Let 'mark-to-market' stay

On Monday, as Treasury Secretary Henry Paulson’s 700 billion bailout plan was rejected by the Congress, former House speaker Newt Gingrich started to preach for suspending an accounting rule as an alternate plan solve the current financial market crisis. Newt made appearances on Fox New, on CNN and published a commentary on the Forbes.com.

“Probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market," Newt said, "… If regulators on their own--or Congress, if regulators fail to use their discretion--can fix 70% of the financial crisis by changing the mark-to-market accounting rule, we should change the rule first before attempting to pass another reevaluated bailout package. “

Newt failed to conceptualize the issue and his reasoning is flawed.

Getting rid of ‘Mark-to-Market’ accounting rule will make the symptom a little less severe but will not help with the disease in the long run. We do not have to go back too far in history to find a lesson. In late 1980s, Japanese economy suffered a burst of their financial bubbles. Right before that time, the first 20 largest banks in the world were mostly Japanese. The reason was that those Japanese banks all had loaded with loans of the Japanese real estates which had their prices gone through the sky. When the real estate market crashed, the Japanese banks were on the brinks of collapsing. Fortunately, there were no “mark-to-market” equivalency in Japanese accounting rules and those Japanese banks were allowed to ‘write off’ those bad loans over time with their profits. How long? Till recent years, some the Japanese banks are still working those numbers. In fact, the Japanese economy never fully recovered from that financial crisis. Question to American people is if they want to get rid those bubble quickly and move on or to bear with this pain for the next 20 years.

The fundamental accounting principle is to protect the investors. To that end, it generally requires that the public company take financial gains conservatively and recognize loses aggressively. ‘Mark-to-market’ was created under this spirit. Before this rule was in place, there had been many frauds by company managements who cheated investors by keeping assets on books at their original purchase price. While actually, the market values of those assets had dropped to near nothing. With ‘mark-to-market’, the management will have nowhere to hide. Of course, by then, the account board could not have anticipated ‘mark-to-market’ being applied in such a volatile and yet illiquid market. By then those financial scientists were still holding real world jobs in academics or industries. They had not yet landed on Wall Street virtual economy and had not yet invented those derivatives now known to us as CDO, CDL and SWAPTIONS. Wall Street absorbed those toxic assets out of greed. For years, they booked billions upon billions of profits. Never had anyone cried foul. Today they are losing money and want to suspend the rule to cover up their mistakes. If SEC indeed suspends the 'mark-to-market' rule as Newt has insisted, investors will not know a financially healthy company from a sick one. Worse, those CEOs who made tons of money by participated in those years' near fraudulent operations, will, once again, be able to report 'profits' and take home an obscene sum of financial "rewards." It may be a good idea for the Wall Street, but will it also be a good thing for the Main Street?

http://www.forbes.com/home/2008/09/29/mark-to-market-oped-cx_ng_0929gingrich.html

China's First SpaceWalk

Buried among news of presidential election and a historical financial government bailout of the failing financial market is that successful space walk by 3 Chinese kaitonauts. China is now the third country capable of sending people to walk in the space. After hosting a summer Olympic game, Shenzhou 7 spaceship’s successful launching and recovery will boost the Chinese national pride to a new height. Congratulations to the Chinese people!

There are no shortages of comments on the Chinese media and web chat rooms on the significance of this achievement. True, a human spacewalk helps covering up the bad publicity of an outburst of tainted baby milk powder; it has the potential of enhancing China’s military power; it helps creating thousands of new business and jobs. Out of the many possible impacts, one stands out is the people -- thousands upon thousands of young people who worked directly or indirectly on the space program. Right before launching, on Saturday (9/21/08), the official Chinese news agency – Xinhua released a picture on the 7 commander and deputy commanders. Their average age of this crew is only 45. Gone are the people in their 70th from the first 3 Shenghou launches in the past 5 years. From this news, we can further extends the majority of the Chinese space program is made of people in their 40th or younger. At this young age, the Chinese space program will have a bright future.

One may wonder what happens to those in their 50th and 60th? Giving posts directly to people 20 years younger of their average age must have by passed many age groups in between. China is a society that has a history of emphasizing the order of age. The truth in today’s China is that there are not many people in that age range to be passed by. People in those age groups are simple absent on the high tech working places. Growing up during ‘the Great Cultural Revolution, they squandered their best times in life playing Chairman Mao’s Red Guards or doing the manual labor in the countryside. Chinese universities were either engaged full time in political turmoil or simply closed during the 1960s and 1970s. Many people praise the Chinese communist party and government with China’s space program citing only with this kind of power concentration that China may get the kind of success. They missed to see that United States has had a successful space program for a long time. They also failed to notice that the flip side of unchecked power concentration is havoc. If the few individuals in top power decide to do wrong things, there will be very little the rest of the country can do to stop them. In 1950s, 1960s and 1970s, up to 3 generations of people were sacrificed for one top person’s personal ambition to become a world revolutionary leader. When Chairman Mao died in 1986, the country economy was on the verge of collapse. Millions upon millions of people did not have enough to eat.

In June 1989, there was a pro-democracy movement in Tiananman square led by college students. That movement was squashed in cold blood. Since that time, the Chinese communist regime adapted a historical compromise with the people. It stopped all ideology maneuvering and focused, instead, on developing the national economy. The ‘opening up to the world reform’ has brought about unprecedented economic prosperity and social freedom to tens of millions Chinese people. I applaud those changes while also believe the Chinese people deserve much more. Along with the economic advancement, the Chinese Communist Party should start political reforms. It is high time for the ordinary Chinese citizens to know the inner circle of government operations; it is high time for the ordinary Chinese citizens to be given back their citizen’s rights to participate in the national political process. Once knowing that the Chinese space programs have been endorsed by the Chinese tax payers, people in rest of the world will cheer for China’s spacewalk with whole hearts.

Obama and McCain did their 1st presidential debate while I could not careless

Presidential candidates Obama and Mccain argue over war, taxes in 1st debate held last night in Oxford, Mississippi. While the US financial market is crumbling and our jobs are in danger, I found it difficult to spend time on this less important issue. This is a great country with great government institutions. Whoever is to hold the office of the president is less a problem than losing jobs. I did not even bother to turn on my TV. I studied.

Intrepid

One does not live for this world,
a little effort,
a little love,
a little idea,
a little persistence,
a little sharing,
and a little time,
together, we can make a much better world.