Monday, June 16, 2008

Econ 201

Being more about logic than actual math, I usually enjoy a good accounting puzzle, like this one that's related by one Johnny Debacle:
Here’s how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the “presumed savings that you have on your liabilities,” Bove said.
It took me a minute to figure out what they're trying to do on this, but I finally figured it like this: let's say I have $100,000 loan out on my house, but my ability to pay it back is in question so the most the bank could sell the loan for is $80,000; so since I could technically buy my own $100,000 loan for $80,000, then I can say that I'm only in the hole $80,000 instead of $100,000. The point though is that if the loan has been devalued because of my inability to pay, then I certainly don't have $80,000 sitting around with which to buy my own bad debt.

However I and Mr. Debacle shouldn't underestimate the limits of American ingenuity:
Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn't want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

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