Posted on 03/18/2009 9:40:45 AM PDT by TigerLikesRooster
Eureka! The Banking Industry’s Problems Are Solved!
by Mike Larson 03-13-09
Mike Larson
Who knew it would be so easy? Who knew we could solve the banking industry’s collapse by simply changing how we account for assets. Eureka! Problem solved!
That seems to be the conclusion Wall Street came to earlier this week, judging by the reaction to Fed Chairman Ben Bernanke’s comments at the Council on Foreign Relations on Tuesday. During that speech, Bernanke weighed in on “mark to market” accounting, saying the following:
“The ongoing move by those who set accounting standards toward requirements for improved disclosure and greater transparency is a positive development that deserves full support. However, determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loan loss reserves over the cycle.
/snip
What Bernanke did is shift ever so slightly toward the position of the banking industry’s apologists. These lobbyists, assorted policymakers, and pundits (including folks like Steve Forbes, who wrote an Op-Ed in the Wall Street Journal the other day), are arguing — once you cut to the chase — the following …
The problem with the banks isn’t all the crappy securities and loans they’re loaded up with.
It’s not that they took on too much excessive risk, lending against assets whose value is plunging.
It’s not that they funded asinine private equity deals, stupid commercial construction deals, and dumb home purchases.
/snip
There’s just one problem …
Pretending Something’s Worth More Than It Is Doesn’t Change Reality!
(Excerpt) Read more at moneyandmarkets.com ...
Ping!
Mark-to-Market was apparently worong-headed to begin with- am I to understand that they don’t want them to change that?
What interest do liberals have in keepin mark-to-market???
“What interest do liberals have in keepin mark-to-market???”
Could it have anything to do with stealing money or hiding fraud?
Two set of books, yeah that will fix the problem.
The problem here is the author has it backwards.
There’s just one problem …Pretending Something’s Worth More Than It Is Doesn’t Change Reality!
What "Mark to market" does is force us to pretend that something is worth less than it really is. That's the reality that's killing the banks.
Here's an example. Let's say you're a bank and you've written a $160,000 mortgage loan to a family on a $200,000 home. The family is current on their payments, and intends to live in the home for many years. But market forces in that area have reduced home values by a third. Again, this loan is performing. The family intends to stay in the home and weather the market, and they are paying their mortgage.
Still, under mark to market, the value of your loan asset (backed by the collateral of the home and property) is now $133,333. Asuming that the family has paid $10,000 of principle to date, as a financial institution, you still have to "write down" the value of your asset by $16,667.
So, nothing has really changed. There are no changes in cash flows. There are no changes in the terms of the loan. There is no evidence that the loan will ever default. Still, the bank has "lost" money (on paper only) because of the market.
Mark to market forces every bank (every corporation, actually) to assume that they have to liquidate all their assets today at "fire sale" pricing to establish the value for their balance sheet. They have to pretend they will sell these assets at today's market, not hold them and find a reasonable buyer, or hold them for appreciation.
Pretending that things are worth more than they really are is bad. But pretending that things are worth much less than they are is equally bad. Mark to market went too far and now forces companies to understate the value of many assets, causing paper "capitalization" issues that don't always reflect reality.
What a freakin DOLT!
(not you Tiger!!!)
Mark to Market is the root cause of all of this.
Mark to Market ALLOWED and ENCOURAGED these investments because they wer GOING UP (WAY UP).
Once the bottom fell out - they were worth Zip.
The “old rules” allowed for an objective review of the instruments value and exactly HOW the institutions were valuing them! (responsibly - recklessly - etc...) Based on that, a lender could determine risk.
With Mark to Market, there was now objective review!
Further there was no mid to long term investment. Every decision was based on short term returns.
I saw this explained very well în a great english blog a while back (http://eureferendum.blogspot.com/) - but can’t find it now, must have been in October.
Paraphrasing,
A rancher has a herd of 100 cows. If asked how much they are worth - he could, under the old rules, use historic values, and the amount he could expect at some time in the future when sould for slaughter, etc....
Under Mark to Market - he must set thier value to what he could receive on the market at that time. Lets say 1000 Dollars / cow.
So, today, March 18, the ranchers herd is worth 100,000 Dollars.
Tonight, the Pres__ent announces that BSE has broken out in the US and that no cattle can be sold.
What is the value of the ranchers cattle on 19 March?
Mr. K wrote:
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If the banks were back functioning and lending, there would be no need for national health care, green energy and all their other pet projects. Not that their projects have anything to do with "solving" the real problem. But if they say they are trying to help that problem, anything is possible. Most people are that gullible and will give them a chance.
Keeping mark to market:
Preserves the fantasy that Sarbanes-Oxley is good legislation.
Puts banks into a downward leverage spiral that will let the government take them over.
Contributes to the overall devaluing of capitalism.
Here’s another example. Pretend you have a “tranche” of triple-A rated mortgage securities and twenty percent of them are either in foreclosure or on their way there. After one year.
Actually, no pretending is necessary. This is a typical, documented example.
>Pretending Something’s Worth More Than It Is Doesn’t Change Reality!
Tell that to Congress. [/sarc][/cynic]
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