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The problem really is that the value of those risky holdings changes by the minute. When banks announce write-downs, they reflect the value (and with it the expected future value) at the end of a certain day... it's accurate until the next morning only. So it's true that it's not accurate by the time you read it in the paper, but it's not because anyone is lying.
They're required by law to value their holdings based on established accounting practices, I don't think there's any evidence they're violating those. It doesn't seem in their interest, you want to announce the write-downs as soon as possible along with everyone else. That way you're not going to lose customers to the competition, as they are in the same boat.
If we look at UBS for example, they held $70bn of such dodgy papers before this crisis. They've written down $40bn. In a year or two, it's entirely possible that not all of those $40bn are actually lost - the current valuation would mean that every single loan defaulted and the houses they were backed with lost over 50% of their value.
The current valuing seems overly cautious to me, but at this point that's not a bad thing. If it turns out the losses weren't so bad, they can once again announce record profits and everyone is happy
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I agree with the first paragraph for the most part, however, I disagree a little bit with your conclusions at the end of your second paragraph. I'm not so sure they want to announce the writedowns as soon as possible. Announcing all the writedowns could lead to a major sell-off or a panic that I think many of these companies really want to avoid so I think they understate the actual writedowns along with everyone else. Concerning your third paragraph, I actually don't think they are being overly cautious, I think most are reporting less than they should, but I suppose there is no real way to know this for sure or argue this point. You have your opinion and I have mine.
I'm not saying they are violating accounting principles...with Sarbannes-Oxley and the fact that required accounting audits generally ensure accuracy (unless we have another arthur anderson / enron) companies generally are within the "rules." However..concerning accounting and GAAP, I've taken several accounting courses (i'm not a cpa) and know all too well how accounting can be used to manipulate and hide information and still be considered within the legal framework. IMO, this is a huge problem...things like "other expenses" or other fun nomenclature, deferring expenses or incurring them now, using different inventory methods to affect income taxes, reporting things as assets or revenue that should really be reported as expenses...it's amazing how accounting can play with the numbers in so many ways. While you can pour over a companies financials and their footnotes to said accounting sections, it is sometimes difficult to figure out exactly what is going on without doing much more investigating. Enron as I seem to recall had some fun with their "other expenses" sections and reporting revenue for things that should have really been expenses that was (at least some of it) entirely legal (obviously though, Enron orchestrated mass fraud as well).
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I'm not sure if he really was dishonest there. Bear Stearns was highly leveraged. So if they started getting calls on their own debt, they could have gone from "everything is fine" to bankruptcy in a matter of minutes.
I know of an individual investor who went from being a billionaire the day before 9/11 to bankruptcy a few days later. It's not that he didn't diversify, but he was leveraged and started getting margin calls. That's what you get for investing more money than you have and the market as a whole takes a dive.
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I personally think investing on margin turns out to be too risky (at least for me!). I've seen so many people lose their ass when they start getting margin calls. Your friend is just another story of so many examples. This and the overall highly leveraged nature of many hedge funds is a big reason that 2 of Bear Stearns hedge funds collapsed roughly 6 months ago.