Posted on 09/29/2008 6:36:40 AM PDT by SE Mom
To a supporter of capitalism and free markets, the current debate over a Treasury Department proposal for a $700 billion fund to purchase illiquid assets, is troubling on many fronts. First, a temporary and targeted change in mark-tomarket accounting rules could help solve the current financial market problems at much lower cost. But this alternative has been dismissed with very little in the way of debate.
Second, when the public hears that the government must save the economy from capitalism run amok, it loses faith in our free market system. In other words, the huge Treasury proposal has accelerated the momentum toward political populism.
And, third, it seems clear that much of the current crisis has been exacerbated by mark-to-market accounting, which has created massive, and unnecessary, losses for financial firms. These losses, caused because the current price of many illiquid securities are well below the true hold-to-maturity value, could have been avoided. The current crisis is actually smaller than the 1980s and 1990s bank and savings and loan crisis, but is being made dramatically worse by the current accounting rules.
Some argue that if we change accounting rules in the midst of a crisis, then investors (especially foreign ones) would lose faith in the US as a safe haven. They add that changing the rules is like sweeping the problem under the rug, which could lead to a Japanese-style decade of lost growth.
However, these arguments do not hold water. Many foreign countries do not have mark-to-market accounting rules like the US. In fact, the lack of transparency in many other countries, especially those with less freedom (just think Chinese banks), is appalling.
(Excerpt) Read more at ftportfolios.com ...
There's so much I still don't understand, but this one thing has me stuck. WHY in the world don't they suspend mark to market?
This article was posted last week- but it seems of urgent importance now- so I'm re-posting it...
It appears- if this one step were taken it would make a multi-million dollar difference.
I'd like to know from our freeper finance gurus, why this isn't talked about everywhere and constantly?
There's a lot more at the link to explain this- very informative.
Finally- IN the bill- it's suggested the mark-to-market WILL BE SUSPENDED.....AFTER...the bill is passed. That suggests to me- there's something dirty here. WHY don't they suspend it FIRST???
WHY isn’t this being done NOW? What am I missing?
bttt
~snip~
Relaxing mark-to-market rules temporarily in the US, let’s say 3 years, for troubled assets issued between 2003 and 2007, will not undermine our standing in the world. In addition, the proposal of a $700 billion bailout fund, combined with the government takeover of Fannie Mae, Freddie Mac and AIG, has already undermined foreign confidence. Just look at the dollar. It has plummeted in recent days. And listen to what foreigners are saying about capitalism, which is now under more fire than it has seen since the 1970s.
Finally, back in the 1990s, Japan took six years to get real overnight lending rates below zero, while the US did it in six months starting last September. Also, in 1989, Japan initiated one of its largest tax hikes in history when it lifted the Value Added Tax from 0% to 5% and the capital gains tax rate from 0% to 20%. The combination of tight money and tax hikes (which killed the Japanese economy) were the real catalyst behind Japan’s lost decade, not just an unwillingness to accept losses. The US is nowhere near this kind of environment.
Another argument for the bailout is that financial market problems are so severe today that public money must be used to solve them, because private money can’t or won’t. This argument is interesting. Where do those who make this point think public money comes from? It doesn’t grow on trees; it comes from the private sector.
In fact, if the Treasury makes a profit on its plan, which some say could reach into the trillions of dollars, then these profits will be made at the expense of the US financial sector. In other words, any profit made by the new government investment fund is just indirect taxes. They are profits that could have accrued to the private sector.
~snip~
That’s the same question I have...why not do it first?! These mark to market accounting rules were the result of the Enron mess. Just one more unintended consequence of what happens when the government gets involved in free markets.
I’m disgusted and truly frightened that we’re headed the way of Venezula.
I just can’t believe that there aren’t still plenty of banks that are solvent and well capitalized. Let the risk takers and irresponsible lenders fail! Free markets will always make the necessary corrections.
Milton Friedman and Ayn Rand should be required reading staring in middle school...I know, fat chance.
I am so depressed this morning.
One reason is the bank assets shrink. Mark to Market was a ploy to increase leverage, reduce bank asset requirements, more money to loan. Result — Mortgage brokers calling you non-stop every day, you notice the silence now. Banks were following the curve of ever increasing home values. And then one day ... If you do it now, revalue assets, big trouble with liquidity at the bank. No one knows how to deal with dropping home values, look at the curves.
At least this is what my banker told be, in simplified form.
Changing the Mark to Market accounting rule from daily over to a multi-year rolling average *will* help banks in the short term, but won’t fix any long term issues like the extreme drought in financial liquidity.
don’t be so depressed
Intrade
US Congress to approve a government bailout of banks on/before 30 Sep 2008
Last Price: 18.4
That’s pretty low
Sorry, but you’re over my head on all of this.
that’s why cap gains tax cuts are important. All of these assets are locked up because it doesn’t pay to sell them
Amen to that, sister.
Smoke and mirrors. FMV is based on what the buyer will pay, not what the seller thinks it’s worth. The bottom line is there’s a buyer strike. Suspending fair market value accounting isn’t going to change the basic dynamic. It’s only going to buy time, which is fine when you’re facing imminent financial collapse (shoes dropping in rapid succession started by a market collapse).
Either way, until the next big innovation that makes everyone’s life easier comes along, we are in trouble.
I just feel a great big BOHICA coming.
I’m listening to Glenn Beck on Miami WIOD 61AM just now. The host that is usually on during this time was pre-empted for some reason. I think he’s kind of a doofus anyway, so no great loss.
Glenn is NOT on board with this bill.
Not really. It's an FASB and GAAP standard from way back; you carry assets at 'fair market value' on your balance sheet.
Because the instititions in question have previously demonstrated that they will abuse the only alternative to mark-to-market — namely internal or privately contracted valuations — to commit outright fraud in their financial statements. A government announcement that they are now free to resume producing fraudulent financial statements based on fraudulently inflated valuations of all these trashy mortgage-derivative securities, would hardly calm the markets.
yes - I forgot what news program covered this topic, but it said pretty much the same thing - just changing the accunting requirements would help matters immensely.
It is a perfect storm isn’t it?
It isn’t just this guy over here or that guy over there - this was a vast set of circumstances that rolled into one huge tidal wave taking down everything in its path.
revoking it would be racist - um - or halliburton
Yep- and listening to our guys in The House this morning- they almost ALL mention suspending mark to market...
And YET...
This is such bullcrap. Did you ever hear of Level 3 assets ?
If you think the banks are marking to market now I have a bridge to sell you. Level 3 assets at all the banks incrased of the last year, every quarter. In case you don't know what they are (go look up a good explanation) most people call them "mark-to-fantasy", ie you make the value whatever the valuing firm wants them to be.
Step back and think. What engenders trust and confidence ? Transparency, or opaqueness ? Banks are having problems because with level 3 assets and games with tier 1 capital ratios no one knows if banks are solvent or not. If you force banks to mark to market, ie make their valuations transparent, then we will all know whether banks are sound or not and can trade or loan accordingly.
Just remember, when people with a clear conflict of interest amounting to hundreds of billions or trillions of dollars of assets say something, it's pretty safe to assume the opposite.
This has just become a game of political football.
Bernanke doesn’t have the authority to enact the fix - but he is alot smarter than all these dimwits combined.
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