The Stock Thread

[moby bass]

We have set some very dangerous precedents here to save some badly mismanaged companies with no repercussions on the part of management.

These precedents were set long ago.  The last time was the last bailout of the auto manufacturers and that is only one example.

Oh I agree. I said for years they have been taking power that wasn't theirs.  As for Chrysler, in the 80's, I know it was a loan from the gov't to Chrysler. Technically it was probably a bailout.  However, in an effort to show good faith, Iacocca took no salary but based his compensation on stock value should the company recover.  Still, if you ask me if the government should have loaned Chrysler the money, my answer would still be no.

[roadwarrior]

wasnt that chrysler in 92?

Yes, but the early '80's. Lee Iacocca worked for $1 and

SUBMITTED A PLAN to make Chrysler profitable.

On July 17, 1983 Chrysler repaid all governmant loans.

Today the automobile companies lack a plan and cannot

survive using their current business platform. This situation

cannot be "fixed", it must be reengineered from the bottom

up.

8-)

[Siebert Outdoors]

So are all these execs workin for $1? :

[tyrius.]

still no one loses their executive seat with these companies. Fire them all!!!!!!!!

That's a good argument, but a logical response is can these companies go through the transition period necessary in a change of leadership?

[tyrius.]

still no one loses their executive seat with these companies. Fire them all!!!!!!!!

OK, I'm going to delve into some technical accounting stuff.  I'm not trying to excuse the companies bad decisions, but just want to bring up another aspect of this situation that we haven't covered.  This will also really show the true dork that I am.  

Anyways, there is an accounting concept called "mark to market".  This concept requires companies to change the value of their "liquid" investments to the current market price (regardless if they plan on selling the asset or not).  So, given the non existant Mortage Backed Security Market, MBS, (or Collaterized Debt Obligation, CDO) these assets are being written down to fractions of their original value.  Because there is no demand for them they basically can't be sold.  Because they can't be sold their mark to market value is very small.  

Now that only deals with current value.  The actual security that they hold may have a default rate of say 25%, but given the current market price the bank has to value that asset of say 30% of its original value, instead of the planned 75% collection rate.

So in other words, over the life of the asset the owner of the asset can honestly expect to collect 75% of the value, but they have to account for that asset of only 30% of it's value.  This is due to the mark to market accounting method.

Now that I've explained that, we can get into the effect that this concept has on banks.  Hopefully, people are following this.  Anyways, this mark to market concept causes HUGE writedowns of asset value for banks.  This gets booked (accounted for) as an expense so the bank "appears" to lose money.  They really haven't lost exactly what they've put down, but they are forced to put that amount.  So, the quarterly results look really bad because of the extra expenses taken due to the write down.  Also, banks are supposed to keep certain ratios of capital on their balance sheets.  The mark to market concept inflates the amount of losses to the balance sheet so banks have to scamble to find other assets to "shore up" their balance sheet to meet regulatory requirements.  They try to sell stock and if that doesn't work then they're in big trouble.  If customer's start withdrawing their money (bank run), then the problem exacerbates itself until the bank can no longer function and they go out of business.

So, in essence banks have assets on their books that have been written down significantely due to mark to market accounting.  This causes the banks ratios to be out of whack and puts the bank in a really bad position of trying to find assets (raise capital/get investments).  The bank's typical operations may be making loads of money, but because of the above they can be forced out of business or forced into a "merger".

There is currently a lot of discussions to modify the mark to market accounting requirements.

OK, I'm going to go have another beer and hope that my reputation here isn't that of a major accounting dork.  I'm going to include a pic of my personal best just to make myself feel better.

[tyrius.]

Oh I agree. I said for years they have been taking power that wasn't theirs.

No truer words have ever been spoken.  I won't say anymore though as political discussions will get this thread locked and it's a good one.

[Siebert Outdoors]

Thanks again for the explination Tyrius.  

Your not anymore of a dork then I am.

[Siebert Outdoors]

The stock market really makes no sense to me.  One day its 300-400 favorable the next it is down 600points.  Drives me crazy.

[roadwarrior]

Last week's bear trap probably led many to believe the worst is

over, when in fact it has just begun. The pain will be great, the

burden heavy, and the suffering widespread.

DJIA -680 at 8149

S&P -80 at 816

Oil $49.12

Issues yet to be resolved:

Bankruptcy or nationalization of the automobile industry

Widespread municipal default

Continued consolidation and failures in the financial sector

Collapse of the commercial real estate market

Ongoing challenges in the airline industry

The fundamental issue is home ownership or foreclosures.  

This problem continues to grow. Solutions are not easy and

the amount of money involved is staggering.

In the financial markets, derivatives represent an impending

crisis of unknown magnitude. We do not know what is really

out there, what it consists of, or what it's worth. This will not

be resolved in short order.  The repercussions of any forced

liquidations are unimaginable, but would be devastating for

all markets.

 

[Grey Wolf]

If you guys think this is a short term problem , I feel sorry for you.