Only Paper Losses? Here is why that is misleading....

Banks and certain funds are required to maintain deposits in "safe and liquid" reserves equal to a certain percentage of money loaned or invested in riskier endeavors.

If funds listed on their balance sheets as assets have 'lost a significant amount of their fair market value' then the bank or fund has to increase their reserves to meet the percentage requirement of reserves.

Those paper losses can wipe out a fund or bank if they do not have sufficient value in other assets to meet the reserves requirements. That is where the cheap money comes in with the injection of billions by the Fed. THey can borrow it at small cost and put it right on the balance sheet.

"Paper loss" means this: You buy stock in XYZ Corp at $10 a share. Over ten years of growth, the stock slowly increases in value to $30 a share. On bad economic news, the value of the stock drops to $20 a share in one week. You have a "paper loss" of $10 a share.

Or maybe you bought some more shares a month ago at $29.50 a share. Your reasoning is sound: the stock has steadily increased in value and you want to buy some more. Maybe you have been buying a few shares every paycheck for the last ten years. Now, the shares you bought last month are also valued at $20 a share, meaning a "paper loss" of $9.50 a share.

Why is it a "paper loss?" Because the loss (or gain) exists only in your bookkeeping. No actual loss (or gain) occurs until the stock is sold. As long as you hold on to those shares, there is every likelihood that the loss will reverse and the value of that stock will again increase.

A paper loss is like thinking you've won a million dollars in the lottery, only to discover a few days latter that the winning number has a 12, not the 21 your ticket shows. That you have actually won only $50,000 does not mean you have a loss of $950,000.

The value of the stock FOR INCOME TAX PURPOSES is not the same as the value of the stock for FAIR MARKET VALUATION purposes.

You are correct when you say that there is no actual loss or gain until the stock is sold, but that is for recognizing gain or loss for Tax Purposes.

What I am referring to is FAIR MARKET VALUATION of assets for purposes of meeting reserve requirements. The fair market value of assets can go 'up or down' without the sale of the asset.

For example, the bank carries a single family residence as a collateralized asset at 300,000 because that is what the appraisal put its value at when the mortgage loan was issued a year ago. However today, the homeowner dropped off the keys and left town --now the home has not been sold, but the fair market value is SUBSTANTIALLY LESS today than when the loan was issued. When carrying the bank's interest in the collateral they do not get to continue carrying the asset at 300,000 today just because that was its value when the loan was made. The current fmv might be 200,000 and the loan value could be more than the fmv.

The same would apply to loans made to a hedge fund. The hedge fund may be carrying all investments at their acquisition value when in fact that value of the assets securing the investments may be zero. However, until the Hedge Fund sells those investments there is no recognition of the true fair market value of the investments, and the zero value remains hidden.

THis is the type of 'paper loss' that the banks are looking at and may or may not be reflecting in their balance sheets today.