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?
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.
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.