a banker. Very simple world, but it works. Liquidity implies that person A can buy a tractor from Person B, based on the fact that his beans have always sold for $10 a bushel. So the bank finances the deal for the farmer to buy a tractor, based on the value of his upcoming crop. The bank then sells the note to the steel worker. With these new funds, the bank can now loan money to the home builder to build new homes. You get the picture. Our little world has both financial and asset liquidity. Assets are flowing and alive.
In this scenario, Mark to Market (MTM) works well because there is actually a market. The term ‘Market’ implies a buyer and a seller. There is always someone who is ready, willing, and able to sell; and someone who is ready, willing and able to purchase. The purchase may be done with cash, financing, or even asset trades. The agreed upon price becomes the market price. So in order to have a market, one can see you MUST have liquidity. One can now also see that both terms (Market and Liquidity) imply a level of trust about what is being traded and the transaction of payment in funds or assets. In our little world, the market value of anything can be quickly found. One $50 steel beam can be construed to be worth 5 bushels of beans, or $50, if beans sell just sold for $10 a bushel to someone else. But what if everyone stops trusting each other, and finally stopped trading with each other because something had caused the underlying value of the assets backing all their livelihoods to crash. This scenario would seem impossible to happen naturally in our little world. In fact, I state it is impossible, without determined and planned destructive intervention. What would happen to the price of beans if no one was willing to trade with the farmer? The beans have a MTM value of $0. The farmer now defaults on his tractor loan, which destroys the bond the steel manufacturer is holding. This scenario runs its course and EVERYONE is destroyed.
In order to destroy this little world, one does not have to bomb or kill anyone. Just destroy LIQUIDITY. Now let’s apply this to the present situation within the USA. How could this ever be accomplished?

I. Destroy the Value of Equities(Stocks)
a. Implement the “Shorting to the Down Tick” rule without any limitations on losses. This by itself would be restricted by the number of outstanding shares. So one could calculate a bell curve and formulate legitimate statistics upon which shorting would naturally occur due to the finite number of shares available to trade.
b. In order to overcome the limitations on point ‘a’, allow the unrestricted short selling of phantom shares which would destroy the natural paradigm of shorting a company with a finite number of shares. In this scenario, a stock could be driven to $0 if the short seller has the financial power.
c. Do not enforce the rules of ‘covering’ your short sales. This adds unbelievable power and unlimited funds for points ’a’ and ‘b’. It also means all the funds gained from shorting are kept and not used to buy the stock used as the collateral in the short sale transaction.
II. Create a financial instrument that insures the bonds floated by any company(CDS)
a. This must be traded in a totally non-transparent and unregulated manner.
b. Anyone must be able to buy them, even if you are totally uninvolved in the bond transaction. This includes your enemies.
c. Make this instrument more powerful than the bond itself by adding fail safe checkpoints which can be tied to several scenarios, credit ratings being one example, which force early repayment of a portion or the entire bond.
i. The checkpoints are regulated by an outside agency with the ability to downgrade a company’s credit rating

without question.
ii. These outside agencies actually hold the bonded companies hostage to some extent.
III. Create powerful offshore predatory hedge funds intent on carrying out points I and II.
a. With the implementation of point I and point II, perfectly healthy companies will soon be destroyed, due to their relative stock values being driven down to unfathomable levels, their bonds being called because the rating agencies downgraded their credit thus activating a checkpoint fail safe within the CDS, thus destroying their cash, thus bankruptcy.
b. Other companies that were dependent on the underlying asset values of the newly bankrupt company now must write down their corresponding asset values. But these companies are also under the point I and point II attack.
c. Launch the attacks described in points I and II on financial institutions in a predetermined and planned out manner. In other words, start your attacks aiming at ‘vulnerable’ institutions that will crumble quickly and then use the momentum caused by the financial failure to pole vault to the next more difficult institutions.
d. Mask your real attack, liquidity, by getting everyone to focus on any single event.
IV. Aim your attacks simultaneously at commercial paper institutions.
a. Even a small degree of failures within the flow of commercial paper will greatly influence liquidity.
b. Cause modern day panic ‘Runs’ banks due to the spread of false rumors about another bank failure, which is really just another victim of point III.
c. When appropriate, launch a massive attack at a major world wide institution. If coordinated properly in Point
III, this will be much easier.
V. Enforce Mark to Market Accounting (MTM).
a. Due to point III, and the declining liquidity caused by point IV, asset values will decline in an accelerated manner
b. Declining asset values will cause complete mistrust between banks, thus causing LIBR to sky rocket. This LIBR effect will cause major devastation to every Equity on the market, since no banks can borrow to buy commercial paper and no businesses can sell it.
c. The result will be that there is NO market, hence No value to any asset.
d. LIQUIDITY stops because no one knows what the underlying value of any asset used as collateral really is.
e. Fear and distrust. No trades, no market, no liquidity, no LIFE.

I have left out much in an effort to simplify a more condensed explanation of what has transpired, IMO. The actions used to counter attack the above situation must all be based on the following points
1. Restoring Liquidity First Federal Reserve and Treasury are doing this. It is only a stop gap
2. Stopping the manner in which we are being attacked/ shorting to the down tick, transparency in CDS and Mark to Market rules modified
We need to move immediately to Mark to Model or back to Cost Accounting model
3. This will restore confidence in the financial markers and it will also stop banks from having to write down asset values every time they make a loan.
4. Restoring confidence by announcing your plan

We need Christians across the country to take a stand to stabilize the collapse of world financial markets. We are running out of time!!
I sent this letter to the Senate Banking committee and President Obama. My hunch is he may not fully understand.
If the SEC would at least test out a suspension of the Mark to Market Accouting Rule and use a Cost Basis Accounting instead and at the same time suspend the shorting to the down tick, AND RETURN TO THE UPTICK RULE president Obama may be spared total embarrassment from a crash he will be blamed for!
Your help to bring back the uptick rule for stock shortselling and totally change to structure of mark to market accounting is critical. CDS transparancy is also key.
Feel free to forward to your Congress and Senators and every American you know. We have little time left as the rules in place will lead to a crash of massive proportion. All one has to do is look at stock values since these rules were put in place in October 2007 for shorting stock to the down tick (last used in the GREAT DEPRESSION AND STOPPED IN 1933) and January 2008 for Mark to Market Accounting and see the cause and effect. Do a two year chart on any stock you wish. It will be very eye opening!!!!!!!!!!!!!!!!!!!!!!!!

Timothy Kershaw

A car is not worthless because it is out of gas and can not be driven to an auction. A 10 carat flawless diamond is not worthless at midnight in the Diamond District of Manhattan just because all the buyers are asleep. A house is not worthless just because no offers come in the first day of the listing.

All markets have timing as an element. MtM ASSUMES markets are continuously repricing an asset and that the process is fair and open (not manipulated). For some assets those may be a better assumption than for other assets. Obviously the assumption has broken down for many of the asset classes that are used by banks for reserve capital.

Keep up the voice of reason, even if few are listening. Hopefully in time, the right will out.

i bought a ton of .com stocks when they imploded and my boss complained bitterly that they were all, “illiquid POS”. but they were also ridiculously undervalued and most were only trading at cash value in the bank or less. liquidity eventually came back and they market revalued good companies higher and the bad ones went bankrupt.

trying to adjust prices to some artificial level just cuz you think you can guarantee the holding period, doesn’t really make sense to me. but i see your concern.

reality is that these complex mortgage tranches will probably stay illiquid, cuz they are too complex for most average funds to value…. even if the underlying fundamentals improve, liquidity may not.

take care bob & i enjoy the blog.

Is that you?? Of course you are right about FASB. We are fixing it. Good to hear from you.

Spoonmaster?

You may be right too. I do need to get a life. I don’t necessarily want to change information available to investors. But you can have transparancy without having to write regulatory capital down dollar for dollar with the hit on illiquid securities, especially if the owner can hold them to maturity. Another problem with MBSs is that a couple of bad mortgages behind a very large bond shouldn’t require writing down the whole thing. Don’t worry. Nobody seems to be listening anyway.

Bob