MARKING TO MARKET ON THE WAY UP.

MARKING TO MARKET ON THE WAY UP. Kids, imagine selling a security based on slices of many mortgages. After 30 years, this security is expected to be profitable based on the repayments of all the mortgages (subtracting the expected defaulted sums). Rather than waiting 30 years, I find a “market” price for the security, mark it to market, and take all that expected return over 30 years as an immediate profit. Doing this led to large “profits” and large bonuses. Some time ago I had the opportunity to talk about the financial crisis with a man whose financial wisdom I admire. He said, in part, “The accountants have a lot to answer for. They let bankers do deals, mark them to market and take large profits, and then put the assets aside and forget about them.”