Magic Erasers

Many years ago, I was caddying for old Judge Sypes, a crusty octogenarian who walked and talked as slow as his age would indicate. But make no mistake, he was a man whose mind was as clear and concise as any twenty-five year old, and who would spend another six years on both the bench, and the golf course. For one of the holes, I marked his scorecard incorrectly, having given him a five, instead of a six. The Judge quickly pointed out my error; he played and scored the game of golf with the same honesty he took to the bench. As I was crossing out my mistake, I said: “Why don’t they have erasers on these pencils?” “Well,” the Judge said, “If they gave erasers to those who don’t respect the game, when the scorecard is handed in, the truth and the scorecard may be at odds.” I didn’t quite understand because I always thought that in golf, whether high or low, the score was just the basic honest truth, like Judge Sypes said.

Recently, by changing back to the mark-to-model method, the Financial Accounting Standards Board (FASB) gave the banking community erasers for their pencils. Keep in mind that mark-to-model is a system of reporting what you think assets are worth, versus mark-to-market, which gives a current unbiased value of your assets. By succumbing to the pressures of politicians, TV pundits, Wall Street, and the bankers themselves, we have reverted back to the days of what started our current economic fiasco. Leverage based upon fictitious assumptions, was, is, and always will be, the death knell of a financial system.

As the earnings and guidance are reported this week, the stock market may move higher, in anticipation that the worst is over. Never mind that the banks are sitting on trillions of dollars of worthless assets. Never mind that unemployment may not be a lagging indicator, but a leading indicator, and never mind that house foreclosures, credit cards, and leveraged commercial real estate may experience a tsunami of destruction.

Not to fear, the bankers have their erasers, and all’s right with the world! Judge Sypes would probably agree that using the eraser to your best advantage may be legal. But he, I’m sure, would be as disgusted as I am.

Till next time,

Bill



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