What is loss?

The answer to this question is the difference between price paid and price received.  However, current accounting and regulatory rules that govern banks define loss as any amount less than par, or 100 cents on the dollar.  This simple and “conservative” definition of price received (par) is freezing the secondary market for securitized assets.

The accounting and regulatory rules are discouraging banks from buying distressed securities at any price in fear that the purchase will lead to a charge against capital.  If a bank buys an MBS at $.50 and the security pays the bank back $.75 at maturity, isn’t that a gain?  Current accounting and regulatory rules would force the bank to take charges against the MBS, since the bank will not receive par($1.00) at maturity.  The real answer should be that the loss should be defined as the difference between price paid and price received. 

These two clarifications of existing definitions by the leadership of the Regulatory and Accounting community would help unclog the credit markets, stop the de-capitalization of the banks and provide a boost to the economy that will require zero taxpayer dollars and realistically describe the financial condition of the banks.