Friday, November 23, 2007

Arnold Kling thinks like a strong Wall Street CEO

From his blog:
A commenter raises the issue of whether accounting losses exceed actual losses in the current subprime crisis. That is, suppose that only $3 million of default losses are likely to occur on a $50 million pool of subprime loans, but because of loss of confidence, the market price of the pool drops to $40 million. Using mark-to-market accounting, the holders of the pool take a loss of $10 million, not $3 million.

My view is that the holders in fact should record a $10 million loss, and then if they hold the pool they can record a gain in subsequent years. It's much better to take write-downs too much, too soon than too little, too late.

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