One line of thought (not originated by me) is “Don’t Mark-to-Market if you don’t want to, but if you don’t, reveal whatever model you’re using to actually do the ‘marking’”.
If they replace it with the “old” rules (i.e. pre M2M) = good.
If they make up some “new” rules = bad to catstrophic.
The auditing firm has to attest to the financial statements so how do they do it?
He explained it this way: If you are a borrower who pays your mortgage every month right on schedule regardless whether the market value of your property has dropped or not, then you are not a risk to the bank, but Mark to Market requires the bank to retain more money just because your property is worth less, thus depressing money available for lending. Changing this rule will open up the lending spigots again.
Here’s the problem as I see it. Let’s say a bank buys a bunch of lottery tickets. How does the bank value this kind of “investment”? Does it book the sale value of the tickets, the full value of the lottery jackpot, or some model which takes into account the probability of winning the jackpot? It’s a problem inherent in valuing assets which don’t have a fixed value and the more and more meddling in trying to fix a problem like that doesn’t help investors.
It is very GOOD!
The MBS's are valued at 0 right now even though they are producing 70-90% of the anticipated cash flow. IOW, only 10-30% of the mortgages that are bundled together are non performing. If a mark to model approach is taken it would make a lot more sense.
10 years from now I’ll be worth $100 million. Really. And if I’m not, the taxpayers can bail me out. Does THAT sound like a good idea to you?
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.
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.