What am I worth?

According to one of the laws of American accounting, if someone owes you money, it increases your net worth.  (‘Accounts receivable shall be treated as assets on the balance sheet.’)  So, if you borrow money from me, I can say that my net worth is increased by the amount that you borrowed.  The more that is owed to me, the more that I am worth.  This is why banks have been so desperate to get people to borrow money in the past.

The ability to pay back the loan is not a factor, so I can show on my books the total value of all that is owed to me.  Under the so-called ‘mark-to-market’ rules, if 20 percent of the loans outstanding have defaulted, than I have to write down the value of the outstanding loans by 20 percent.  This rule was fought tooth and nail by the banks, because it lowered their net worth.

When a bank cannot sell debt at face value, instead having to discount it, it means that money that was on the books has evaporated, and must be written off.  A large bank tried to sell several billion dollars worth of debt, but could find no buyers until it had discounted the value of the debt to 22 cents on the dollar.

So, no one really knows what they are worth, because they can’t find the real value of the debt that they hold until they try to sell it.  For a bank, this means that they may not actually have the money that they thought that they did, so they don’t want to loan any money out.  Considering how inflated the prices of everything has gotten, how much will the Treasury have to pump into the system to get lending going again?  Do we have that much money?  Probably not.


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