This week’s blogs: a strange fruit

Many years ago I had a friend who was a foreign exchange dealer. He told me
about a dinner he was at with other foreign exchange dealers.

In the centre of the table was a pineapple. Being foreign exchange dealers,
and having passed the port more than once, they started making books on how many
leaves there were on the pineapple.

For perhaps 20 minutes or so, they would buy and sell from each other.

The dealers who made money ­ they were City foreign exchange dealers so they
played for real bucks, of course ­ were the ones who bought and sold purely
according to ‘market forces’.
The ones who lost money were the ones who obsessed about how many leaves
actually were on that damn pineapple.

All well and good and clearly a parable for how market prices can sometimes
bear little resemblance to the underlying fundamentals.

Indeed, the real world can actually impinge on the ability of market makers
to make a market.
But not a lot ­ and not for long.

If the game had carried on for longer, eventually the pineapple would have
gone rotten. The reality as to how many leaves were actually on the pineapple ­
and, indeed, going to remain on the pineapple by the time the accounts had to be
squared ­ would have kicked in big-time.

So why am I talking about bloody pineapples?

The Conservative party over here and the US legislative bail-out bill over
there both call in to question fair value accounting ­ the mark-to-market
mechanism that some are saying is to blame for the incipient spin of
mortgage-backed securities values.

So if I get this right, we wouldn’t be in this mess if only the accountants
had let the bankers pretend that it wasn’t happening.

Better to ignore the truth of the matter, to ignore the fact that Main Street
bank lenders have allowed Joe Public to borrow money with little regard to Joe’s
salary, Joe’s ability to repay and Joe’s ability to find someone prepared to pay
even more for his home than Joe himself did.

Better to ignore the fact that Joe’s mortgage and millions like it have been
swept up into big bundles, and that some of those bundles contain real stinkers
(but we don’t know which).

You can suspend or even scrap mark-to-market accounting ­ but there ain’t a
rug in America big enough to sweep all the fallen leaves under.

Andrew Sawers

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