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 ...
I agree with many of your points, but I would add that there is/was a reason for wanting MTM accounting:
The lies and fabrications of highly elastic accounting had reached a point coming out of the dot-bomb bubble that people wanted a set of financials from a company that they can then put through a (relatively) simple program, come up with some ratios and trends and make a simple, qualitative assessment based on the company’s own accounting.
The complex nature of many of these “mark to model” assets prevents that - simply because the company does not make the “model” software available to investors. If the software that implements then model were available to investors to run and verify the value of some of these illiquid assets for themselves, there would be a bit more trust in the companies that hold this crap on their balance sheets.
The real solution to this crap would be for companies to cease pursuing and buying assets that are absurdly difficult to value. If they maintained their books in easily-understood assets, then we would not have this mess.
And by the way, there is one, and only one way this gets fixed.
And that is by example. Two companies, identical in every respect, same number of employees, gross sales, assets, liabilities...the one that comes out the no-footnote annual report gets a 35%-60% higher market valuation than AsteriskCorp.
It would make more sense to say they have no value!!!
Nailed it!!!
I thought I was arguing that we SHOULDN’T treat apples like oranges??
For firms and economies affected by “mark to market,” pain now in the form of bankruptcy reorganization or liquidation is better than letting impaired assets subvert corporate balance sheets. Firms that want to avoid the effects of “mark to market” need to keep their balance sheets stuffed with cash and cash equivalents — even though that reduces immediate profit taking.
LOL
” it values them on todays LIQUIDATION value which is essentially the foreclosure price.”
That’s all they are worth, they will keep going down for at least 2 more years.
And just tell the depositors that their checks will clear when the bonds mature in 20 years?
Is the loan performing, or not? Is the borrower capable of servicing the loan until maturity without selling any of the real estate?
For commercial real estate, the answer to one or both of those questions is usually 'no', so then the loan is worth what the collateral is worth (minus liquidation and carrying costs).
>>>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.
You make great recommendations particularly on the averaging), but doesn’t it happen that the markets are liquid in good times and illiquid in bad times. Mark to Mark appears to have been invented to report PROFITS in good markets... not LOSSES in down markets.
If there is no underlying tangible asset,then perhaps financial institutions shouldn’t be creating this fictitious transaction— particularly those that rely on the federal government for socializing losses.
Gosh, what did we do in the 1950s in this situation? /s/
This debacle is causing a devastating misallocation of taxpayer funds.
If one is under an IMTM regime, and one holds an asset for which there is no present bid, the regulatory boys and girls can -- and do many times, bet your socks -- insist that said asset be valued at zero for MTM purposes.
This is absolute rubbish, of course. Anything that can reasonably be described as an asset has some positive value. Possibly unknowable, possibly unquantifiable, but positive nevertheless.
Yet, the inherent perversion of today's crop of ''regulators'' waltzes blithely along, ignoring -- even celebrating -- such blatantly obvious idiocies. Instead of attempting price discovery, which is one of THE principal activities of a market, these bozos cling on to their silly rulebook and insist that such-and-so asset has no value because there is no immediate bidder for the asset.
Lunacy. Sheer lunacy.
I'm a futures and options trader; MTM is like breathing in this industry, just a very reasonable way to know where one stands at the end of each day's trading. And, MTM is agnostic about profits or losses -- one's positions are worth a distinct and calculable amount X at any given time, whether they're losing positions or profitable ones.
The problem (well, ONE problem at least) has occurred because MTM is simply not a magic valuation bullet for all investing/trading activities, and is not legitimately applicable in a wide variety of instances where it is now being (mis)used.
If there is no underlying tangible asset (to use your condition), then mark-to-market is simply ridiculous on its face. Whatever lunk thought up the notion of trying to mark 'phantom' assets to market deserves a thorazine cocktail with a valium chaser.
We didn't see this situation in the '50s (or 60s, or 70s mostly) because methods of derivatives pricing weren't sufficiently advanced to allow for the creation of CDOs, SIVs, CRLs and the like.
MTM is designed to give an accurate picture of the valuation of assets that trade freely, not assets that trade perhaps once a year or so.
The solution to firms' keeping (and misvaluing) shoddy assets on the books is to apply a valuation standard that is appropriate to the industry. Most of the S&L debacle of the 1980s was fueled by simple corruption: a parcel of land worth, say, $20,000, was revalued arbitrarily, with a wink and a nudge, to $200,000, and the new (cough) 'valuation' was pushed into the fractional banking pipeline, with the obvious result.
Nor can ''keeping the books stuffed with cash and cash-equivalents'' really solve this problem in many industries. Numerous industries -- building, for example -- perforce deal in physical non-cash assets. Yet there must be, for these industries as for any other, mine included, some valuation method that reflects the real world.
In these cases, mark-to-market isn't it, at all. Many times, for many different physical assets, there is no immediate market, no bidder(s), and the mark -- if one goes literally, as the goobermint regulators do when it takes their fancy -- is zero.
Which is complete rubbish, certainly, but that's what we've come to.
Don't get me started on infinitely flexible accounting ''rules'', or what I call ''feed-the-pig'' accounting. These are at least as responsible as derivatives for some of the financial fiascoes we've seen of late, and they should be excised wholesale from accountancy. Starting Monday. Grrrr!
Excellent commentary, and thank you!
TJ Rogers recently wrote up a little piece on how MTM rules had created a set of financials for Cypress Semiconductor wherein TJ could not even answer an investor’s simple question: How much ‘cash’ do you have *right now*?
When TJ found out that he had to look in at least three different places on the balance sheet to come up with “where the cash went” from the pre-MTM days to the “MTM today” accounting, he was furious.
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