Mark-to-Massaged-Market: Two Cows Version

Now that mark-to-market rules have been chastened and sent to bed without supper, Clusterstock has produced the two cows version of the new accounting rules.

You borrow $200 to buy two cows. You pay $100 for each cow. You write that down.

Lightning strikes one of your cows, an unlikely event that should only happen once every 10,000 years.

Lightning strikes the other cow.

You notice the cows are on fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows look dead.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fact that the cows look dead. They're probably just sleeping.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98. You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations once the cows wake up.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each and say the cows are just sleeping.

They light your paper on fire.

You ask the government to buy the sleeping cows at $98 each.

Tim Geithner tells you about the public-private investment partnership, which will encourage BlackRock and Pimco to buy the dead cows. Pimco puts in $5 and the Treasury puts in $5, and the FDIC lends $60 to a new entity called Pimcows, LLC. They buy the cow for $70. Tim whispers that he expects you'll buy a new cow with the $70.

You have two dead cows, $70 and $200 in debt to your investors. You have no plans to buy new cows.