Posted on 03/12/2009 1:02:14 PM PDT by ari-freedom
Mark-to-market accounting rules were intended to bring transparency and order to the bookkeeping at banks and other large businesses. In theory, the rules are prudent. In practice, the rules are doing more harm than good, and current congressional efforts to reform them deserve consideration.
The problem is this: Under mark-to-market rules, a bank must readjust the value of the assets it is holding to reflect current market prices. For some kinds of assets — especially mortgage-backed securities and other real-estate products — those market prices have declined well past the point at which the banks would agree to sell them. We are reflexively skeptical of any argument that there is a “real price” that is different from the market price, but in this case the distinction is plausible. These assets generate income, and that income makes them worth more to the banks than buyers on the market would currently be willing to pay. Under the current rules, that doesn’t matter, and the assets’ value has to be adjusted to account for what the rules describe as a “hypothetical transaction at the measurement date.”
Real market prices come from the interaction of a willing buyer and a willing seller, but the current mark-to-market rules deform that familiar arrangement into “willing buyer, unwilling seller.” It doesn’t help that for many mortgage-backed investments, there isn’t much of a market to generate prices: Some of these securities simply are not widely traded and are not intended to be; in other cases, the markets have been attenuated to the extent that there are no willing buyers. Both of these conditions make the calculation of “market prices” an exercise in fuzziness.
(Excerpt) Read more at article.nationalreview.com ...
Awesome, finanical eminent domain.
Joy, we will now get gov’t backed deals for private equity companies. Our Gov’t will end up supporting and financing the risk.
Not gonna be good. I like the idea of knowing a price and choosing to purchase it at the 'market' rate. If they decide not to sell at that rate, well tits up.
Harm to whom? The crooks? I'm in favor of mark-to-market, simply because it will force banks to be more careful when choosing the instruments they want to invest in.
I’ll probably get a lot of grief for saying this but I like Mark-to-Market ,, it keeps the banks honest ,, too bad honest books are seen as a problem by some... Quite simply the banks brought MTM on themselves because trading worthless securities and land deeds back and forth between two failing banks at inflated valuations was (and still is) a favorite way to pump up a balance sheet at an otherwise bankrupt institution ... We need a way to properly value the untradable instruments but I want to keep MTM.
I don’t know, all of the posts so far have been in favor of keeping Mark-to-Market.
well, I liked the economy we had before mark to market. It was fine for decades and now it collapses after one govt regulation?
yes but this (against MTM) is now the official position of the National Review
Cheating on the books by trading worthless instruments works because bank “A” sells or trades instrument “A1” to bank “B” for instrument “B1” , both banks show a sale of lets say $10M and a purchase of $10M and with the magic of reserves they fixed $50M of bad balance sheet entries with no real outlay of funds. Ask McCain about a few of his fave AZ thrifts that went BK during the S&L crisis after playing that game for years...
I think the problem is that most people (including me) don’t really understand exactly what it does. I admit, my husband has explained it to me several times, and while he’s talking it makes sense, then later...well, maybe I’m just old. All I can say is that the person whose opinion I value most on financial things says that if they don’t change mark to market we are going to continue to have troubles. If someone here who knows something about the financial industry other than “bankers are bad and they are crooks” I would like to listen to an opposing view.
I liked the economy we had before mark to market.
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The banks would still be just as bankrupt with or without MTM ,, trying to re-inflate the bubble won’t work,, the problem is that what they own truly is near worthless. Perhaps we need tiered rules for different asset classes based on expected number of years to payback or profitability but I’m for books that reflect reality...
Mark-to-market rules are also there for regulatory net capital purposes and regulatory net capital rules are there to protect customer funds. “Regulatory” net capital should not be confused with comonly known terms equity or net assets. Banks and some other types of institutions are requred to maintain a certain level of “regulatory” net capital based on the amount of customer funds they are holding as a safeguard for those funds and, as such, regulatory net capital generally consists of only liquid assets, which is one reason why they use mark-to-market.
I think keeping Mark-to-Market reduces the chances of another disaster, like we’ve seen from happening again. Remove MTM, and we’ll go through this crap all over again down the road.
I’m very skeptical of govt regulations. I don’t want bureaucrats in charge over this economy.
MTM is causing problems but the real problem is that the BANKS ARE BANKRUPT AND THEIR ASSETTS STINK. MTM wouldn’t have prevented the real estate bubble or the following collapse because the valuation of the assets was all wrong because of the ratings agencies putting them at investment grade. There was corruption at all levels , nobody was doing their job they just kept the party going...
The best solution is to let the BK banks go BK ... There also needs to be a roadmap , right now would you buy something knowing that the gov’t may seize it a month from now at half the price or would you sell something if you might have some schmuck at the fed gov pay you far above what it’s worth next year?
The Fed Gov created the RE bubble and the resulting banking crisis , they need to fix it by letting the banks go bankrupt and by buying the toxic assets. More than anything they need to announce “A” plan (not a plan a week) and stick with it.
so how come the economy was just fine all these years before MTM? All the growth of Reagan, Contract with America, Bush...just an illusion?
I don’t want them doing much of anything. I want a life where I rarely think of the govt.
I agree about letting the banks go bankrupt, even tho my husband works for one of them. I think in the end things would work their way out. I might need a nice refrigerator box tho....LOL
But all of this happened WITH MTM (that keeps reminding me of the Mary Tyler Moore show thing where the kitten meows!)
Blaming MTM is just shooting the messenger.
well now we’re talking about banks going bankrupt and nationalizing them because people believe the govt can regulate more effectively than the free market.
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