Saturday, March 14, 2009

"A Death Spiral"

Steve Forbes says President Obama is continuing the most destructive policies of the Bush administration. I remember John McCain during the campaign saying that "mark to market" accounting practices had to be ended. Obama has not ended them.

Banks, insurance companies, and other financial institutions, under mark-to-market, have to adjust their balance sheets when the market value of the financial assets they hold goes up or down. When the credit crisis hit in 2007, there was no market for subprime securities. In the fall of 2007 mark-to-market became effective. Despite the toll it was taking on financial institutions, President Bush stubbornly refused to suspend or kill it.

Forbes, writing in the Friday, March 6 Wall Street Journal, also mentions another Bush policy. Bush's SEC commissioners got rid of the so-called "uptick" rule, put in place in 1938, which held that investors could not short a stock unless it went up in price. As Forbes writes, "market volatility exploded."

The SEC also turned a blind eye to "naked" short selling. Short sellers, when they realized the SEC was turning a blind eye to their activities, relentlessly sold financial stocks short.

Forbes recommends President Obama suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked shortselling. He says financial institutions and life insurance companies are in a "death spiral."

1 comment:

Terri Wagner said...

I'm certainly not on the level of Steve Forbes but it seems to me on the surface that Bush was trying to get the markets where they actually were which was rotten since 1938...no surprise there.