A reader asked what I think about the mark to market debate, bringing back the uptick rule and the government putting the screws to the ratings agencies.
From where I sit these issues are more solve the world’s problems issues as opposed to trying to protect or grow assets (depending on where the cycle is at the moment).
Mark to Market: In response to this question long time reader Stephen Drone joked that we should let the banks put whatever value on them they want. To the extent that happens it is obviously a problem. However to the extent that it has artificially altered capital ratios and the like that too is a problem and in the real world there is some of both.
I could be easily convinced that artificially altered capital ratios were a part of the daisy chain the lead to so many failures and near failures. Not the cause of any of the bad behavior, dumb loans or greediness but a contributing factor further down the line to stocks going to zero.
Generally the idea of suspending mark to market seems right to me if they had done it ages ago. Now the genie is out of the bottle and it is not obvious to me that suspending mark to market now would solve as many problems as some people think–I’d love to be wrong about that one.
Uptick Rule: Before the uptick rule went away there were plenty of ways around it; ETFs, put options, other derivatives and odd lots. If you did not know odd lots did not require an up tick because odd lot trades do not get reported to the tape; I realize odd lots are not much use for a hedge fund but still worth mentioning. Further if someone bought 10,000 put options the market maker selling those puts could short stock (one way for the MM to hedge) without an uptick. Adam Warner just emailed me to say the part now struck out is incorrect. My bad. I have a specific memory of this but apparently I have mis-remembered (Roger Clemens reference).
I have never felt there was a lot of there there, so to speak, with the uptick. One thing I am not sure of, never having been much of a short seller, is what the process is for shorting an NYSE stock away from the NYSE and of course more volume gets done away from the exchange than the old days. To short a NASDAQ stock the bid had to be an uptick not the last trade. This differs from the NYSE where the last trade had to be an uptick and the order to sell short could not itself cause a down tick. But if the bid for IBM on an electronic market is an uptick then can short sellers just keeping selling regardless of the last trade?
Anywhoo back to the subject, plenty of very smart people articulate fine arguments for the uptick being reinstated but I just think there is less than meets the eye.
Ratings Agencies: If you believe they are scumbags with no integrity who can be bought then they have lost all credibility with you. Is there anything then that the government could do to restore your faith in them (assuming you ever had faith)?
Is what they did with AAA ratings on pools of crappy loans really as despicable as some claim? Regardless of your opinion it happened and at the very least blew up or otherwise meaningfully impaired many pools of capital. What good does it do to fix them now?
Of course this need to be addressed but it in no way that I can think of contributes to whatever finally solves this crisis. If that rings true then it probably won’t get the right kind of attention for a while.