Friday, September 19, 2008

Forbes, and mark-to-market

Steve Forbes' prescription:

Gold standard: Tying a premier world currency to a commodity is too constraining, an inflexible policy. It is a physical asset and much be stored, secured, and is subject to theft. The asset price is potentially vulnerable to market manipulation. It also presumes that science will never produce a method of creating mass quantities of gold, something I would not necessarily bet on. Alchemy is silly; nanotech, on the other hand...

Naked shorting is an awful practice. In this age of computers, we have the technology sufficient to guarantee that shares are truly being borrowed.

Going further, this blog feels that the T+3 settlement practice should be scrapped in favor of instant settlement. Major Wall Street trading platforms already compete for speed on the millisecond time scale, executing thousands (millions?) of trades per second. Why wait for settlement when we have instant execution?.

Mark-to-market is coming under increasing fire, for reasons made obvious by recent events. The value of an illiquid asset is often zero (cannot be determined) or far below "real" value at various points in time. Forcing assets to be booked at current market price can potentially require recording the value at far below "real" value due to the nature of the market rather than the nature of the underlying asset.

On the flip side, failing to mark-to-market implies government and business accountants must agree on a valuation other than the current market price — a slippery slope fraught with moral hazard.

Mark-to-market will continue to be an issue to watch. Yesterday's WSJ article on AIG and government regulation touched on mark-to-market, as did several other commentators.

Update, since it is presently being debated: Banning short selling seems unwise. However, this blog was specifically and only referring to naked shorting, above, not short selling in general.

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