If a bank buys a bond paying 3% interest for $100, and then the interest rate on similar bonds goes up to 6%, the value of the bond is cut in half because no investor is going to buy a bond earning 3% if they could buy an equivalent bond earning 6%. But rather than take losses on their bonds which would have triggered regulatory action,
...banks simply "declared that they intended to hold on to large portions of their money-losing bonds until they matured rather than selling them, and they then changed the bonds’ accounting labels accordingly. ... excluding the unrealized losses from their balance sheets allowed them to report robust levels of capital when in reality their assets were worth much less.If we are going to insure deposits, we need regulators to do their jobs. They can start by reading Chapter 3 (the opportunity cost of holding a bond is what they could have earned by selling it) and Chapter 5 (the value of an asset is its discounted cash flow). This is not rocket science.
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