Posted on 03/06/2009 6:24:22 AM PST by AJ in NYC
We have been accused of beating a dead horse when it comes to our support for either suspension of, or targeted relief from, market-to-market accounting.
And we suppose after writing thousands of words, producing videos and giving speeches about the issue, some might be tempted to let it go. But we can't do that, especially when the government continues to spend trillions of dollars and is coming very close to bank nationalization.
Article Controls email
reprint
newsletter
comments (59)
share
del.icio.us
Digg It!
yahoo
rss
Yahoo! BuzzThis is a real shame. Suspending mark-to-market accounting could fix major problems at no cost. Unfortunately, many people dismiss this issue without really understanding its impact on the economy.
We are economists, not accountants or bank analysts. We really don't think a debate about how big the housing bubble was, or whether a certain bank is viable or not, is worthwhile when it comes to accounting rules. That misses the point. Mark-to-market accounting rules affect the economy and amplify financial market problems.
The history seems clear. Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.
Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.
Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away.
(Excerpt) Read more at forbes.com ...
I guess I’m just unsophisticated....
What I think I’m hearing is that “The economy cannot survive if we’re forced to tell the truth about the value of our assets.”
We are soooooooooo skrood........
Mark to market breaks down once the assets in question get aggregated to the size that only a handful of buyers can afford or assess the value of the aggregate. When that happens, the market-determined price can be driven as much by psychology as the aggregated knowledge which a large universe of buyers and sellers can bring to bear on an asset.
The problem is that Wall Street has created a mountain of exotic, highly non-transparent aggregates that no one now wants to touch. In this case, the mark-to-market value of those aggregates right now is zero, even though the underlying assets will almost certainly have significant value over time. So a lot of banks are holding assets which have no market value right now, even though the assets backing them will pay off over time.
I’m vehemently against suspension of M2M.
We got into this situation by telling lie upon lie upon lie. Suspending M2M means we are going to ratify, if not institutionalize the action of telling of a lie and we are going to do it for this one priveleged class and nobody else. Every other holder of market-variable securities is de facto M2M’ed every day/night. You don’t have enough $$ to cover stock you own/or are short? You get a margin call. You get a period of time to correct it. You either do or you don’t or you are forcibly sold out/down. Period.
This priveleged class for whom we are talking about suspending these rules has received the single largest pile of taxpayer donated largesse in terms of loans and gifts and bailouts, and has responded in most cases by TIGHTENING credit, by RAISING interest rates on consumer credit, or by shutting down consumer and business credit lines entirely. The result has been a major contribution to the current economic downturn. By the people who were MOST responsible for creating it. WHo have received the MAXIMUM consideration so far.
Forbes? Go F**K YOURSELF. Lower my credit card rate to 5% and then we can talk.
Count me among the nay votes here. Blaming mark-to-market is like blaming math when you find out your balance is 0.
I think we should go to Mark to Model.
The Mark to market has done tremendous that will continue until the markets become normal.
Bottom line is, any asset is only worth what somebody is willing to pay for it at a given point in time.
So if an asset is not "marked to market", what the hell value is it marked to? Mark to fantasy? Who decides?
Count me as a skeptic of suspending M2M. Perhaps this is the one thing this government is doing right so far.
the only other alternative is bank nationalization
Do you have any opinion on whether we should go to Mark to Madoff?
I think some form of mark-to-market is necessary, but it’s really a question of the window of time over which you look at the market’s assessment. If you force the banks to revalue their books at the market close value every day it is possible to greatly misstate the longer-term value of a lot of their holdings.
Some sort of market avergaging over an extended period is probably the correct way forward.
No. We should use fair market vakue. The fire sale nature of mark to market grossly undervalues the assets and forces banks and ogher institutions to take passive holding losses today rather than at the time of performance. It is bad economics.
It may allow you to buy assets at 8 cents on the dollar, such as George Soros has done with Indymac, but that is it’s only use.
Mark to Market materially mistates the value of a long term security during a financial panic and is simply appropriate.
FASB 157 may have been the trigger for this blow out.
“So if an asset is not “marked to market”, what the hell value is it marked to? Mark to fantasy?”
My thought’s exactly..
I don’t agree that nationalization is either an inevitability or the only other option.
First, not everyone has the same concept of what that would specifically mean, and I myself don’t have a specific definition of what it means. Second, it’s de facto in effect anyway. Third, it would bring the toxic assets of the banks directly onto the Fed’s balance sheet, impairing Fed creditworthiness (a term that of course has never even been thought of or discussed before) further and thus likely raising borrowing costs for the Fed, crowding out, even more, private capital from the markets that could use it to promote business activity, and thus feeding the downward spiral. Those are the mechanics as I see them, and maybe I’m wrong.
As for the principles, I want gov’t to frickin’ STOPPPP putting its’ grubby hands into every aspect of the economy.
As for the spirituals, I don’t think the market will view the government overtly taking over banks as a positive event. If they need talking over, are they thus healthy?
I’m willing to listen to the other side, but if the argument for the other side is that housing is really worth 8x median incomes, that car sales should swing back to 15 MM units per year, that every retail strip mall donut shop is a needed component of the economy and that every Toll Bros 3700 sq foot home built in what was a pig farm 4 years ago is really worth $650K and that every banker walks on water, leave me out of it. I will admit my viewpoint can be viewed as perhaps “vengeful” against the banks, but the alternative is that YOU AND I become uncompensated owners of these banks, and I hate that idea.
With current Mark to Market rules in effect, the ong term securities are marked as if ...all long term securities in the country will be sold by the end of business today. And that is incorrect. It’s simply rediculous.
Are you listening ZERO?
Why? What if the assets do need to be sold today? Why would I want to buy a bank's stock, right now, based on some marked-to-fantasy value? M2M means we can look at the assets at their current value, and make our own decisions about prospective future gains.
If I need to sell my house today, it's only worth what someone will pay for it. Why should the bank be able to carry it at some ficticious value, but I would have to take real market value for it? Why should I be able to borrow more against it than it's actually worth? Isn't that how we got into this problem?
Agreed.
What if something is worth zero or close to it today, but tomorrow when there is a buyer it is worth $50,000? An article I read used Boing 737 nose cones. At mark to Market, they're worth 1000 scrap value today. When an airplane needs one its worth $50,000.
There has to be a way to value assets beyond the immediate spot price.
I understand your point, however I don’t think you have a clear understanding of the issue. A significant portion of bank assets are generally tied to loans and held on the books. They reap the loan payments and will eventually realize the loan payoff. They have no more need to value these assets on a daily basis than you have to keep a running balance on the value of your home or car.
Along comes M2M. Now the bank has to value these assets based on the last “like” security sold in the market—even if they have no intention of selling them. Since many bad actors packaged bad loans with good loans, they have all lost their marketability.
A significant portion of banks’s balance sheets are now worth very little... and more than just the banks that deserve it.
Who does this hurt? All of us as bank balance sheets now have artificial holes and a greater need to hold capital rather than use it.
If you priced your home to sell on this date, today, you have to mark it down to half price. If everyone else decide to sell it by the close of business today, you would recieve bids in the 8% of list range. Is this realistic? No, it is not.
The point is that you cannot sell all long term securities that exist in US by the end of business today and to claim that this is somehow an adequate valuation method is crazy.
Fair market value is a better method.
I don't know if that's a valid analogy. I don't think M2M implies scrap value. That's like saying market value for your house is only whatever the scrap value of the lumber, wiring, and plumbing is worth. So yeah, if M2M implies we're valuing real estate at scrap-material value, then I agree it's wrong, but I don't think that's the case.
M2M for a 737 nose cone is what someone will pay for a 737 nose cone, not scrap aluminum.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.