Mark To Market Hocus Pocus

FCN ^ | 3/12/09 | Nicholas Benton

[FromLori]

It is sheer madness that Wall Street types insist some changes in the rules of accounting can turn around the global economy. Fixation on such exotic notions as the mark-to-market and up-tick rules only perpetuates the "smoke and mirrors," and completely misses the mark on what's really wrong to begin with.

The typical Wall Street operative, like an accountant, has as his life's objective evening out balance sheets to conform them, among other things, to investor expectations. Therefore, if there are rules that make it hard for that to happen, there are howls to change the rules.

It has been by following stock market and typical accounting principles that many U.S. newspapers, for example, are now on the brink of bankruptcy. Faced with shortages in revenues, newspapers cut non-revenue generating costs. So, newsrooms were gutted while preserving advertising sales staffs.

What accountant can figure the true value to a newspaper of a good reporter? All the accountant sees is that the reporter is taking a salary, and not bringing in revenue.

[don'tbedenied]

This guy doesn't know Mark to Market from Markey Mark.

He writes in a bizarre one sentence paragraph style.

If he believes what he's writing he should have an off the grid home stocked with food and guns.

[tallyhoe]

Since our economy drives the World economy I believe that if we had had mark to market changes in late 2007 the markets would not have dropped the way they did. It was banks inability to correctly discount their mortgage portfolios that caused the banks to falter!

[Retired COB]

This idiot thinks he's smarter than Steve Forbes. Forbes says it needs to be changed back, and I'll take him at his word.

I do have to confess I voted for him in the primary against George Bush because I thought he would have made a better president....and I was right.

[incredulous joe]

“This guy doesn’t know Mark to Market from Markey Mark.”

LOL.

While I have learned a heck of a lot more about economics in the last year than I had ever planned to, can anyone encapsulate what the term “mark to market” means for the layman?

I hear it kicked around quite often, but no one stops to say exactly what it is.

[alecqss]

MTM puts markets ups and downs on steroids making them into bubbles and busts respectively w/o much relation to real money flow.

[444Flyer]

Ping

[alecqss]

anyone encapsulate what the term “mark to market” means for the layman?

If, for instance, their collaterals increased in market value, banks all of a sudden find their balance sheets flush with money. If move is in opposite direction - their balance sheet says their are bankrupt. With exactly the same money flow and owned assets.

The consequences are harsh in both cases. When paper show increases it forces everyone in the same direction - disregard long-term view and move into bubbling assets (increasing the bubble to the biblical proportions).

When bust, it causes all sorts of liquidations complemented by shorts driving bank into the ground.

[Attention Surplus Disorder]

"The typical Wall Street operative, like an accountant, has as his life's objective evening out balance sheets to conform them, among other things, to investor expectations. Therefore, if there are rules that make it hard for that to happen, there are howls to change the rules."

I'm always irritated to hear this kind of specious argument format:

[stupid, unfounded premise} followed by the word therefore

Even though I am against repeal of M2M accounting, folks, it is IMO 85% likely to occur. Our congressites see this as a golden opportunity to deflect blame elsewhere. The result is mightily precidtable: Banks, insurance companies will sky. After these rules are relaxed, they'll be able to crow as to the effect of their actions on the stock market. Make no mistake about, banks will ramp BIG time if they repeal M2M. Disclosure: Long XLF.

[Malesherbes]

If not Mark to Market, then Mark to ... what? That pesky market - as in the expression “free market” - has become an inconvenience. Last night on Fox, the great economist Mort Kondracke said it should be Mark to Intrinsic Value. Great, now who is going to define “intrinsic value?”

[ChessExpert]

Gimme that old time liberal religion.

This is pervasive throughout the economy, where since the 1950s, wealth gradually became redefined away from the ability of an economy to sustain a rate of improved standards of living, as measured from a second derivative perspective.

Yes things were so much better during the 1930s and 1940s with the depression and world war II. Six years into the new deal the unemployment rate was 19%. Wonderful! People were able to learn what really mattered in life.

But escalating out of control since the Reagan revolution of the late 1970s,

Reagan was voted into office in 1980. He was sworn in in 1981. Timing aside, let’s blame Republican prosperity one more time. I think the author missed blaming the roaring 20s.

With the help of credit (a.k.a usury)

How medieval. Is lending a sin again?

This isn't some cyclical recession that will turn around later this year. This is, for the entire planet, veritably an apocalyptic age, marking a reckoning of decades of unparalleled speculative excess, with no end in sight, short of either a global conflagration and new Dark Age, or a massive revival of an alternative, real value-based set of policies and practices that would be a Wall Street nightmare.

Who will determine the “real value-based set of policies and practices” that we need? In BHO we trust?

It is a mistake for anyone to take cheer from “a Wall Street nightmare.” A nightmare for Wall Street becomes a nightmare for main street.

[ChessExpert]

“This guy doesn’t know Mark to Market from Markey Mark.”

LOL

[texmexis best]

I can’t really add anything to that explanation other than that MTM forces banks to take passive holding losses on long term securities that are used for reserves.

The required reserves are about 12.5%. That means that a bank can loan 8 times its assets values (approximately). An error in valuation, say too low valuation in MTM, creates a lending problem that is 8 times the error in valuation. Which can have, as we now see, a huge effect on companies who have a need for working capital at various points of the year and an additional problem for companies that wish to expand their operations.

If you had to sell your house by 4:00 PM today, what would it be worth? Much less than you paid for it. The mark to market rules force banks to value all long term securities as if all long term securities were going to be sold by 4:00 PM today, and obviously specious method of valuing securities that are being held for reserve or other long term reasons.

Hopefully, we will modigy Mtm valuations or use the older method of fair value or mark to model. MTM has been a disaster.

[texmexis best]

I agree.

[ChessExpert]

“can anyone encapsulate what the term “mark to market” means for the layman?”

As a fellow layman, I’m learning this also. It seems to be a move from a historical to a current market valuation for your balance sheet.

If you owned ten condominiums (A through J), their book value would normally be what you payed for each. If you sold one (condo C) in a depressed market, that would be reflected in your balance sheet - but just for that one condo.

Under mark to market, you would have to drop the valuation of all the condos, the one you sold and the nine you kept. So you take a real hit. If you are a bank, your reserves just went through the floor. You may be violating the law, so you’d better act quickly. Banks and other financials rely on leveraging. So the harm has been multiplied many times further. That’s a simplified explanation. I hope I’m right!

[texmexis best]

The author has had a very poor business education. He simply does not know what he is talking about.

[ChessExpert]

“If not Mark to Market, then Mark to ... what?”

Mark to purchase price?

[texmexis best]

Mark to fair value.

[ChessExpert]

What is fair value?

[ChessExpert]

Thanks for the write-up.

I talked with my wife who has a degree in accounting. The basis is what one payed for an asset. The fair market value is what you would get for selling that asset today (to a disinterested third party). I think that is pretty solid.

I’m not sure if there is a difference between using fair market value and marking to the market (mark to market). I just don’t know.