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October 21, 2008

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Fred

The finacial market is in "self-preservation" mode therefore the free-enterprise spirit is supressed. The free-marketers are now asking the Goverment and the Tax-payer to help because they are "too important to fail". This happened in history too many times.

The accounting rule on "mark-to-market" is an interesting subject. It is questionable how to account for product such as CDO which has no market. A good example is Taiwan's recent stock trading rule which limit the downside trade of a stock to 3.5%. How do you mark a value to a stock you own if it does not get traded due to the limiting floor. Real estate is another example, the book value is the purchasing price. But how do you mark its current value until is is sold? Can you reference it to a sale record of a similar property near-by? That is the problem of the US mortgage crisis when consumer use their home "equity" as ATM to extract cash out of their "mark-to-market home value" over the last 10 years. The US housing market value is driven to a bubble. Now the bank has to write down all these losses in an "orderly-retreat" as oppose to "fire-sale".

This current finacial crisis is systemic which require a systemic reform. I have not seen that in either US or China. To say that China will reap the benefit is an overstatement of reality. China is already a superpower in the US debt market. They were entagled in this fiancial mess as deeply as EU and Japan. The advantage of China is that the goverment contol the fiancial reporting system so nobody know if their banks' balance sheets are any good. The banks are already "nationalize" so what else can you do ;)

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