Thread by @ritholtz

Hey @MichaelKitces and @ken_askew

Regarding, this:

https://twitter.com/MichaelKitces/status/1079363476513013760

some thoughts. There are many issues here - its a complex, nuanced topic and often gets bogged down in the minutia, but here goes nothing:

Traders bought difficult to value, thinly traded, tough to mark assets - that allowed banks room to mess around (commit fraud). It looked great pre-crisis, when marks were accurate enough while the underlying assets were booming.

ritholtz.com/2008/10/unders…

Once prices began to decay and volatility kicked in, all of that changed.

These Marks ranged from “hopeful” to “delusional” . . .

Then the accountants insisted on more accurate marks for assets that lacked liquidity (or buyers). It looked very grim. Assets weren’t zeros, but conservative accountants may have seen then that way.

ritholtz.com/2008/09/fair-v…

With FASB 157, pendulum swung the other way.

No more reality-based marks, just "good faith estimates" of "eventual value." It smelled like a fabricated, bullshit-based mark.

Marks that would previously have been fraudulent were now totally legal.

ritholtz.com/2012/02/fasb-s…

Changing Mark-to-Market to Mark-to-Model was a free pass to allow banks to NEVER have to write down their liabilities.

ritholtz.com/2011/10/bankin…

But here was the rub: FASB 157 made investors more skittish during the GFC selloff – how can you buy a distressed bank when you have no idea of what the state of their balance sheet is?

The Big Banks likely were under-capitalized, overexposed, and opaque – but you could not tell for sure. I suspect buyers were scared off

ritholtz.com/2011/08/big-ba…

It wasn’t just the banks – once we had the S&P500 – Ex Risk many (general) investors stepped back as well

ritholtz.com/2007/11/sp500-…

That was a decade ago. I cannot help but wonder if the hangover of this is part of the reason why banks have performed so poorly since GFC relative to other equities. Hard to value junk does no encourage buyers.