Mark-to-Market has been tough on the financial sector stocks. But not every holder of CDO’s are publicly-traded like Merrill or Bear Stearns where we get to dissect their financial statements. In fact, we know that pension funds and state treasuries were buying up this crap as late as this spring. Did they give it all back? Did they sell it somehow and get it off their books? I doubt it.

After the 2006 Pension Protection Act and the 2006 FAS 158, I think it’s worth watching what big pension funds are doing to value the assets that no one else knows how to value. Pension accounting is still a giant fudge factor, but less so than the system that existed in 1999-2002. Back then, you might remember all the research floating around about the huge underfunding of pension obligations. We had declines in asset values (stocks) and declines in interest rates that increase (mathematically) the pension liabilities.

HMMM? Where are we in 2007? It might be tough to have to mark-to-market CDO’s in the pension portfolios but that’s what I believe the PPA and FAS 158 require. Note that the implication for corporate balance sheets and income statements are a bit tougher for the underfunded portion than they used to be. Oh - and if Bill Gross gets his way and interest rates declined to 3.5% or 1% real (if you believe inflation is only 2.5%) - well, if rates drop - then do the math on the pension liabilities. Boy, I hope stocks (pension assets) don’t fall from here at the same time rates decline and before those CDO’s get reinflated.