Why hasn't the market questioned the rise in financial stocks?

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investorzzo's picture
investorzzo
Status: Diamond Member (Offline)
Joined: Nov 7 2008
Posts: 1182
Why hasn't the market questioned the rise in financial stocks?

Has mark-to-market accounting been replaced or overhauled? We all remember the cry for suspension in 2008 and 2009, but if it received an official “fare-thee-well,” I certainly missed it.
In a mark-to-market accounting world, the 4 bank beasts (i.e., Wells (WFC), Citi (C), JP Morgan (JPM) and B of A (BAC)) are collectively insolvent. Those are the findings of Garrett Jones at George Mason University. And yet, the SPDR KBW Bank Index Fund (KBE) has vaulted 21% in just 6 weeks!

http://seekingalpha.com/article/199026-why-hasn-t-the-market-questioned-...

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Why hasn't the market questioned the rise in financial ...
investorzzo wrote:

Has mark-to-market accounting been replaced or overhauled? We all remember the cry for suspension in 2008 and 2009, but if it received an official “fare-thee-well,” I certainly missed it.
In a mark-to-market accounting world, the 4 bank beasts (i.e., Wells (WFC), Citi (C), JP Morgan (JPM) and B of A (BAC)) are collectively insolvent. Those are the findings of Garrett Jones at George Mason University. And yet, the SPDR KBW Bank Index Fund (KBE) has vaulted 21% in just 6 weeks!

http://seekingalpha.com/article/199026-why-hasn-t-the-market-questioned-...

Even banks do not know how to save money! What a joke. Everyone knows that when you gamble at a casino, the casino makes money over the long run. You can only gain money through gambles if:

1) Do it sparingly, and you are lucky.
2) You are very, very lucky.

What do banks expect to happen when they intentionally failed at being fiscally conservative? Are they really trying to lose money faster than the government can? I mean, they are trying very hard to potray themselves as "wall street capitalists" even as they receive government handouts as if they were on food stamps - aren't they?

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Mark to Profit

Mark to Market accounting was suspended in 08.

But it doesn't really matter because in the "real" world of Wallstreet it works like this:

The investment banks are both the market maker and the majority of the market itself. Thus they decide what  market assets are worth, in accordance to their trades.

For example in 2005, Goldman Sachs created a market for Credit Default Swaps on Subprime Mortgage vehicles for Dr. Michael Burry of Scion Capital. While technically, GS was only to act as a middle man to broker the deal, in reality they also became the counter-party to the trade as well.

So throughout 2005, 2006, and 2007, GS marked the value of the CDS assets that they sold to Scion Capital as unchanged, despite the fact that the millions of homeowners were defaulting on their subprime mortgages during this period. Then in mid 2007, Goldman Sachs took the other side of the trade (joined Scion's short position on Subprime Mortagage vehicles) and suddenly Scion's CDS assets soared in value.

Goldman Sachs was both market maker and market in this situation, and priced the assets to maximize profits from their trade.

So to answer your question, nobody is questioning the rise in financial stocks because the market makers are profiting from that rise. When the opportunity to profit from a decline in financial stocks is ripe, everyone will question the value of financial stocks.

 

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: Why hasn't the market questioned the rise in financial ...
investorzzo wrote:

Why hasn't the market questioned the rise in financial stocks?

Individuals make decisions. The market is not an individual, so it is incapable of making decisions. The market is sentient but not sapient.

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