Posted on 09/30/2008 3:55:05 PM PDT by flyfree
"John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets. In March, John McCain called for a meeting of accounting professionals to discuss whether mark-to-market accounting was magnifying problems in the financial markets."
(Excerpt) Read more at corner.nationalreview.com ...
If the market recovers, this issue may make a good campaign ad.
Bump for great justice!
Yup. I bet the Democrats and the media are doing all they can to keep things looking gloomy until November 4, though.
This accounting manipulation is simply stupid non sense. To abandon market-to-market will not save your mortgage. It’s just bizarre. Illiquid assets are illiquid, they won’t simply be converted into to a number above its current market price simply because SEC changes its rule. If people have to withdraw cash from the banks, they have to liquidate those assets based on market value!! Can they go to SEC to ask for a value based on this new rule!!!???
Market-to-market valuation has nothing to do with current crisis. Government and SEC should stop counting on this accounting gimmick to save their day!
The Bush administration already has all of the tools it needs to correct the crisis on its own. The Treasury has a trillion dollars available already to buy up bad paper, and the SEC has the power to fix the market regulations freezing liquidity.
This is McCain’s opportunity.
He called for Cox to be fired and was criticized for it.
But I think he was right, actually.
And he can take it further.
He needs to come out and accuse the Bush administration of fear mongering, declare the bailout a scam and the crisis as manufactured.
It would instantly make him a hero to both conservatives and liberals alike, and end this election.
This would be McCain’s ‘Sista Souljah moment.’
Could you maybe explain your comment in more depth?
Someone please change my example and make it right if it is wrong.
Mark-to-market has a great deal to do with the current crisis.
Banks have been forced to mark their books to market for many years. If an asset suffers a temporary decline in market value (which almost all assets do), market value accounting requires the loss to be recognized immediately, whether the bank has any intention of (or need for) selling the asset or not.
When banks write down their assets because of mark-to-market, their equity capital takes an immediate hit, reducing their capital to asset ratio. When the capital to asset to ratio declines below a pre-determined limit, usually 4 percent, the bank is considered insolvent, even if it can meet all its current obligations.
The problem with mark-to-market is that it makes a company’s financial position very volatile. Most economists recommended keeping two sets of books: a book value (historical) set for accounting for what the firm originally paid for the asset, and a market value (current) set for seeing what the firm’s position would be if it had to liquidate immediately. That is why both Paulson and Bernanke have said that the collateral behind the failing assets is worth something, they just don’t know how much, since the value will fluctuate with the passage of time.
When the firm’s position is based solely on the current whims of the market, increased volatility is inevitable. With that increased volatility come more failures.
Most of the things that need to be done can be done by the SEC, the Treasury, the Fed, without congressional involvement.
According to the McCain campaign, the Freddie/Fannie bailout already gave the Treasury the authority to extend $1 billion in credit to buy up these bad mortgages.
Bush and Paulson didn’t need to go to congress.
They got greedy and power mad, so they’ve been fear mongering with a high-pressure sale on congress to give them unlimited, unchecked power to loot the treasury for Wall Street on their way out the door.
Even the Clintons only stole the drapes and chandeliers.
It’s time for McCain to step up and call Bush out on this.
Not to me, but thanks.
Disagree.
I paid 320K for my house. If I had to sell it by COB tomorrow, I probably couldn’t get 200K. If I had to sell it during October, I could probably get $250-275K. If I could sell it any time I found a buyer during the next 6 months, I could get $330-360 (according to a realtor I know).
The time frame you have to sell something has significant effect on its market value.
You are absolutely correct. Another way to hide toxic assets in balance sheets. Sen. McCain is terribly wrong on this one. We need transparent balance sheets, not another way for greedy execs to cook the books for big bonuses. Can you say, “Franklin Raines?”
You are correct in saying that the book value is not necessarily related to the value of the item today. But it does have usefulness in that it is supposed to reflect the historical value of the item. We really need both pieces of information, the book value and the market value, to make an informed judgment about how healthy the firm’s finances are. That is because of a Pilate-type question that few in finance ever really think about: “What is something really worth?”
If we always say “market value,” then our answer will change almost daily. If we say “book value,” then our answer will never change. It’s a financial economist’s nightmare.
This is something that might keep you up at night (read on at your own risk). Enron was run by scumbags who lied to their investors, their customers, and other stakeholders. After their sins were partially exposed, the house of cards that was Enron crumbled and many people suffered misery as a result.
What would have happened had the scandal never broken? Could the executives have shored up the company while continuing to juggle their contracts and keeping up appearances until the market moved their way? Not in Enron’s case, since they were way too overextended.
But what of other companies that suffer temporary reverses or even engage in illegal activity? Like an embezzler who could eventually repay the money he has stolen, the company might eventually recover without anyone suffering or getting the wiser.
The trouble seems to be that human nature just finds it too tempting to keep on deceiving and skimming off more. But I could tell you tales of companies that should have been exposed and ruined, but were able to get their acts together and were turned into going concerns again and other companies on which the trigger was pulled too early (sometimes to hand over the keys to a predatory investor). Are the gains from perfect transparency worth the costs of business interruption and job losses? I think they probably are, but also think that we are seeing the beginning of a massive backlash against Sarbanes-Oxley.
For later.
If you have a bond that generated the following cash flows:
Jun: $10.0M
Jul: $9.0M
Aug: $8.5M
Sep: $8.4M
But it had not traded for several months, is it worthless?
Mark To Market accounting may make you write off that asset to $0.00 if it has not traded. Valuing an estimate of the cash flows would put the value of that bond in the tens of millions.
Which is true? If you had the aforementioned bond, would you sell it to me for $1? M2M would say it is worth $0.00. If you won’t sell me that cash flow for $1.00, then you are wrong.
Sounds like the banks got overcommitted in real estate.
I know nothing about mark to market, but it seems there’s an expert out there for a dozen different plans. I’ve listened to a lot of them and some are saying the mark to market rule should be suspended in order to get money “unfrozen.”
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