Annals of fictional market manipulation, cont.

By Felix Salmon
July 17, 2009

Rick Bookstaber, after mentioning that “we have no clue” how Goldman is making all that money, then adds:

I am in the middle of writing a novel that begins in the midst of the 2008 crisis. In the novel there is an investment bank where one of the trading units gets requests from its clients to price their illiquid inventory. (This is an exercise that occurs in real life, because the clients have to mark to market, and for some assets there is no market. So they go out and get bids from a couple of banks, and then mark at the average of these two prices). This trader puts in incredibly low-ball prices. One bank prices a security at $92. He prices it at $50, leading to a mark to market price of $71. The trader knows that with such a low price, the client will be forced into liquidation mode. The trader positions his book for the forced sale that he helped precipitate, generating big profits from his scheme. This is fiction.

I just can’t wait for the movie. Any chance of getting Dan Aykroyd and Eddie Murphy back together?

4 comments

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It would be nice if this was just a novel from the fiction section, from an accounting standpoint these events have already taken place. Some of the profits reported by large banks are the result of an accounting standards change that took place earlier this year. Banks such as WAMU had already failed under the old accounting standard.

Posted by Craig Coal | Report as abusive

and Jamie Lee Curtis, who is also still wonderful even though she does those Ben Stein-esque commercials for some sort of enhanced yogurt?

Posted by bdbd | Report as abusive

How about a better story ??

The PPIP has been consistently delayed because it would blow up the whole mark-to-market revision scheme. Many banks are simply zombies due to overvalued assets on their books. Selling into the PPIP auction would mean a catastrophic hit to their junk asset valuation line. They’ve chosen to sit, wait and build capital slowly to absorb the tsunami of losses. One quarter to the next.

Even a Sophmore accounting major knows that mark-to-market valuation is the centerpiece of proper balance sheet presentations. The very foundation of Cost Accounting 101. The change of April 2 was forced on FASB by government and banking together. Thus, only the banks really know their true financial condition. But they got profitable real fast. Very scary, indeed.

M2M is to accounting what supply/demand is to economic theory.

Posted by rayman in CA | Report as abusive