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December 24, 2007


David Harper

Thanks for the helpful context and this great blog!

But I do not get how the "solved for" variable changes from equity to liabilities. My read is that under basic ownership, they have moved the line that separates liabilities from equity "down" as far as possible. Below it is only the residual; above it, some items that used to qualify as equity are now liabilities.

But isn't it true that the equity is still the residual (the book value that remains after assets - liabilities). I understand that formerly items like derivatives are now assets/liabilities, but I don't get how liabilities are the plug variable - aren't all of the liabilities valued independently such that (the smaller) equity is still the residual?

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