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806 posts
msg #72126
3/6/2009 8:28:07 AM

Obama Repeats Bush's Worst Market Mistakes
Bad accounting rules are the cause of the banking crisis.Article
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What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect assets. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest. Thus, under mark-to-market, even non-suspect assets are being artificially knocked down in value for regulatory capital (the amount of capital required by regulators for industries like banks and life insurance).

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

So although banks have twice the amount of cash on hand that they did a year ago, they lend only under duress, or apply onerous conditions that would warm Tony Soprano's heart. This is because they know that every time they make a loan or an investment there is a risk of a book write-down, even if the loan is unimpaired.

If this rigid mark-to-market accounting had been in effect during the banking trouble in the early 1990s, almost every major commercial bank in the U.S. would have collapsed because of shaky Latin American and commercial real estate loans. We would have had a second Great Depression.

But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.

Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks' capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.

Mark-to-market accounting is the principle reason why our financial system is in a meltdown. The destructiveness of mark-to-market -- which was in force before the Great Depression -- is why FDR suspended it in 1938. It was unnecessarily destroying banks.

But bad ideas never die. Mark-to-market was resurrected by the Financial Accounting Standards Board and became effective in the fall of 2007 (FASB rule 157) to the approval of the Bush administration, its Treasury Department, and the Securities and Exchange Commission. Even as FASB 157 began to take its toll on financial institutions last year, Mr. Bush refused to kill or suspend it. When Congress voiced displeasure last fall, the administration and regulatory authorities made some cosmetic changes, but the poisonous essence remained.

Another horrific Bush policy that Mr. Obama has left untouched concerns short selling. In 1938, the SEC, created by FDR, enacted the so-called uptick rule, which held that investors could not short a stock unless it went up in price. In July 2007, the SEC, whose commissioners were handpicked by the White House, got rid of the rule. Market volatility exploded.

Compounding this lunacy was the SEC's inexplicable failure to enforce the rule against "naked" short selling. Before an investor can short a stock, he is supposed to borrow the shares and pay a broker or stockholder a fee. What sellers soon realized was that the SEC was turning a blind eye to naked short-selling, thus adding even more pressure to beleaguered bank equities. Short sellers quickly saw how mark-to-market made seemingly invincible companies vulnerable to destruction. They picked their targets and relentlessly sold financial stocks short.

If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling. If he doesn't, historians will look back in utter amazement at Mr. Obama's preservation of Mr. Bush's worst economic policies.

Mr. Forbes is chairman and CEO of Forbes Inc. and editor in chief of Forbes magazine.

Please add your comments to the Opinion Journal forum.

Printed in The Wall Street Journal, page A13

273 posts
msg #72170
Ignore SFMc01
3/6/2009 1:16:22 PM

This subject of whether to mark assets to market ... or value them at cost ... or depreciated cost ...or some other method ... is extremely difficult. With important and thought provoking pros and cons. I certainly respect Steve Forbes and others who disagree with the change to "mark to market." However, as a retired President & CEO of a life insurance company, I strongly disagree with them.

Attempting to place a value on the stock of AIG or Citicorp or FannieMae by looking at their assets at Book Value is just plain stupid too. Frankly, I would much rather be able to see that their assets are underwater than be painted a rosey false picture. These companies made stupid investment decisions and, in a changed economy, they are now appropriately viewed as being in poor financial condition. If someone wants to invest in them ... knowing what their investments are worth in today's market and pretend they are worth book value, they are welcome to. On the other hand, to hide the true condition of their investment/loan portfolios is downright deceitfull too.

Shame on these companies and their executives! Their primary obligation ... before profits ... is to protect the assets of the company ... their investors. In their greed and in their pursuit of the almighty dollar, they have failed to do this. They are paid big bucks to exercise prudent judgement ... reflecting on how markets and times change ... and they have failed miserably. Don't blame accounting rules ... the fact is these executives made very poor investment decisions and it is not the accounting that is at fault ... it's the damn stupid loans they made. Loans that are stupid under anyone's accounting method.

439 posts
msg #72200
Ignore petrolpeter
3/6/2009 7:38:24 PM

Thats right.And if they would have just blown theses guys up(Bush is good at that)and spread out whats left we wouldn't
have to listen to,deal with,and pay for this mess over and over.Bush had 4% unemployment and 14000 DOW ,something the democrats can only dream about at this point and probably should have raised taxes back then.Going to miss him.

6,397 posts
msg #72221
Ignore karennma
3/7/2009 11:53:08 AM

Bush had 4% unemployment and 14000 DOW ,something the democrats can only dream about at this point and probably should have raised taxes back then.Going to miss him.

And where was the DOW when Bush LEFT office? DOWN 50% from it's highs.
His Ponzi schemes were nothing but a house of cards which started crashing in August '08, while John McCain was riding around middle America, telling everyone "the economy is sound". Tsk, Tsk .. !! If those poor Bush lovin' GM workers only knew THEN what they know now.
I WON'T miss Bush and I DON'T miss Bush. In fact, like most Americans, I've almost forgotten he was PresiDUNCE.
Yet the sound of his name still makes my blood boil.
Record high DEFICITS, record high unemployment, lowest retail sales in 16 years, record illegal immigration, record outsourcing off American jobs, the crash of the real estate and stock markets ... ALL ON BUSH'S WATCH! Bear Stearns, Lehman Brothers, AIG, Citi, BAC, discontinuation of the UPTICK rule ... OMG!! How much more damage could HE do???
Obama's been in office for TWO months. TWO MONTHS!!!
It took Bush EIGHT years to create the problems we're in NOW.
dear Geezus, just give some valium before I puke!

6,397 posts
msg #72222
Ignore karennma
3/7/2009 11:57:13 AM

OMG!! And I forgot the worst offense of all !
4200 American soldiers killed for .... ???
for ....?
for ...?

439 posts
msg #72225
Ignore petrolpeter
3/7/2009 1:26:11 PM

The stock market started to crater when the mid term elections took hold and democrats won majority and Bush became a lame duck,remember laughing and poking him with a stick towards the end of his term?His biggest mistake was appointing and listening to Hank Paulson as treasury sec. as a 'professional' to bail out insolvent banks.He conned all of us,once a CEO,always a CEO.As soon as there was even an inkling that brain deficient demoncrats would be in control of congressional policy,the markets foresaw this and is responding accordingly.Guess we all received our Obama stimulus tax cut this week $9.51--$400.00 total but is it going to offset the expiration of the Bush tax cuts,Cap and Trade carbon tax,Upping cap gains tax,Trader Tax,and all the FUTURE tax hikes that our insolvent gov. has to now impose to stay afloat.When the market finally finally prices some of this bad stuff in,Obama and Pelosi shove more bad policy into the other end.Thats why they have the worst market decline for a January,Election,and Great Depression.Oh,my mistake,worse than the Great Depression!

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Some of the last news in Iraq was that they completed elections with-out incident.And why don't we here the barrage of news from Iraq any more?The BBC says most reporters have left because there isn't a story there any more,they are probably here covering The Great Depression II.Silent victory?

98 posts
msg #72226
Ignore welliott111
3/7/2009 3:18:59 PM


You say" HE" did this and "HE" did that, HE( no matter if it's Bush,Obama or whoever current President is) can't do a damn

thing without approval of congress. And we've had a democrat controlled congress for 2.5 yrs I might add, so think about that

for a second. If you want to blame someone, blame the fat cat congress and senators who are fleecing taxpayers with their

bullshit "earmarks " and "pork projects" that our current president vowed to eliminate.

59 posts
msg #72230
Ignore acfncp3
3/7/2009 7:29:33 PM

I hesitate bringing up politics on this site because I know that's not what it's really here for but let's not forget the time bomb that Barney Frank and Meeks set along with Maxine Waters and the Black Caucus. If you have an open mind please go to YOUTUBE and search under "FNMA Meeks" and you'll see something that Barney is denying ... like Shakespere's line.. 'me thinks he protests too much". You can see for yourselves that the dems are reaming... no pun intended.. the accountant who is raising the red flag on FNMA and Freddie Mac execs cooking the books in order to give mortgages to people who don't qualify. Franks sneers at the regulator and says the gov will never have to bail out the mortgage companies and they all attack this poor guy, ridiculing him for bringing up "trumped up charges" about fnma and freddie giving out these mortgages. The poor guy at one point says, " hey I wasn't the guy who cooked the books' . Waters defends fnma and freddie and then praises them for their success in giving out a record number of "100 pecent" mortgages to poor people. The repubs and Bush tried to regulate fnma and freddie but were afraid of being called "racist" by the dems. These unforseen consequences was the time bomb that the democrats set that went off in Bush's last year. And now they're in charge ... give me a break...

Sorry about bringing up politics on this site ... I really value all the work done here to find put opportunities .. giving what Obama is doing to the market... I just wanted to point out the youtube site so you can see with your own eyes the history of this problem and understand one of the main reasons we are in this mess. It's something that you'll probably never see highlighted on CNN or MSNBC but it's telling when you see them with your own eyes despite their protestations and cover up.

Good trading..

6,397 posts
msg #72231
Ignore karennma
3/7/2009 7:32:14 PM

we've had a democrat controlled congress for 2.5 yrs I might add, so think about that
for a second.

UNFORTUNATELY, it's only been two years.
It'll take the Dems a hellva lot longer than two years to FIX the MESS the repukes created.
Here's some history for you. Just the FACTS ....
You think about THIS for a second.

- 104th Congress (1995-1997)
Majority Party: Republican (52 seats)

- 105th Congress (1997-1999)
Majority Party: Republican (55 seats)

- 106th Congress (1999-2001)
Majority Party: Republican (55 seats)

- 107th Congress (2001-2003)
(Jan 3-20, 2001): Democrat (50 seats) ; Republican (50 seats)
Majority Party (November 12, 2002 - January 3, 2003): Republican (50 seats)
Minority Party: Democrat (48 seats)

-108th Congress (2003-2005)
Majority Party: Republican (51 seats)

-109th Congress (2005-2007)
Majority Party: Republican (55 seats)

110th Congress (2007-2009)
Majority Party: Democrat (49 seats)
Minority Party: Republican (49 seats)
That worthless turncoat Lieberman has the 50th seat and another so called "Independent" has the other seat.

So there you are! TWELVE YEARS of Repukelicon rule !!
TWELVE YEARS of Repukelicon rule in Congress have gotten us where we are today.
Like I said, it'll take a HELLUVA lot MORE than two years for Dems to fix this mess!
Frankly, the damage is so bad, I believe it's irreparable.
No one can fix it! Not even Barak Obama!
The America of my childhood is ruined forever!
America will NEVER be the same.
I read somewhere that within 2 years, the United States will be the largest underdeveloped country in the world.

6,397 posts
msg #72232
Ignore karennma
3/7/2009 7:45:28 PM

Sorry about bringing up politics on this site ... I really value all the work done here to find put opportunities .. giving what Obama is doing to the market..

Yeah, I HATE discussing politics too. In general, I hate to discuss politics, and I don't frequent political websites.
But statements like the one above really get my blood boiling. I can't just sit here and say nothing.

George Bush was PresiDUNCE until January 20, 2009.
The DOW peaked @ 14,093 on October 8, 2007. George Bush was PresiDUNCE.
The DOW crashed to 8187 on October 20, 2008. George Bush was STILL PresiDUNCE.

Barak Obama has been President for TWO months.
After TWELVE YEARS of repuklicon congressional policies, eight years of GWB, illegal immigration, massive job losses, record U.S. corporate bankruptcies and Ponzi schemes, THE TREND CONTINUES.
I mean come on!!! You're a trader, right?????
What did you THINK was gonna happen after January 20, 2008?

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