Wednesday, October 01, 2008

Marking to a Brittle Market

There has been a great deal of critism of the Mark to Market principle.

My observation is that Mark to Market is a good idea. The problem is that, to make mark to market work, one would have to redesign accounting and regulatory principles from the ground up to make Mark to Market work.

The problem we have is that currently regulatory regime piles rigid liabilities on firms. Having a system where a company must mark its assets to market creates a situation where a company must report a brittle set of liabilities and a fluid set of assets. This system where liabilities are fixed and assets liquid create a economic where businesses are not able to sway within the turmoil of the market.

Mark to Market in the present system simple creates a system where one side of the books is brittle and the other side fluid. Market turmoils causes businesses in such a climate to snap.

Mark to Market is a good idea. For the system to work, both the liabilities and assets must be designed to fluctuate with economic winds. For example, in a fluid system, the payroll might automatically contract in a down cycle. There also has to be a realization that the contraction of liabilities often trail the contraction of assets.

For example, sales commissions contract in a down cycle. However, since the payment of sales commissions tend to follow sales by a month or so, the actual contracting of commissions might show up on the next report.

Speaking of tools. I just added a page on redesigning financial tools. The article claims that much of the current instability is the direct result of the tools on the market.

1 comment:

Anonymous said...

Recently an insurance company nearly wind up....

A bank is nearly bankrupt......

How it affect you? Did you buy insurance? Did you buy mini note or bonds?

They say without using tax payer money, they will not be able to lend to small companies…..

Bank primary role is to lend money….else what sort of business will let them earn….? Many ways of raising their own funds eg preference shares, sovereignty fund etc.

The bankrupt company have chapter 11, the fail finance industry got bail out…… but your credit card will never get bail out…….other industries did not got bail out and merger etc and job laid

Who fault?

The top management of the Public listed company ( belong to "public" ) salary should be tied a portion of it to the shares price ( IPO or ave 5 years ).... so when the shares price drop, it don't just penalise the investors, but those who don't take care of the company.....If this rule is pass on, without any need of further regulation, all industries ( as long as it is public listed ) will be self regulated......

Sign a petition to your favourite president candidate, congress member again and ask for their views to comment on this, and what regulations they are going to raise for implementation.....If you agree on my point, please share with many people as possible....