Marking to Market-When there isn't One.

So Goldman Sachs is back in the hot seat in front of the FCIC. This time it is for allegedly aggressively marking down the prices of assets they had shorted which in turn would also have increased the value of the credit default swaps they held on AIG.

I like the way people now start to discuss the idea that valuing "esoteric" securities might be more art than science. Well, the answer is a resounding yes, especially if you consider that economics is certainly not science, and, although many will disagree, neither is modern accounting.

It starts with something as simple as do you use your models to value securities-or the market place. Well, when you issue them, it's always your model. How else can you take 6-8 points out of a trade? But once you've sold them, the bid is surprisingly more a reflection of the "market" rather than the model. To use the model on the bid would mean giving back the points you took out on the original sale.

But let's look a little more closely. BNPParibas suspended trading in three of its funds holding Asset Backed Securities (ABS) because they couldn't evaluate them! No, because to use the model the funds would have been in meltdown, and to use the market, well, the funds would have been in meltdown! They could have valued them, but it would have been devastating to have done so.

And this as in August of 2007. Goldman's valuation problems were taking place in July and August. This was on securities they had sold (and shorted the collateral) in April-which just coincidentally was the same time that Deutsche Bank was recommending selling mortgage related products, especially in the sub-prime area.

Stranger still, this was at the time that Mr Paulson was shorting the very securities they were selling as Abacus.

So if you were to ask me if I thought Goldman were deliberately marking down assets that they were short I would actually answer not necessarily. If you were to ask me if Goldman were deliberately marking up securities they wanted to sell-my answer would be unreservedly in the affirmative!

They just needed some time to allow the market to "catch up" with their positions, which often is strangely three months-regardless of the firm. Clients don't like it when positions they bought on Monday at 100 are marked down to 92 on Tuesday. Three months later it is an easier disusssion to have with a client.

So the question of mark-to-market becomes moot, when the dealers determine the price in the first place...