Oh, the insurance regulators force life insurers to do just that. Could it be that the conservative state insurance regulators did a better job than the Feds on banking? Yes.

In the life insurance industry, we do tests to avoid these scenarios. If a scenario has surplus go negative, we have to allocate reserves for it, equal to the present value of the deficit. It’s a good system — perhaps the banking regulators should adopt it.

The banking industry made too many risky loans on inadequate capital bases. Their overlending, individually and as a group, created a situation where there is not enough balance sheet capacity to hold long-duration assets. Thus the prices sag.

I’ve worked for firms that said in a crisis they could write their way out of it. That rarely works. The high quality companies get a disproportionate amount of the new business, and those on the ropes don’t make it.

MTM was a best a bit player in this crisis; besides, most of the banks I know have been using the flexibility of SFAS 157 to overmark, not undermark assets.

The big issue was overleverage; the banks played with inadequate capital. Now asset defaults are overwhelming that capital.

“It is quite possible that we are in a depression, and as such, there are too many assets relative to the ability to fund them — asset values must fall.”

This is the core issue, everyone else is just talking their own book, hoping that things will get better.

Assets will be dirt cheap. Figuring out how to improve the utilization of the excess asset base will be the key challenge in generating better-than-average cash flows in the upcoming Brave New World. IMO.

There are several truths well-known to educated investors that have been glossed over in all of the discussions of mark-to-market accounting….