THE “MARK-TO-MARKET” RULE

WHAT ARE THOSE YOU ASK? A CREDIT DEFAULT SWAP IS A “DERIVATIVE”, IN THIS CASE A COMPLICATED INSURANCE-LIKE CONTRACT THAT PROMISES TO COVER LOSSES ON A SECURITY IN THE EVENT OF DEFAULT.

SEARCHING FOR A “ROOT CAUSE”SOME EXPERTS ARE POINTING TO A LITTLE KNOWN ACCOUNTING RULE COOKED UP BY THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) AND TITLED FAS 157.

THIS RULE STATES THAT COMPANIES HAVE TO “MARK-TO-MARKET”, OR PUT A MARKET PRICE ON ANY FINANCIAL INSTRUMENTS THEY HOLD AND TRADE. THIS IS RELATIVELY EASY IF THAT INSTRUMENT IS A STOCK, BUT WHAT IF IT'S A "CREDIT DEFAULT SWAP?“

THE “MARK-TO-MARKET” RULESEARCHING FOR A “ROOT CAUSE”

THE SITUATION BECOMES ALL THE MORE DAUNTING WHEN YOU CONSIDER THAT THE TOP 25 COMMERCIAL BANKS -- INCLUDING CITIBANK, BANK OF AMERICA, JP MORGAN CHASE AND WACHOVIA -- HELD MORE THAN $13 TRILLION IN CREDIT DEFAULT SWAPS AT THE END OF THE THIRD QUARTER OF 2007, ACCORDING TO THE COMPTROLLER OF THE CURRENCY.REGULATORS LIKE THE S.E.C. ARGUE THAT “MARK-TO-MARKET” IS IMPORTANT IN TODAY’S SARBANES-OXLEY ENVIRONMENT OF TRANSPARENCY

. BUT CRITICS OF THE RULE CLAIM MOST OF THE “MTM” WRITE-DOWNS ARE CAUSING CAPITAL SHORTAGES IN FINANCIAL INSTITUTIONS THAT ARE NOT

RELATED TO ANY ACTUAL LOSSES, OR EVEN EXPECTED LOSSES.

WHAT DO THE EXPERTS SAY ?• ON ONE SIDE, JPMORGAN CHASE CEO JAMIE DIMON, IN AN INTERVIEW ON THE CHARLIE ROSE SHOW, MAINTAINED THE CRISIS ISN’T BEING CAUSED BY AN ACCOUNTING ISSUE AND THAT MOST OF THE LOSSES WILL BE REALIZED.

• BUT STEVE FORBES RECENTLY JOINED THE DEBATE BY ASKING, "HOW CAN YOU ‘ MARK TO MARKET ’ SOMETHING, WHEN THERE'S NO LONGER ANY MARKET?" THE PROBLEM IS THAT WITH CREDIT DEFAULT SWAPS OR SOMETHING CALLED COLLATERALIZED DEBT OBLIGATIONS - -THERE IS NO MARKET BECAUSE NOBODY WILL BUY THEM.

A FEW SUMMARY THOUGHTS

WHAT DOES THIS LITTLE ANALYSIS MEAN ?

• WELL, TO ME IT SAYS NONE OF THE 3 MAJOR PLAYERS SHOULD REALLY BE IN FULL PANIC MODE:

• ANY BANK SHOULD BE ABLE TO WITHSTAND A ½ % LOSS.• $25,000 to MANY FAMILIES WOULD BE SIGNIFICANT PAIN, BUT SHOULD NOT BE CATASTROPHIC.• $40B TO UNCLE SAM IS ALMOST AKIN TO BUDGET ROUNDOFF ERROR .

AT BOTTOM LINE: THIS PROBLEM SHOULD BE MANAGEABLE UNLESS SUB-PRIME MORTGAGE LOANS ARE ONLY THE TIP OF THE ICEBERG.