Posted on 03/13/2009 8:09:02 AM PDT by Shellybenoit
Many financial gurus believe the requirement for banks to "mark-to-market" their assets, particularly the mortgage backed securities has put our financial system in the mess it is in today. Mark to market is accounting act of recording the price or value of a security, portfolio to reflect its current market value rather than its book value.
Lets say you were a bank and bought $10 Billion Dollars worth of mortgage backed securities (MBS). The market crashes, and if you were to sell them today they would be worth $1 Billion and you have a paper loss of $9 Billion Dollars. Under "mark-to-market" the bank has to reflect that paper loss as an actual loss. Because you have that Paper loss, you have to take $9 Billion and put it in a "lock box" where you can't touch the cash. It is treated as if the loss was actual. Many large financial institutions recognized significant losses since 2007 as a result of marking-down MBS asset prices to market value. In other words the recent failure of some banks, and the tightness of money were the result of banks having to hoard money as an anticipation of possible losses on paper.
There is a movement building to convince congress to change the Mark to Market practice, which congress reimplemented in 2007 after a 68 year hiatus. One of the proponents of repealing the 2007 law is Newt Gingrich:
(Excerpt) Read more at yidwithlid.blogspot.com ...
If you get rid of mark-to-market, what will you replace it with? The old method of mark-to-what-we-really-wish-it-was-worth was what the bubble market’s house of cards was built on.
You are exactly right...I don’t know what needs to be done, but we can’t go back to the old days before mark to market. You can not trust Wall Street. This has been proven over and over.
Recognizing a loss because of a slip in perceived market value rather than recognizing a loss when it is incurred is a crazy way to do accounting. If it has to be done, maybe try using a moving average or something.
It’s too late now. The assets have been written down by a tremendous amount. If/when the market does bounce back, under no mark-to-market, the banks will not be able to benefit by writing UP the values of the assets. Bottom line: the banks have already taken the down side; changing the rule will preclude them from taking the up side.
Why should hide the value of their assets? If they stuck to buying low-risk, then it wouldn’t be a problem. But the banks always reach and get involved in 3rd world debt, sub prime mortgages, CDOs, SIVs, etc. Maybe the banks will get some market discipline under mark-to-market. Suspending the rule will give the banks free reign to load up the toxic, high yield paper.
One more thing: it is a fairy tale to believe that the banks have written down their problem assets to “market” levels. There are market bids for their toxic stuff, but if a bank sold anything at the lower level, it would have to mark down everything it has. That’s why the TARP, as initially conceived, was doomed to failure...no bank wanted to recognize what their securities were truly worth. The banks are run by people who only care about the next quarter or the next year. They over-levered to maximize their earnings in the short run, and they got handsomely paid. When it blew up, they either walked away and got another job. A prime example is Vikram Pandit. His Old Lane hedge fund was a lot of smoke and mirrors, a highly levered collection of subprime and other crap that generated a lot of carry in the good times. He sold it to Citigroup for $700 million. It is now worth ZERO, but he is running the company.
I’m really fed up with these anti mark-to-market arguments. All they ever boil down to is this: “If we neer look at how much we lost, it’ll be like we never lost it!”
Agreed. Markets in the short term rarely reflect true value. Using a long term average would be better.
That's true in some cases but not most. The people you can't trust are politicians.
Speaking of politicians, I just hope they never develop a mark-to-market method for personal taxes. Can you imagine the loot they could bring in then?
I dont understand what you mean
Does English banks and banks in Europe use Mark to Market?
I may ahve mispoke in this case. I googled Geithner and he claims he isn’t Jewish, although apparently he might be by heritage or some such thing.
The name “Rattner” though I believe is Jewish. No? There is a wealthy and powerful (and liberal) family here in N.E. Ohio by that name, and they most certainly are Jewish.
Beyond treasury secretaries though, look at Fed chairmen: Bernanke, Greenspan, heck, even Volcker. All Jewish.
What’s the chance of that, given that they make up less than 2% of the US population?
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