I wanted to take the time to focus on what I believe is the root cause of all the turmoil in the Financial Industry, which is now adversely affecting all other business areas.
It comes down to TWO things.
1) Re-assessing "assets" to their correct valuation (Mortgage Backed Securities)
2) TRUST that the business(es) you lend or do business with have the correct risk assessment, by providing financial transparency.
Re-assessing "assets" (Mark to Market)
Item 1 is what has been described as "mortgage backed securities". The media spin has been because of falling housing prices and failures (defaults) on payments, these "mortgage backed securities" are causing problems in the financial world.
If you have taken history lessons, or are over the age of 30, you have knowledge that everything in life ebbs and flows. Housing since the dawn of time have risen and fallen in price, depending on supply and demand. So this "blame" on housing prices falling is NOT THE PROBLEM. The problem is the "mortgage backed securities" where created using FICTITIOUS math to value the securities with unrealistic assumptions. The securities should have been auto-correcting, like your own house, allowing them to be revalued as required. Since they are not revalued automatically, using "mark to market" accounting, these assets are over-inflated in valuation.
When they do go to sale, they are marked lower than values expected, since the whole scheme has no transparency. Buyers will only risk purchasing them with "plenty of cushion" for valuations lower. For a more detailed dissection of these securities, click here.
Trust is THE problem. Not Liquidity, Not mortgage foreclosures, not insolvency, not any mis-direction the media is spinning. It comes down to TRUST.
There is trillions upon trillions of dollars around the world ready to be "lent", create new businesses, or buy stock. At the heart of the issue is, who is it SAFE to do business with? Bear Sterns, Lehman Brothers, AIG, Indy Mac, Freddie Mae, Freddie Mac, Countrywide, and multitude of other businesses gave little warning of failure. Within days or couple of months all of these businesses went from "A great business" to bankrupt or crippled. Why?
Because the internationally accepted rules of accounting and failing to mark to market "assets" are not being performed.
Instead, the industry and USA government sponsor "delaying" mark to market, or correcting the accounting rules.
Failure to fix USA corporations and create transparency IS the ROOT cause of the death spiral the USA is experiencing. Yes, mortgage failures may have been the trigger, but only because the "assets" these represent in businesses are not transparent.
Above all the buzz, all the trillions of dollars, all the political posturing, Trust is the heart of the issue. Until it is addressed, the world will continue to collapse. And at the bottom of the collapse, mark my words, only then will the laws change, and trust will be fixed and restored. Why wait? So the corporations that used these FRAUDULENT securities can get the bad assets paid by the USA taxpayer or foreign investors and avoid bankruptcy.
And today, the SEC authorized banks to DELAY marking to market their assets. The USA government is the ROOT CAUSE of this issue. If the government had any type of leadership, it would force the transparency and let the insolvent businesses fail. This would allow the rest of the companies to pick of the pieces and move on.
1) See Credit Default Swap Post
2) Well known economist and Clinton adviser Robert Reich agrees TRUST is the issue (after my blog entry of course)