Thursday, 26 March 2009

This thing called MTM

Do you still remember how I once blogged that all the money in the world didn’t suddenly disappear; it’s just that money was never there the first place? Today; let me tell you one mechanism on how you are made to think that money is there. It’s not real, but you will be made to believe that it is real.

This mechanism is called Mark-to-Market, or better known as MTM. Let me give you an example on how it works.

Let’s say a company called “A-Co”, together with a lot of people all owned the same car, a 5-year-old proton wira. And let’s say this proton was bought at RM50,000 but is now worth RM20,000 if sold to another person or traded-in for another car. That means, A-co had a MTM loss of RM30,000. In simple accounting term, A-co will record in their accounts as a loss (perhaps in the form of depreciation) of RM30,000. Understand? Simple isn’t it?

If suddenly, one psycho guy came up and announced that he adores 5-year-old proton wira and is willing to pay RM500,000 for one, and is willing to buy as many as possible. What happen now? It means A-co now have a MTM gain of RM450,000.

Under accounting rules, assets are to be disclosed at fair-value, loosely translated as market-value. It means A-Co does not need to sell the car. As long as the car belongs to A-Co and that psycho guy exist, A-Co can now recognise a gain of RM450,000 in the accounts.

What does it means? Assuming no other items, it means you will see in A-Co’s financial accounts that there is a profit of RM450,000. An ordinary man on the street with no corporate knowledge will see the accounts and go… “Wow, just one car and can make so much profit!”

But is the profit (money) real? Can you go to A-Co and ask them to show you RM450,000 in cash? Heck, A-Co will not even be able to show you RM1 in cash. All they have is a car, and a psycho man story.

But you know the beauty of the story? People in A-Co can claim they work very hard and
demand for high bonus. And so they go to the bank and tell the bank they have such big profit and draw out a huge overdraft for bonus. By the way, when I said people in A-Co means the senior management. Those at the bottom will be told that A-Co’s target was RM1,000,000 and since there was only RM450,000 profit; A-Co did not meet the target so no bonus.

Earlier this week, the US govt (the one led by your favourite Obama) announced that they would be
buying over the “toxic debt” via a US1 trillion fund. That is to say, US govt is going to buy worthless papers, though once perceived as lucrative investments. When someone is willing to buy these worthless papers, it means there is a market price for it.

Can you see the “5-year-old protons” and the “psycho man” in the above scenario? Don’t be surprise if companies holding these worthless papers can suddenly announce profit and bonus payments start to roll again.

Did the Obama administration which gave birth to so many American wannabes just did a… … …


1 year ago…
A day in ParisLawatan ke sekolahA Paris analysis

2 years go…
Some of Mom’s wishes2nd chance with Mom – why is it enough

15 comments:

leyaw said...

The EU President called that a road to hell

blackjack said...

and we are on the way to economic recovery yay!

Johnson Tee said...

Be very afraid. All these is only a show and Obama is just a puppet.

http://www.youtube.com/watch?v=KrpRocaEfQE

Johnson Tee said...

Be very afraid. All these is only a show and Obama is just a puppet.

http://www.youtube.com/watch?v=KrpRocaEfQE

Ah Siang said...

After all, economics is about how much you are willing to pay for something.

We are psychos to pay RM 1.50 to RM 2.00 for bottled water.

We are psychos to pay RM 300 for a bottle of liquor.

I see this plan as a magic trick to make the toxic debt vanish from the banks balance sheet. But this problem will be shared by everyone, making the effect not so bad.

Huei said...

no wonder i'm an IT person..not a business one! =P

would people actually just claim that they have a profit when they didn't even sell the car in the first place? (the psycho scenario)

-eiling- said...

Very true and I understand how you're trying to relate this post to some of those companies. It's just like making profits on paper with no cash in hand. Those are not real gains. It's just like those on the Rich List. Their wealth figures include liabilities or paper gain investments!

Freethinker said...

MTM is to stay. But the mechanism to determining the bonus pool could derive from a realised and unrealised assets. It's when they treat the unrealised asset as money in the pocket that is scary... but then again, depends whether how confident the shareholder in giving paper money...

joshua wong said...

Zewt,

A very interesting explanation of the mark-to-market (or fair value accounting) concept for your readers and the layperson.

Read here for an interesting suggestion on reorganising banks which focus on the toxic liabilities instead of toxic assets.

xabi said...

ooohhh. nooooow i understand =)

damn, i want to do economics too!

zewt said...

leyaw - i tot we are already in that road?

blackjack - absolutely.

johnson tee - from the very beginning, i just dont understand why ppl adore him. his obglibation is not to us.

Ah Siang - hello there, welcome to AZAIG. well, that is what the US govt is doing... socialise the losses.

zewt said...

huei - yes, they can. becos the accoutants said so... they say can means can lor.

-eiling- - precisely. worse, there are ppl who make some paper loss and claim they lose everything, that's also irritating.

freethinker - not really, it still depends on company policy on bonus payment. i think more are getting vigilant now.

joshua wong - sounds like you already know it in great details :)

xabi - never too late! hahaha...

joshua wong said...

Zewt,

Still, i learned something each time reading your blog :)

Please keep up the good writing.

neno said...

wah..this is tough..i think i better stick back to my job..kekeke..

zewt said...

joshua wong - you're too kind with your words :) you have a good sense of understanding.

neno - hahaha... tough leh...