Robert Rubin, who quit his post as senior counselor at Citigroup Inc. this month, said an accounting rule forcing companies to mark down assets every quarter to reflect market value has “done a great deal of damage.”
“I spent my whole life at Goldman Sachs believing in mark- to-market accounting, and having said that, if you look at the experience from the last two years, I think mark-to-market accounting has led to terrible vicious cycles in asset prices,” Rubin, the former U.S. Treasury secretary, said during a discussion at the 92nd St. YMCA late yesterday.
Yes, because it was the accounting treatment, not the toxic assets and years of building leverage, that required drastic markdowns. Who was responsible for draining the liquidity from the market? Poseidon?
Robert Rubin Says ‘Mark-to-Market’ Accounting has Done ‘Damage’ [Bloomberg]
Is GS capable of hiring anyone who isn’t dishonest or do they ask everyone during the hiring process;
“Are you dishonest and corrupt? We can’t hire you unless you’re not.”
Is it true that some Lycans subsist entirely on liquidity drawn from the merger arbitrage market?
I’m pretty sure the economy is rebounding. This recession talk is a classic case of overstatement. The world is not ending and prosperity will return.
Mark-to-market on the way up, Candyland make believe on the way down.
I mean, I *guess* you could call Rubin a deregulatory type, but he just looks more like a craven thief to me.
Hey number 1, I’m a double negative, i believe we haven’t not met.
I think you should submit your tag to Grant’s illustrator for a cartoon.
@3
Daniel Harrison, is that you?
slow day at the 92nd street Y…
@ 7 hahahaha
@1
I’m not so sure you have to be necessarily dishonest to get in, but to survive, nay, thrive, you may very well have to be delusional
@8
then go f**k yourself.
(sorry, couldn’t resist – needed daily dose of vituperative comments, doctor’s orders.)
and let’s remember, it’s only because of the poors that those assets are toxic in the first place.
no, seriously
“I spent my whole life at Goldman Sachs”…and a few years in hell at Citi.
@11
Yeah, that, and “market failure.” The market is way down, therefore it has failed. So sayeth Dennis Kneale.
Love the ads for Cash Advances on the top bar, amazed it took this long
as long as there is a revolving door between 85 broad and washington, d.c., GS will be the big dog.
do they draw straws to see who goes?
trading EP for carney was the best thing this site has done
85 broad > washington d.c.
@16 – Amen.
Now Geithner is hiring more people from GS to work at the Treasury department.
Maybe he will pay lots of money to decorate his office the way he did at the Fed with expensive wallpaper or find other ways to waste money from taxpayers.
@2 I think they were Marking-to-Lycan. This is a sure fire way to reinflate the economy as its almost sure to make prices rise!
@3 back to Yahoo! Finance for you.
Mark-to-Maybe
Mark-to-Myth
Mark-to-Mumble
Mark-to-Magic
Mark-to-Markie-Mark
Mark-to-Menudo
Mark-to-Mayhem
Mark-to-Mid-Office
Mark-to-ShamWow
Why does anyone buy a new car?
Since we value things by marking them to market, as soon as you drive it off the lot, you’ve lost 20%.
Did you really get 20% utility buy driving it off the lot?
Are car buyers irrational?
LOL @ finance fags who don’t comprehend accounting regulations. CPAS FTW.
I am an accountant with Agape World. What is mark to market?
I can’t believe that DB is avoiding a discussion on economic stimulus bill.
It is a thing of beauty.
new car buyers are by definition irrational and emotional.
-new car leaser
24 It is argued that in fact NEW car buyers are irrational and that its more rational to buy a pre-owned. A car with 12,000 miles will have maybe 90% of the lifespan of a new one, but 85% of the cost.
That’s irrelevant. A better analogy is buying a new car when you’re in a situation where you are required to maintain a certain net worth. You better take into account that 20% haircut, cause that is in fact what is going to happen if you’re forced into liquidation the day after you bought that car.
And that’s the essence of the argument: if you’re a going concern that 20% haircut is not an issue (and therefore dont do MTM), but if you’re fighting for your life it is and you’re creditors are going to want to know at all times what youre worth. And highly leveraged financial institutions certainly fall into the second category – by dint of all that leverage, they’re constantly fighting for their life.
28 Wrong answer. A new car leaser is the same as a new car owner. Both have to bear the same costs: depreciation, finance charges.
Most people can predict what the price of a car will be a year from now or a few years from now. If you buy a car you know it will lose value and you also know how much a new car is worth.
They can’t predict the value of these toxic assets because the scam was so elaborate that nobody knows anything – they don’t know if information on the original loan documents are real, they don’t know if the people who got the loan will be able to pay it back, they don’t know if the value of the home was inflated but banks still want to be able to claim the value of those assets will be higher a few years from now.
Maybe we should all start our own companies and buy worthless junk but claim that in a few years people are going to by buying that junk so we don’t have to put the current value on our books.
Rubin is a turd. Keep blaming on accounting rules that make sense. A sub-prime mortgage that will default coupled with a home that was appraised far too high shows that things are bullshit.
No one would be complaining if MTM was making these assets MORE valuable. It is only as they sink that people want to change things. Classic revisionist history.
hi 30 it’s 28 here.
give BMW NA a call and ask them if leasers and owners have bore the same costs the last 3 – 5 years. the answer is no and you are wrong.
recently, leasing has been the far better strategy for consumers due to over optimistic residual pricing.
right now, the sweet spot for consumers is to purchase a 2 or 3 year old vehicle.
regardless, buying new is never right, except for emotional reasons.
thank you for playing.
@30 – wrong. as a new car leasee, I can assure you that I don’t have the same issues as an outright owner. for example, if I got $hitcanned tomorrow, I could show up at the merc dealership, give them the keys and tell them to hire some lawyers to try and get the rest of my lease payments. then they would find that the lease belongs to my llc which has no money and no claims on my personal assets.
another scenario is the end of the lease. I don’t have to worry about finding a buyer for the car. the fact that resale values have been decimated doesn’t affect me – it affects the dealer who priced unrealistic resale values into the financing agreement.
Bought da wife a 2007 Volvo SUV with 22k miles on it for $24k in cash, sucker was $48k brand new.
If the odometer didnt say 22k I would’ve had no idea it wasnt a new car.
Why would anyone buy a new car?
@35: Or, not continuing to roll over those illiquid or OBS assets once that was built into every major bank’s business model, is a large part of why we’re in this mess.
M-T-M accounting forces companies to control the amount of leverage they have. No excess leverage, no excess money, no asset price inflation, no bubbles, and no bursts! A bit simplistic, I add, but not to far off. M-T-M all the way, I say. At least for such metrics as book value. Continuing earnings can be based on acquisition prices as long as they are financed with similar duration debt. Carrying illiquid assets at book value and financing with Repo or CP is a large part of the reason we are in this mess.
@31
Your argument is flawed from the start.
Sure, in “stable” times you can guess with a fair degree of certainty that your Civis will get $x after z yrs of use and y miles on the odo, etc, etc, just like how during “stable” times you can, with a similar degree of certainty, predict the value of your MBS or CDO.
However, when sh!t hits the fan, as it eventually and inevitably does, predictive ability (especially based upon historical assumptions) goes right out the window. As others above have pointed out, when theres alot less demand, that value you thought you’d get goes down dramatically, not to mention the loss of liquidity (but you knew that).
I do believe it is the 92nd St Young Men’s Hebrew Association (YMHA) not the Young Men’s Christian Association (YMCA). Hence, always referred to as the 92nd St Y.
As for the substance of Rubin’s argument, it is hogwash. Don’t blame the M-T-M my friend, blame the idiots who filled the balance sheet with junk.
If the new car smell can cause the Lycans to rise up to 800 basis points less than the comparable rise on public transporation, then this can be converted into a swaption, whose value is approximately equal to 20% of the new car price, provided that the new car has at least seven seats.
VAR for a 50 basis point rise of a Lycan is approximately $1,200 Canadian Dollars (with 99% confidence interval), so even for a new Range Rover (one of the real ones) you are fully hedged.
@ 30 / 34;
if leasing is so superior b/c of the reasons that you claim (which is b/s, you are obviously a liar), tell me why john q. can’t do the exact same thing with a purchase. “Here are the keys, LLC has nothing; F/U merc dealer.” The difference is that after paying off, LLC can contribute the car to you if you bought.
You are a jerkwad.
@40 I would like it very much if I could punch you in the face
None of this matters because soon the government will create a “bad bank” to take all those pesky toxic assets from banks so they don’t have to be responsible for them anymore – the only way to solve this crisis is to make taxpayers responsible for the junk and let banks keep the profitable assets.
There are all these economists trying to explain what the government is doing but nobody thinks about the possibility that the banks were aware of exactly what they were doing the entire time and that they knew they would be able to get the government to find a way to take money from taxpayers and give it to them.
@24… You can say that virginity sells at %20 premium.
I do believe it is the 92nd St Young Men’s Hebrew Association (YMHA) not the Young Men’s Christian Association (YMCA). Hence, always referred to as the 92nd St Y.
As for the substance of Rubin’s argument, it is hogwash. Don’t blame the M-T-M my friend, blame the idiots who filled the balance sheet with junk.
@24… You can say that virginity sells at %20 premium.
I speak Rubinese, please allow me to translate: “If it creates profit it is good. If it creates losses it is bad. If it creates profits again it will be good.”
@42
I think #40 is attempting a humorous metaphor; derivatives, werewolves, “valuations”, it is all fantasy or he is just an idiot that you should punch in the face.
It’s not so much that the car declines in value by driving off the lot, it’s that you pay the bid-ask spread. If you buy from a dealer you always pay the spread, doesn’t matter if the car’s new or used.
@48 good catch. I don’t understand the new Lycan joke around here, but its about on par with that guy who said farming is simple because of derivatives and leasing is better than buying a new car. Finance can’t cure all the ills of the world and can barely pay for models and bottles anymore. A lot of this stuff never made sense. I haven’t seen the movie, but its probably up there with some of the more recent creations from the geniuses at AIG, LEH etc.
In my limited experience the one real difference between buying a new car and a pre-driven car from a dealer is that even if the pre-driven car comes with a warranty, it will not be as good as the one the new car came with and you will not get the dealership to be as flexible with you. If they know you’re rich and dum… I mean, of the wealth status and mindset to buy new cars, they are going to do what they can to accommodate you in almost any situation. Some cars come do with transferable manufacturer’s warranties, but if they can find a way out – and remember who wrote the warranty – they’ll shaft you if they can if they don’t think they’ll get a new purchase out of you.
However, since even Detroit cars now have a reasonably long operational lifetime, buying a car a few years old with a limited or no manufacturer warranty is probably still the odds play.
@42
At least they’re only rising and not evolving anymore
Rubin got paid hundreds of millions of dollars in bonuses, much of that from the growth of his companies’ balance sheet on mark-to-market accounting.
If he now thinks we should move away from MTM accounting, does that mean he’ll give back his bonuses?? Say it ain’t so!
@52 good point. same for GS alums
RE: Why would anyone buy a new car?
Choose your own options, proper engine break-in, no foreign ass prints in the leather. For starters.
Though with the mass bleeding at car dealers these days, it certainly makes less sense to buy new.
If you like what the dealer has sitting on the lot, and can get a great price, then write a check.
see @4—
more like shutes and ladders….
Me thinks #49 has the simplest, but also most accurate answer…
cluz: that lease/buy analysis is of exactly the same calibre as I would expect from someone who graduated from your much vaunted b school. Meaning long on innuendo, short on any meaningful analysis. In the future, you should leave that kind of dirty work to the Wharton, Chicago, and Stern boys. (BTW: the correct answer is that leasing – whether its a car, a building or a violin – is a financing decision, with the outcome impacted greatly by the accuracy of your residual value assumptions.)
How much is bad bank going to pay the bankrupt good banks for their toxic assets? Certainly much more than market, or else the whole plan makes no sense.
@49 granted. So where do you mark the value of the car? To the bid? What about when the spread widens?
The fact is that a car has utility beyond its resale value, particularly when the spread is wide or the resale market is dysfunctional.
I buy an expensive car to get me from place to place and to pick up shallow women.
When valuing assets, it is a problem if the market price diverges from other measures of utility (for example, discounted cash flow).
We tend to “like” measures like market price because they are directly observable and in theory not manipulable (but we see prices get manipulated all the time as when PMs mark their positions on quarter end).
We tend to “dislike” modeled measures because we don’t trust the people setting the assumptions.
@60
Well said, friend…
60 and 61 You also need to consider the purpose of the mark. If its to determine the liquidation value of the owner (which is in fact the case, when the mark is used to determine capital adequacy), its market, and too bad if that differs from what the owner perceives as intrinsic value. The owner assumed risk in levering up to acquire assets that are now not readily salable. And now has to face the consequences. Its a twist on gamblers ruin: its not enough to have the odds on your side, you also need the resources to keep playing. If not, your successor will be the one realizing intrinsic value for those assets.
let’s mark to the market when the market is rising and not when it’s falling. Isn’t that a violation of GAAP?
http://endofesq.com/?p=933
Someone mentioned a way the government could help the economy instantly – it’s so simple yet it would be so effective.
We need to increase consumer spending because so much of our economy relies on it but people aren’t shopping or buying cars or going to restaurants right now. The government could spend a few billion sending gift cards to everyone in the country – they could only be redeemed in stores or at restaurants and they would expire in a few months. Nobody would be able to save the money – they would have to spend it. That would immediately help the economy – the economic stimulas they want congress to approve won’t even begin until a couple of years from now.
But that is too simple and effective – the government needs to find ways to waste money and bailout banks instead of doing anything that might help the economy.
64 That would certainly help move big screen tv’s and in turn the Chinese economy. Next idea please.
@64: Money is fungible. They can’t save the gift card but they can use the gift card to buy something they would have bought anyway and the net result is the same.
I swear to God I’m going to shoot the next person that says, “we need to get people spending again.”
did someone just take the time to suggest that the gov’t give out gift cards?
holy fuck. we’re doomed.
68 here – egg on my face realizing the government actually has given out gift cards during the katrina fiasco.
we’re still doomed.
The reason you don’t think it’s a good idea is because it would work and it’s simple – you probably prefer the solutions all those high paid economists talk about that don’t accomplish anything. The stimulus that congress wants won’t do anything for at least a couple of years. If people start spending money again right now it will save jobs and stimulate the economy. The money would be spent now because the cards would expire in a few months.
Maybe you think Geithner has a better idea – giving money from taxpayers to banks but not nationalizing them so that shareholders are protected so that they can use our money to buy other banks and expensive planes.
@70
So apparently, the *only* alternatives are gift cards, or Geithner’s Bailout-O-Rama?
We’re *really* doomed.
I have a better idea. Bailouts for NO ONE. C, BAC, JPM, and probably WFC shareholders can go pound sand, and the bondholders can pick up whatever pieces are left.
Stop the rest of the Fed and Treasury’s BS, let the rest of the asset markets clear, and people will start spending money again, once they can acquire things for what they are actually worth, instead of what blithering fools like Bernanke, Paulson, and Geithner *think* they should be worth.
sure the best way to increase spending is to just give money to people who don’t have any.
and the best way for me to fix a junkie is to give him some heroin.
Maybe Bernanke and Paulson aren’t fools, maybe they know exactly what they’re doing and why they’re doing it. Of course the Fed isn’t going to let JPM fail – they’re on the board of the Fed so they will always be protected.
I’m not including Geithner because he is just a corrupt idiot – it’s Summers and probably Rubin making all the decisions now. The reason Geithner never worked at a bank is he couldn’t handle it – he can only handle government jobs.
@67, 68 – Did you forget whose money we’re talking about? It’s the taxpaer’r money to begin with… you oppose giving it back to them?The solution is not ‘gift cards’ to openly spend; but a close variation.
Look, the money is going to go to the banks, right? And the money I’m talking about is coming from taxpayers pockets. Instead of writing open checks to the banks, give it back to the people with the condition that it can ONLY be spent on consumer debt reduction.
This frees up credit for the consumer and ltimately places the money into the hands of the banks.
But it will never happen, tax cuts will. And nothing will change as a result.
Mark to market accounting ate my homework. I wouldn’t have had the receptionist spank me after the holiday party if it weren’t for mark to market accounting. I wasn’t born a serial killer; mark to market accounting made me a serial killer. If this harsh lighting weren’t marking my assets to market, I could pass for twenty-nine. If pigs could fly, they wouldn’t lose their jobs and have to move to the suburbs. Mark THIS to market, Rubin. What’s aught but as ’tis valued? Marky Mark.
How about we roll out a good bank? I am sick and tired of this Bad Bank shit. Let the fuckers fail and let healthy banks eat from their bloated carcasses.
Its time we wack the Bad Banks that have taken money from the TARP and start over with some CLEAN balance sheets.
Think of a new JPM type bank with out any legacy crap on the books. Now that would be worth investing some money into.