The whole mark to market accounting method receiving the blame for the current financial crisis is a red herring.
The crisis was caused by bad lending, primarily in sub prime loans, that reduced the value of assets held by financial institutions. These institutions were fine with market prices when real estate prices were rising and reflected well on their balance sheets.
The same institutions that were artificially propping up their balance sheets by buying and selling these derivatives at market prices, although many of them were based on bad loans and doomed to fail, are the same institutions that can't sell these derivatives today because of a depressed market caused by mortgage defaults.
Now they don't want them valued at market price since the bad loans have come home to roost. For years they traded these derivatives amongst each other, inflating their values and garnishing huge profits. Unfortunately the underpinning assets were mortgages that should have never been made in the first place. Suddenly, no one wanted to buy these derivatives any longer as the housing market collpased.
Now the banks want to make believe these assets are worth more than they actually are. Although market pricing was in fact used during the housing boom (by buying and selling these risky investments on the market), now they want to value these assets at what they paid for them, which was artificially inflated by a market they exploited.
The fact is, that they didn't know when to get out of the market for these derivatives, they thought the ride would go on forever. Now the ones holding the derivatives are holding the proverbial bag and vastly overpaid for these assets due to defaults on the loans.
Incidentally, FAS 1157 allows for not valuing assets at market prices when those prices reflect distressed or ****** sales. Unfortunately, so many bad loans were made, as evidenced by default rates, market prices have indeed dropped to realistic levels and can no longer be considered ****** or distressed.
Bottom line - they made bad loans by the bucketload, they artificially inflated the value of the derivatives by exploiting that market, and now don't want to take the write offs that their risky investments caused. They want to value these inflated assets at what they paid for them, not what they're really worth. That kind of accounting magic will only come back to haunt them and their investors at a later date.
The piper had to be paid eventually and the eventuality is now.
Regarding bonuses - $100 billion of the $165 billion in bonuses that AIG handed out did in fact go to the very division that did the trading in derivatives, the balance to the rest of AIG. These derivative division employees were smart enough to have a bonus plan not based on whether derivatives lost money or not.
I find all these bonus indignation to be a bogus problem sidetracking us from the real issues anyway. We've bailed out AIG to the tune of $150 billion dollars and we're outraged over them spending $165 million?? Doing the math in my head, that's what, about .1% of the bailout? Let's get real, 165 million isn't even a pimple on this baby's ass. All these damned politicians should just deal with our real problems and stop pandering to this emotional nonsense.
The crisis was caused by bad lending, primarily in sub prime loans, that reduced the value of assets held by financial institutions. These institutions were fine with market prices when real estate prices were rising and reflected well on their balance sheets.
The same institutions that were artificially propping up their balance sheets by buying and selling these derivatives at market prices, although many of them were based on bad loans and doomed to fail, are the same institutions that can't sell these derivatives today because of a depressed market caused by mortgage defaults.
Now they don't want them valued at market price since the bad loans have come home to roost. For years they traded these derivatives amongst each other, inflating their values and garnishing huge profits. Unfortunately the underpinning assets were mortgages that should have never been made in the first place. Suddenly, no one wanted to buy these derivatives any longer as the housing market collpased.
Now the banks want to make believe these assets are worth more than they actually are. Although market pricing was in fact used during the housing boom (by buying and selling these risky investments on the market), now they want to value these assets at what they paid for them, which was artificially inflated by a market they exploited.
The fact is, that they didn't know when to get out of the market for these derivatives, they thought the ride would go on forever. Now the ones holding the derivatives are holding the proverbial bag and vastly overpaid for these assets due to defaults on the loans.
Incidentally, FAS 1157 allows for not valuing assets at market prices when those prices reflect distressed or ****** sales. Unfortunately, so many bad loans were made, as evidenced by default rates, market prices have indeed dropped to realistic levels and can no longer be considered ****** or distressed.
Bottom line - they made bad loans by the bucketload, they artificially inflated the value of the derivatives by exploiting that market, and now don't want to take the write offs that their risky investments caused. They want to value these inflated assets at what they paid for them, not what they're really worth. That kind of accounting magic will only come back to haunt them and their investors at a later date.
The piper had to be paid eventually and the eventuality is now.
Regarding bonuses - $100 billion of the $165 billion in bonuses that AIG handed out did in fact go to the very division that did the trading in derivatives, the balance to the rest of AIG. These derivative division employees were smart enough to have a bonus plan not based on whether derivatives lost money or not.
I find all these bonus indignation to be a bogus problem sidetracking us from the real issues anyway. We've bailed out AIG to the tune of $150 billion dollars and we're outraged over them spending $165 million?? Doing the math in my head, that's what, about .1% of the bailout? Let's get real, 165 million isn't even a pimple on this baby's ass. All these damned politicians should just deal with our real problems and stop pandering to this emotional nonsense.