Posted on 04/02/2009 10:59:22 AM PDT by TenthAmendmentChampion
WASHINGTON -- The only thing worse than bankers making up accounting rules is members of Congress making them up.
Repeating its blunder from the 1994 battle over stock options, the staid Financial Accounting Standards Board has buckled to political pressure demanding that it change accounting rules. The FASB voted Thursday to ease the interpretation of rules requiring banks and other big institutions to value their assets on a reasonable basis.
The value of the banks' assets is a huge issue for the global economy right now, because banks are required to have a certain amount of cushion to back up their loans. No cushion, no new lending.
(Excerpt) Read more at marketwatch.com ...
“Supply and demand determines value, not the government!”
Oh no, no, no, the stock market determines the value these days. Nothing real about it.
Great analogy.
Only to those that have the correct prayer rug and know the direction of wall street.
Only to those that have the correct prayer rug and know the direction of wall street.
We cannot fall into the Marxist trap that the market is a lottery. The market, the free market enterprise system, preserves freedom and individual liberty.
No bank buys a lottery ticket. The gamble is absurd as is the analogy. During the 1980s S&L crisis the government changed the rules on S&Ls as well as on the tax-preferred treatment of certain investments. These changes precipitated a crisis that was unnecessary and political in nature, not market based.
The same thing is occurring now. A combination of low interest rates (set by government through Fed/Treasury actions), tax incentives on mortgage debt, the government dominated secondary mortgage market, and MtM accounting rules precipitated this crisis. Without government intervention/involvement and meddling in the market you would not have had a RE bubble in the first place.
The presumption that all asset classes have an immediate/liquid market is absurd. There are many classes which are improperly valued if sold in the next five minutes. RE is one of those assets. A bank lends on cash flows, not value. Your down payment isn't as critical as your ability to service the loan.
MtM ignores this and exaggerates the downside. At the same time, in a boom, it can exaggerate the upside as values race up. Loan servicing is the most important aspect of lending, not home values.
I believe changing mark-to-market is a good thing. In normal circumstances, mark-to-market makes perfect sense. But, there needs to be a functioning market to mark to.
Right now, about the only sales for many of these securities are distressed sale prices. Every time the FDIC shuts down a bank or some company is desperate to raise capital and securities get dumped on the market, banks take another hit to their asset valuations - even if those assets are performing. In some cases, the drop in asset values puts them below required capital ratios so they need to go raise cash even though nothing has changed in their cash flow.
I haven’t read the FASB report (and probably wouldn’t understand it) but hope there are some guidelines on modeling assumptions and disclosure for the methods used to value the assets.
Great screen name.
I’m no accountant, but I’m a credit union loan officer and have been for ten years. If auto finance firms had to “mark to market” they would be underwater instantly. Especially on new cars - they lose 20% of their value the instant they’re driven off the lot.
I agree. At our credit union, this is the most important of the three "C's."
Collateral
Character
Capacity to repay
There's nothing marxist about it. All investments carry risk. All of them. That's capitalism 101. The regulatory question is how an institution is required to book its risks. Banks don't typically buy lottery tickets because people actually understand the risks involved and the bank management would have its head handed to it. Call the "lottery ticket" a MBS and instead of a drawing you have some obscure model of credit risk and people think its a sure thing when it isn't.
I'm perfectly fine with a bank owning securitized debt instruments or other ephemeral assets. Where it gets messed up is when the instruments are considered to be capital instead of potential capital. You want to own MBS or other CDOs - great. Only the actual cash flow from the assets can be counted as capital for reserve requirements and not whatever its potential may or may not be.
The nature of private property and free markets, along with basic reason move people to mitigate risk. As I said, the most critical aspect of this kind of asset is cash flow, not the underlying value of the asset itself.
For example you purchase RE for $1 million. It cash flows positively to the tune of $6000/month after Principal, Interest, Taxes, Insurance (PITI). Due to some government regulation you are forced to value the property at $0. What happened?
From the banks perspective nothing as long as you conform to your loan terms. They don't do interim appraisals until it is time to refinance the property. These flows are easily valued and have been for a long time. It is not a confusing process.
The Marxist part of your analogy is this statement: Let’s say a bank buys a bunch of lottery tickets.
No business person gambles. Marxists present the free market as a gamble. All life is full of risks and the best way to mitigate risk is through the free enterprise system. The alternative, which Marxists want and prefer, is government intervention, hence government control, hence our current financial crisis.
More of the same.
BTW here's a quote for you: Gambling is a tax on ignorance - Warren Buffet
Sigh...don't get hung up on semantics...One person's risk is another's gamble. The point is that business people don't have perfect knowledge of the future and have to make investments understanding that they won't necessarily turn out the way they'd hope.
That’s fine...it would be like in my analogy marking the value of the lottery tickets at the sale price of the tickets. The broader point was that having lottery tickets as an investment is probably a bad idea regardless of how you are allowed to mark the value of the tickets for capital ratio purposes.
One person's risk is another's gamble.
You say I am getting caught up in semantics. Your statement on risk is false. Gambling has a net negative return. In a gamble you simply cannot beat the house. The deck is stacked against you. That is the Marxist view and the excuse for their intervention in liberty.
They believe the free market deck is stacked and try to convince people to see it that way.
Here is another quote for you: An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. - Benjamin Graham
I’m not going to have a dictionary debate.
Me neither!
It is just that two other posters thought your example was excellent. It wasn’t. It was Marxist. We need to guard against that, especially since those currently in power view the free market as flawed and in need of government oversight.
Given Obama’s actions in regards to the polticization of GM and the financial industry; his promise to take over/bailout other industries; and Maxine Water’s gaffe on controlling all businesses - well, we better not use their line of reasoning or else we may end up doing their dirty work for them.
I resent this. It's not Marxist to point out that markets involve risk or uncertain outcomes. It is in fact part of the system. Markets go up, markets go down, people make money, people lose money. These are features, not bugs in free market societies.
Secondly, the lines of reasoning used are irrelevant to actual Marxists because they don't use or respond to reason or logic. Their fundamental outlook is emotional and irrational.
Chas Bowsher, FHLB, resigned last week, having no confidence in the ‘easing’ of mark to market standards...*
Thursday, April 2, 2009
Guest Post: FHLB Chairman Disgusted With FDIC Accounting Alchemy, Quits
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Submitted by Tyler Durden, publisher of Zero Hedge
When the man in charge of the second largest borrower in the U.S. is willing to lose his job due to his discomfort with the FASB’s shift in accounting rules, you can bet that the tragic fallout of all the “market buoying” recent events is only a matter of time.
Somehow this noteworthy event, which happened over a week ago, passed substantially unnoticed until Zero Hedge friend Jonathan Weil at Bloomberg dug it up. Charles Bowsher, who was most recently Chairman of the Federal Home Loan Bank System’s Office of Finance and previously served as U.S. comptroller general may be the only truly honorable man in the socialist nexus of politics and finance. The reason for his departure from this critical post - his discomfort in vouching for the banks’ combined financial statements. And as Weil puts it succinctly: “Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?” Why indeed.
If Bowsher was merely involved with some marginal organization, this could be perceived as a hypocritical attempt to score populist brownie points. However, the FHLB is among the governmental entities at the heart of the current problem. Zero Hedge has written previously about the FHLB and its critical role in the ongoing housing crisis, but in a nutshell “The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt — $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook.”
Ah, the poor taxpayer about to get duped one last time. And the immediate reason for Bowsher’s decisions: his concern with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital. And it gets much worse:
For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.
The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.
The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of
Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely.
Bowsher is not new to taking hard political stands:
As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers. (How’s that for prescient?)
Most recently, in 2007, he led an independent committee that issued a blistering report on financial missteps at the Smithsonian Institution, whose board of regents included U.S. Chief Justice John Roberts.
And how does the FHLB spin this event?
“Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks. I don’t think it’s appropriate for us to speak for Mr. Bowsher.”
So: to paraphrase - one of the men who knows the ins and outs of the financials of banks involved in the mortgage crisis more intimately than even Bernanke and Geithner, let alone Obama, is saying that the newly implemented changes by the FASB will throw the whole system into tailspin and he want none of it.
If this isn’t the most damning condemnation of the Kool Aid the administration, the Treasury, the Fed, the FASB, the FDIC, and all the other alphabet soups are trying to make the common U.S. citizen drink and have seconds, then nothing else possibly could be.... of course until Bowsher is proven right and everything collapses into the smoldering heap of defaulted MBS still marked at par on various liquidating banks’ balance sheets...
Oh and yes, let’s hold a moment of silence for Lehman which held billions of mortgage backed securities that it too was “holding until maturity.” Well, Lehman is no more, and all these securities now trade, in the form of the company’s general unsecured claims, at the generous price of 12 cents on the dollar... Furthermore, one can’t say the market is illiquid - the bid-ask spread is only 1 cent. And as there are over $150 billion of these claims floating around, one can’t say the market is in any way limited from a price discovery standpoint.
Maybe if more honest leaders follow in Bowsher’s unique example, the general population will finally start seeing though the everyday lies and misinformation coming out of D.C.
Marxism views the free market, which goes beyond the investment world or the stock market and includes our daily lives, as a gamble in which the worker is disadvantaged by the capitalists (or the house who has gamed the system (meaning the free market) against the worker).
That is their analogy. The market is self-correcting. The current crisis and all our crises from the Great Depression onward have a common element - government political meddling.
Hoover and then Roosevelt made things worse in their interventions. Note that the Democrats response to their meddling which precipitated this latest crisis is more regulation, more intervention and more meddling. No admittance that it was the cause of the crisis. They've also attacked Social Security privatization as a gamble they stopped the Republicans from implementing.
The free market is the most incredible wealth generating machine the world has ever known. Wherever there is intransigent poverty you'll find the absence of free markets and the principles behind them.
As conservatives we should know this and support it. The only reason I responded to your comments was that two other FReepers fell for the analogy. The truth is the free market is the only sure thing if you care about human welfare. Every other attempt to manage human affairs is the gamble and worldwide it is a losers game.
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