Hank Paul-san FOCUS!
In the spirit of Mr. Miyagi’s sage advice, I want to touch on a few issues that I think Wall Street and Capitol Hill need to focus on ASAP.
Revisit mark to market accounting
I feel Newt Gingrich makes an appealing case for suspending mark to market accounting. Ignoring his political view points and strictly focusing on this article one can gain some interesting insight into the problem. In essence, the problem with the process is that all assets are required to be valued at current market prices. Hence, if the market is temporarily depressed, it has the potential to cause an artificial crisis.
Christopher Cox, the SEC Chairman, believes that it is important to keep the accounting method as is, though he did say that certain refinements needed to be made towards both the rule and its implementation. Since Cox believes that rules should not be changed ‘inappropriately’ he disregarded requests to suspend it (and has also failed to elaborate on any refinements that he had in mind). I understand the major argument against suspending the rule is that it will give firms a free ticket to mark up assets as they please. While this argument does have merit to it, the current situation is forcing the market to mark its assets to a market that does not exist! (How’s that for a tongue twister?) The ramifications of this are evident when we see that 80 stocks (or 16%) of the S&P 500 are trading at under $10. Some of these prices may be justified. For example,Citi bank at $3.05 (before it got bailed out) did not seem like an accurate valuation (though a higher single digit number would have been believable). As a result of keeping mark to market accounting, we see that companies seem to be losing capital and make long term investments look poor even if the cash flows are solid. This is because the current market price may not be available and will have to be pessimistically concocted. Or in the case that a market is present, the current recession and dysfunctional market is causing the strong cash flows to be eclipsed by the depressed (current) market price. Hence, it can be argued that mark to market undervalues companies in a recession and overvalues them in boom markets. A happy medium would be to continue to require an accurate disclosure but not let it affect the companies’ financial statements. I understand it is easier said than done and I do not have a solution to the problem. However, I urge the SEC to take a serious look and try and make SOME adjustments.
Uptick rule:
There was talk about bringing back the Uptick rule. The rule required short-sellers to wait until a buyer could be found to pay an uptick (a higher price) before they could short a stock. The SEC temporarily suspended the rule on certain securities that were kept under observation for a year (in 2004). Unfortunately, 2004 had very little volatility and thus the rule was considered archaic. In current market conditions where volatility has been as high as the 89.53 (measured using the VIX ) for the current market it seems like bringing back the rule may help curb the markets downward trend. It is important to note here that I am not using the short sellers as scapegoats for the current crisis and by no means feel that bringing the rule back will stabilize the market. What I do think will happen is that the uptick rule can and will discourage markets from going in one direction and thus resulting in a stark similarity with the Baldwin brothers’ acting careers. The rule is useful because without it sellers can kill a stock since they can get out at any price even if no buyers are present and as a result create pandemonium in the market. In current market conditions I feel short sellers should have to wait for buyers. It is because they have free reign to sell whenever they want that we have been seeing markets take a beating in the last twenty minutes before closing for the past couple of weeks. Bringing back the uptick rule by no means solves the problems we face today. However, it will send a positive signal to the market that the Government and SEC are trying to take positive measures to rectify the current situation.
Take positive measures:
I understand that this recession is worse than the one back in ’84. However, I urge the government to be a bit more reasonable and prudent with the tax payer’s money. Instead of focusing on banning corporate jets, golden parachutes and bonuses for the Big Three executives, I urge the government to take positive measure such as to ask the companies to restructure, re-negotiate contracts and become more competitive. Currently a GM worker is paid 70 dollars an hour where as Toyota pays their workers close to 48 dollars an hour. At this rate, GM’s chances of being competitive are about par with Governor Blagojevich’s chances of being nominated politician of the year 2008. Not only do the Japanese manufacturers have a competitive advantage in building cars but they are also perceived as being of better quality in terms of durability and fuel efficiency. Furthermore, since the cars are manufactured in the US they are not taking away any American jobs or causing a loss in revenue for the American people.
At this point in time the government is no better than the mortgage broker who gave out loans without conducting a background check to see if the person earning $30,000 a year could afford to buy a house worth a million dollars. They just gave Hank Paulson $700 billion dollars without seeing a concrete plan or reasoning for the way he intended to spend the money. The senators were upset at the Big Three executives for flying into Washington on their jets, but had no problem with Hank Paulson’s bailout plan (that was initially three pages long).
Another reason the government has to stop throwing money away and come up with a plan is because the deficit is increasing and T-Bills are ridiculously priced. The government sold $30 billion in new four-week T-bills at a yield of zero. This means investors who bought the T-Bills will get back the same amount of money they put in with no interest after 4 weeks. If you factor in a few basis points for the broker, the investor is essentially making a loss. The fact that there is a negative yield signifies that investors are so afraid to put their money anywhere else that they’re willing to pay more for a security than they’ll get back when it matures, and earn no interest while they hold it.
If the government wants the economy to get better it needs to take positive steps. Instead of paying lip service to the tax payers and stopping golden parachutes and bonuses, the government needs to address the fears of the market and take proactive steps to revisit policies like the uptick rule, mark to market and other such policies that will directly affect the market.
Note: Interesting day tomorrow: the banks are going to reveal their earnings, the Fed is going to tinker with the interest rates (my guess is 25 basis points, contrary to the market’s expectation of 50 basis points) and OPEC meets and is expected to cut oil supply.
The Economy
