Posted on 08/25/2011 11:25:22 AM PDT by LouAvul
I'm reading a review of the Emergency Economic Stabilization Act of 2008. I have a couple of questions.
First, they reference "mark-to-market" accounting standards. That means they wanted to do away with "fair value" (i.e., true value) accounting standards? They wanted to inflate the value of mortgages so as not to destroy their balance sheets?
Second, I read the following: "FASB was criticized for politicization of accounting standards." What does that mean? The injection of politics into the process?
Thanx
Exactly the opposite.
"Fair value" does not mean "true value" - there is no such thing as "true value."
The value of an asset is what someone is willing to pay for it.
"Fair value" is an estimate by accountants as to what the price of an asset should be.
"Mark-to-market" is pricing an asset according to what someone has actually paid for it in the market.
"Fair value" accounting inflates asset prices. Marking them to market doesn't.
Mark to Market is Fair Value — as oppossed to Historical, Purchase Price or depreciated value.
It is what was abused by Enron to claim a certain Market Value for contracts and use that to write up a big bankroll of that imaginary exchange market of theirs.
It just means that you will mark an item at market price when you list it as an asset or against where it is pledged.
There is some valid uses but the abuses are easy to see. I buy an old car for 1,900 but using Mark-to-Market call it an antique worth 50,000 and then pledge it as collateral to buy 26 more old cars...etc., etc.
Most assets in accounting are carried at the price it was bought at, or in this case lended at. You are correct, it makes their balance sheets look better when the mortgages are carried at the old higher values, not the post-crash value.
The mark-to-market is just that - current appraised value would be my guess. That is sometimes used to force writeoffs and get the bad assets off the books.
Mark to market is a tricky issue. While you might thing writing down an asset to its current value is good, the problem with the mortgage mess was there was no market so the “current value” of the toxic loans was $0.00. That effectively bankrupted wall street. Realistically the toxic debt had some value, the question is how do you price it in a financial melt down.
As for FASB, I bet it was the push to get rid of mark to market, not sure though.
Exactly. As they say on late night t.v., “A $100 value, yours for only $19.95!”.
It meant that if FASB didnt do what Dodd and the dems said, they would outlaw them as a standards board. Therefore FASB suspended rule 157 for 1 yr in 2009. When the new president of FASB, Seidman, indicated that she was going to reinstitute 157, they (bankster/government mafia) threatened her as before. That is what they meant by 'politicalicizing.' She resigned. Her replacement kept 157 (mark-to-market) indefinately.
as long as the zombie banks keep sucking the free money printed by their slave, Federal Reserve, we will continue in this morass because they have bought the government, both parties. that is why both sides hate the Tea Party.
More common abuses use real estate developments such as those in Arkansas which made the Clintons rich and launched their national campaign. As long as accounting and legal rules are followed, Mark to Market may be perfectly legal and just as perfectly a scam and fraud.
Michael Savage devotes an entire chapter into explaining this concept in his book Trickle Up Poverty. It is one of the better explanations out there, IMHO.
bttt
With mark to contract, the asset is valued at the last sold price. If over time, the market conditions change AND if the asset is at risk to be sold in the short term such as a borrower missing payments, then mark to market should kick in. From the mortgage perspective, I would say that we should be using mark to contract until the Borrower is late in paying their monthly payments by 30 days.
Correct. Plus, even when the financial melt down cools and stabilizes, the picture still remains complicated due to widespread uncertainty on which rules will be applied going forward and how they will be applied.
This was a key reason why the Great Depression was prolonged under FDR; it wasn't just the economic uncertainty which New Deal policies generated; it was the political uncertainty of how they would be applied with any given circumstance or timing.
Hitler's brand of socialism worked better in Germany because its application was fairly consistent and predictable as opposed to FDR's.
Mark to market in the banking world was not used on their mortgages. If a bank held a mortgage on its books it was not a tradable public asset, therefore it had no ‘market value’ that fluctuated. Mortgages were valued on the books based on their loan status. If the mortgage was being paid the value was based on the loan value. If the mortgage was in default it was classified as non-performing and a charge was taken.
Mark to market in the banks was most likely used for their securities held, whether mortgage pools or collateral held or something similar. This was more likely what the rule suspension was directed at.
The suspension came about because it would have been ridiculous to allow short term fluctuations in market values of these securities to cause a technical bankruptcy of a financial institution when the securities were likely to rebound in price once the ‘panic’ period subsided. And this is what did happen.
Although the suspension is still inplace it is not likely an issue right now. A mark to market of those holdings likely is pretty accurate right now.
This is not the black and white issue many think it is.
Completely incorrect.
In the boom going up, people had homes that they were selling. They had bought these homes for 200,000 four years prior but they were claiming the real estate market was such boom market that they deserved appraised values much higher than normal appreciation and inflation allowed for in normal calculations. So houses were being appraised at 425,000 and sold at 400,000 with 350,000 mortgages with a house that cost 200,000 to build 48 month prior.
The buyer would default or walk away and the lender had a house that was not worth his loan value he had lent. Next the market went to the bottom due to the glut and the economic down turn. That house was now worth 150,000 instead of 400, 350 or something relating to the value when the loan was made. These were the so called toxic assets — loan packages of multiple loans where the true market value for a sale today was a huge percentage less than the loans that could no longer be collected — the borrowers had walked.
At this point M2M was driving the value to zero based upon the additional liquidation and recovery costs and these packages held were then calling in the Credit Swaps (make believe insurance pledged against these packages). And the whole house of cards came tumbling down.
You make a good point that there is a difference between a true Fair Value based upon actual current sales of like items, and a process of opinion based (or spun) values that are arbitrarily established.
The whole system of known real estate practices with historical understandings of values and risks was perverted by Government actions, mandates, buy-ups and waivers to the extent that the home real estate lending market was perverted, polluted and ruined by government leftist planners.
Were there commercial predators that took advantage of the situation and made billions? Sure, but the predators couldn't have come into the farm yard without the government destroying the fences, throwing bait to bring them and then hobbling the livestock and the farm dogs.
Say I own a security - a bundle of mortgages that I bought for $10 million.
Half of them have a 90% chance of defaulting. And no one on planet earth wants to buy the bundle, unless they pay about 40% of the $10 million. So if I truly consider what I could actually expect to sell my “bundle” security for today - I’m looking at realistically being paid $4 million for it.
FAS Statement 157 is aimed at having me write down (expense a loss) $6 million of that asset, so it sits on my books as an asset worth $4 million. The realistic price. Otherwise, some banks are big, like BofA - it has a $2 trillion balance sheet, with hundreds of billions in loans and leases. If it did not value it’s assets realistically, it would be risking having a shock down the road when they mature and are not fully paid to them. So they try to be realistic, that’s why their stock price has fallen so much (85%) because the street is wondering just how solid their assets are.
Trouble is, for whatever administration is in the WH, the bankers of the world are hating the idea for the past few years of having to take too many write downs too fast if these assets are declining in value very quickly: they’d run huge current period losses. So, by hook or by crook, they try to write down things over several years or quarters. It reduces their profit in the current period, but it avoids having to take huge losses when the assets mature and wham ! The thing they paid $10 million for sells for $4 million.
Mind you, the government was the originator of the whole mess by forcing the bad loans, but the banks went along with it. So it’s just an ugly process that just has to be allowed to work, no matter how ugly. Not to mention, there’s political pressure both ways at different times (depending on which way the political wind is blowing) to be stricter with the banks or to ease off on them.
see #16
The value of a price and lot is always subjective. But assigning a “fair value” of a lot by an unvested third party is arbitrary. For example, one of the New England states (I think Vermont) adds a “view tax” to the real estate tax on a house when some county inspector notices that it has a nice view. But the market value (what the owner paid for it) would have automatically priced this in.
Gary Schilling (Forbes Magazine house expert)thinks that “Mark to Market” is the valid way to price a property.
The Fed is a “slave” to banks? I don’t think so.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.