Einstein said, “Only two things are unlimited: the universe and human stupidity. And I am not too sure about the first.” What could be scarier than adding more confusion to already confused thinking? Let’s face it: revaluing already illiquid securities in the midst fo a financial crisis when all willing buyers and sellers have gone shopping for new underwear confirms Einstein’s instincts about unlimited human stupidity.
Even a three-year old can see the problem with the following scenario. Imagine a moment of market contagion. Based on seasoning and performance, holding onto illiquid securities would generate an expected loss of $100 million. But when the accounting and the regs require using “exit values” rather than the price set by “willing buyers and willing sellers” the result is a mandated mark-to-market loss resulting in an immediate impairment of $900 million. OTTI (other than temporary impairment ) .