Amongst all the news of bank write-downs and concerns about further losses, one approach that would have avoided the mess seems to have been completely ignored, albeit Credit Suisse evidently toyed with the idea.
The simple but perhaps radical approach would involve allowing traders to price their own positions – at a stroke, no more losses other than realised losses when traders actually closed positions with others, or when a book was transferred between traders. At the same time bank staff morale would soar, as every trader would become a profitable hero in an expensive suit earning a big bonus. Lastly, much of the processing undertaken by the middle and back office would disappear – trades resulting in a realised loss would simply not be undertaken by traders.
Obviously such a pricing approach would probably mean that most assets would fall under a level 3 classification – mark to model.
I concede there may be some practical, funding and ethical problems, but this simple policy could easily restore the financial health of banks. I commend it to Alistair Darling, Chancellor of the Exchequer for the UK.
PS – just joking