Originally Posted by cthree,Sep 18 2008, 04:25 PM

I give you a silver dollar for $1 and tell you it's worth $10 because it's special. You record its value on your books as a $10 asset. You run out of money one day and the last thing you've got is that silver dollar. You take it to the store ad they give you $1 for it. You just wrote down the value of that asset and in turn your net worth by $9.

Here is another example. You buy $1000 worth of LEH stock a year ago and you record its value as $1000 on your balance sheet. Today, it still says it's worth $1000 and will continue to say so until you mark-to-market or reappraise the value of the asset. If you did that you would have to write down that asset by $999.

If you buy 1000 mortgages and subsequently 10% of them go bad you could say the value went down 10% but that is not true. What's a half rotten tomato worth? Not half I assure you. Same for a good deal of the assets on the books of the banks. When the subprime hit the fan those assets became unpriceable and therefore couldn't be sold because how much is a portfolio of loans of questionable quality worth really?

Once the value becomes unknown you can't use those assets as collateral either and you can't borrow money against the asset. Banks depend on being able to borrow money against their assets. Without it they can't originate new loans or underwrite deals or do any of the other things banks do and they eventually fail.