Posted on 12/26/2008 2:52:48 PM PST by SeekAndFind
The last time I looked I couldn't find mark-to-market accounting in the Constitution of United States. It must be the eleventh commandment because it's obviously sacred. I understand the President has the authority under the Emergency Powers Act, or some such legislation, to suspend the Bill of Rights in case of national emergency. Well, we have a national emergency, so mark to market must be more important than the Bill of Rights.
If a foreign power destroyed a fraction of the wealth that mark-to-market accounting has the past year, we'd go to war. I'm no accountant, but, as I understand it, mark to market is part of what they call "fair-value" accounting; it must be fair.
If so, I have couple of questions. What's fair about a financial institution being put out of business because small portion of its bundled assets become impaired and the whole bundle must be treated as a loss? How is it fair that an expected loss of a few thousand dollars a few years from now, in some cases, must be treated as loss of millions in the here and now? If a small number of mortgages behind mortgage-backed security become impaired, or potentially impaired, why must the whole bundle be written off? If I have a sack of apples with a couple of bad ones, throw the bad ones away -- not the whole sack.
More questions: If the "impairment" results from lack of liquidity because markets aren't working, why can't banks simply hold on to their securities -- until maturity if necessary? Why must they assume a fire sale at fire-sale prices for something they don't have to sell? If some of the impairment results from actual losses on the underlying mortgages, why can't they write off only that portion of the impairment?
(Excerpt) Read more at spectator.org ...
For items that trade only once or twice a year, immediate mark-to-market is ridiculous procedure for evalation, guaranteed to mislead, and unfairly destructive of capital to boot.
Mark-to-rolling-average, perhaps a 2- or 3-year average, is what is necessary (and fair, too) for these and other illiquid and semi-liquid assets.
Apparently, though, either:
1) the ''experts'' and the hot-shot quants can't figure out this remarkably simple fact, or
2) those who decreed mark-to-market for normally illiquid assets have an agenda of stealing property at fire-sale valuations, economic conditions be damned, or
3) those in power have an agenda to punish certain financial institutions, qood possent, or
4) All of the above.
Typo, sorry. Should be ‘possunt’, not ‘possent’.
They should have done this first.
Its been a while since I’ve worn a green eyeshade, but in a falling market how is this any different than the traditional LCM approach?
Mark to Market makes no sense for real estate holdings.
Mark to Market doesn’t value the assets on todays value - it values them on todays LIQUIDATION value which is essentially the foreclosure price.
It’s irrational and it is forcing banks to horde money to avoid being illiquid and having the short sellers start another feeding frenzy.
Mark To Market needs to be decoupled from real estate assets. It’s current interpretation is killing real estate and preventing recoveries in markets which could be going up right now if not for stupid lending policies.
The explanation is right there in the third paragraph.
Banks are forced to treat a bad loan as though the entire amount of the loan is $0. In actual fact, the loan was backed by a real estate asset. The ACTUAL loss is the difference between what was lended and what the underlying asset is worth. But with current accounting rules, real estate assets are treated like equities. It essentially makes the idea of collateral pointless from an accounting standpoint.
The value of assets varies from moment to moment. Mark to market seems a reasonable basis for evaluation but it is not.
The revelation is that there is not adequate means to manipulate all the variables instantaneously arrive at a meaningful value.
In a declining market, there is the appearance of disaster when in actuality there is none.
The asset value is only real at the moment of sale.
BS
The SEC made an adjustment to mark to market rules but evidently did not do enough...so call, email and jack up the SEC to get more changes done now is the best thing...as the Dems may still be celebrating for months after the inaugeral and nothing will get accomplished right away. It is important, and tell them to reinstate the uptick rule as well.
If I had to summarize the issue, I would describe it thus:
Investors want something more trustworthy than just management estimates of the value of complex securities — so they would like an outside market-based reference point — but the very complexity that makes these contracts hard to value as an outsider also tends to make their markets illiquid and volatile, making it difficult to get a good market value.
Top accountant Tom Selling addresses the problem of accounting for the value of credit default swaps. He makes what seems to me to be a common sense suggestion:
Requiring the asset and liability sides of derivatives to be separately measured and reported seems like an amazingly simple fix that could simplify regulation of the financial and insurance industries, reduce the need for the disclosures in financial statements written so as to
discourage one from reading them, and help investors more easily assess risk.
This certainly seems reasonable to me. When one buys a revenue producing asset with debt financing, the two are listed separately as an asset and a liability, rather than as one “net” asset, even though they may be inextricably linked (say if the asset is collateral for the loan and the loan has high pre-payment penalties).
One regional bank is demanding fresh real estate values every six months. It’s a race to the bottom or zero which ever comes first.
As an owner of RE, you are so correct. Yes, I have a small % of debt on that RE, but my bank must look at it as if there is no value, at all, of the RE. Which has made my life interesting, and damned messed up. The next few months are shaping up to be worse. Oh Boy, I can't wait.
MOgirl
Stop that, when you have accounting that is tailored to management you have no accounting standards. You have an Author Anderson, accounting should be accounting and management, should be management. One reports on the work of the other.
**In the above nose cone example, if mark to market accounting is used, no spare parts trading company will replenish supply once their nose cones are sold.**
Nose Cone 1,000
Gain on sale of Nose Cone 49,000
Don’t know about you but I would replenish. In fact if the company only made nose cones it’s income statement would look much than if they was valued at 10,000.
I’m of mixed mind on this topic.
The “value” of a piece of property for lending and/or market purposes is nominally determined by a professional appraisal, which is done on three differing methodologies. 1: Replacement 2: Comparables 3: Cap rate.
Under the “replacement” method I consider a piece of developed RE to consist of 5 broad components: 1: the land. 2: the raw materials req’d to build the structure 3: the general labor 4: the supervisory load & the permitting process; 5: The carrying cost of the loan/opportunity cost of the down pmt during the construction thru permanent financing phase.
If you were to compare the sum of all those elements between say 2004 and now, you would find that land values declined reasonably dramatically, raw mat’ls declined a fair amount, general labor declined, 4: permitting stayed about the same, and carrying costs (for CONST) loan probably skyed. So, one would have to assign a percentage-of-total to each of the 5 general parts and degrade or upgrade them accordingly. As land is typically in the 30% range and materials are in maybe the 20-25% range, replacment costs are probably down by maybe 20%.
As for comparables, those are obviously whacked.
Cap rate calcs have a lot of starangeness in them, as loans may require MUCH more downpayment, rents are decreased for many commercial tenants, and there is a much larger window for rent default.
Current marks reflect seriously reduced demand for the final product, increased difficulty in financing same, a general loss of marketability for the debt, uncertainty as to the ultimate value of the collateral, and worsening cashflow from rents. Anything good about this picture except “we hope it will get better”?
The fact of the matter is that when giant corporations such as FNM, FRE, GM, F, AIG are being vaporized in mere minutes; ratings agys such as Moody’s, Fitch, and S&P have demonstrated either/both collusion to prop asset values or flat out negligence, giant banks such as Citi and corps such as GE have had to pay 600 or more basis points over LIBOR or Fed funds, the market has every reason to regard
current conditions as “dodgy” in every respect. Let’s not forget the Fed’s willingness to invent preferred stock and jam it in ahead of what we might own as a matter of course in its’ unpredictable and ad hoc machinations.
Now, many suggest that these entities have just been snarked and that the markets will come back of their own accord. Maybe. All of them? How’d that happen? We are already giving these cos gargantuan benefit of the doubt via bailouts. Now we’d further like to pretend their futures are rosy because they’re being run by skiled folks....who DIDN’T see this situation coming....whose execs have universally grabbed as much as they can on their way(s) out the door...and it isn’t enough...?
Play any accounting games you want. The market is telling the truth about these pigs and the value(s) of their assets A HELL OF A LOT MORE than the folks who claimed the crisis was “contained”, that FNM/FRE/LEH were “adequately capitalized”, that the $700 billion in the first bailout would be used to buy “toxic mortgages” and seventeen other pieces of bulls**t that have been flung at the US taxpayer, who’s ultimately on the hook for all this Fed/Tsy/congressional largesse.
Long ago and far away, many were screaming that the lack of transparency in debt tranching and derivatives would lead to this situation; that the opacity so pumpalicious on the way up would bite like a rabid dog on the way down. Apparently, there is still no widespread desire to listen to the adults in the room.
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