Here's another take on how government is responsible for the mess we're in.
After Enron, the government changed the accounting rules in regards to assets. There's a term called mark-to-market where a company must value an asset at how much it can be sold at immediately versus the old way where a company can value an investment in more realistic terms; when it can be sold when markets calm down. Many of these bad mortgages under the new rules were forced to be valued at 0 since no one is buying those properties now. Anyone with a lick of common sense knows real estate is not truly valueless, so the accounting rule makes no sense.
Yet it caused the devastation among the Wall Street investment banks as they had to write down the value of their mortgages to zero. As a result, their credit was downgraded by S&P and Moodys. Investment banks have to maintain assets as a certain percentage of debt. With a lower credit rating, the ratio skyrockets. These banks, as a result, had to increase their assets to maintain a higher asset-to-debt ratio because of the credit downgrades. Unable to summon up the additional cash, these banks became immediately insolvent the second their credit ratings were downgraded.
Under the old accounting rules, none of these banks would have been insolvent since they would have had far different mark-to-market values.
Bad Accounting Rules Help Sink AIG
