To help banks, some suggest rewriting accounting rules

The increasingly angry debate over "mark-to-market" accounting rules for banks may be coming to a head.

All year, many bankers have asserted that it was unfair that accounting standards required them to value mortgage securities they own at market value. The frazzled market, they said, was unrealistic about the long-term worth of those assets.

Markdowns of mortgage assets have, of course, devastated the finances of leading banks.

Some in Congress who agree with the banks now want to suspend mark-to-market accounting altogether and give lenders much more leeway in valuing mortgage securities at levels that, in theory, more realistically reflect what the assets will return over time.

Accounting purists say a rule change would raise the risk that the banks would resort to fantasy accounting -- "mark-to-make-believe" -- that would overstate the value of their assets to investors. Remember Enron Corp.?

The first version of the $700-billion financial-system bailout bill in the House included a passage giving the Securities and Exchange Commission authority to suspend mark-to-market accounting in specific instances in which the agency "determines that it is necessary or appropriate in the public interest and is consisent with the protection of investors."

Some House Republicans are pushing harder to change the rules. The Republican Study Committee, a group of House conservatives, has proposed suspending mark-to-market accounting until the SEC "can issue new guidelines that will allow firms to mark these assets to their true economic value." These conservatives' votes could be crucial in the next go-round of the bailout bill.

Former House Speaker Newt Gingrich, now a fellow at the American Enterprise Institute, on Monday published a piece on Forbes.com entitled "Suspend Mark-to-Market Now!" Read it here.

On the other side of the debate are many accounting experts and investor advocates. They say it would be folly to give banks more discretion in deciding how to value assets simply because they don’t like what the market is telling them.

The Center for Audit Quality, an advocacy group for the accounting industry, issued a statement today urging Congress to reject any suspension of mark-to-market rules.

"The principles of mark-to-market accounting are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital," the group said. "In our view, investor confidence would be undermined by efforts designed to mask the actual value of financial assets at a given point in time."

Mark-to-market accounting "did not create the economic crisis," the group said. Rather, the rules have "contributed positively to revelations about the severity of the economic crisis facing our credit markets and certain institutions." Read the full statement here.

Under apparent pressure, the Financial Accounting Standards Board, which sets U.S. accounting rules, said today it would change the focus of its board meeting Wednesday to mark-to-market accounting issues.

What's more, the SEC, which oversees the FASB, looked as if it was trying to head off a full suspension of mark-to-market rules with "clarifications" it published today.

The new SEC guidelines, issued jointly with the FASB, give financial firms more latitude in deciding on valuations for securities when there is no "active market" for the assets -- which certainly describes many mortgage securities.

But the agency "probably will resist calls" for a blanket moratorium on mark-to-market rules, Bloomberg News reported today, citing sources familiar with the debate.

Photo credit: David McNew / Getty Images

Comments

[harry]

Thanks. That explains the whopping big $700B.

This 'bailout' is merely a device to raise undervalued securities to their previously over inflated values.

Nice try Congress.

[AspenFreePress]

You've explained the proposed bailout scheme to my satisfaction. Pure and simple it's crony capitalism.
Sterling Greenwood
Aspen Free Press

[Rob McMillin]

NO FREAKING WAY. "Mark-to-market" is about honesty. Anything else is a lie.

[Gary%20Noel]

There is a huge recession coming no matter what solutions we come up with. The overriding factor is that we are past peak oil and the infrastructure we have built, including primarily the auto centric housing and freeway systems have less and less economic value as the price of oil goes up and up. What we are trying to do now is to land as softly as possible. Easing the requirements for mark to market accounting is a real simple way to do that. It would spread out the pain and still allow us to utilize our capital resource to make the transition to a post oil economy.

Wall Street is right that that would make our economy like Japan but perhaps we should take a lesson on how they managed it. They refused out pleas and demands that they cause their economy to grow (which was more for our benefit) and instead just slowly paid for the buildings which were 'overvalued' and the basis of the capital structure. The big difference is that they had saved money during their go go years and invested in Treasury bonds. Now using the financial 'trick' of small amounts over a long period of time, the Japanese banks are well enough capitalized to be investing in our institutions like UBOC and Morgan Stanley.

It appears to me that the real issue for Paulson is investment by foreigners. He worth supposedly $500 million dollars. My guess that not much of that is cash, it is most likely in stock and brokered accounts held by Goldman Saks. Probably true for most of his friends. If he can get the US congress to agree to his plan, he can structure the rescue to save himself and his associates and they can maintain their control of the money allocation system which they seriously mismanaged. The foreigners are going to drive a much harder bargain.

[Make it so]

Mark to market is not about honesty.....while it is NOT the root cause of the current crisis...it is now a huge contributing factor in the illiquidity of the financial sector..Ask AIG....they made billions of dollars...but they had to be bailed out???
BS...
And thats what the crisis is...banks hording money....not lending it out.

Change it back to the way it was, even temporarily......you'll see 500B flood the market immediately at NO COST to taxpayers......and the country can get moving again.......

[ocean jockey]

Forget mark to market and/or mark to book. Neither means much because one fundamental rule to never forget is THE TRUE VALUE OF ANYTHING IS ONLY WHAT SOMEONE ELSE IS WILLING TO PAY FOR IT. When they buy it, they've established THEIR value, not necessarily someone else's. Every one else's value is ONLY speculation and is INEXACT until the process repeats itself.

[martscan]

ocean jockey:

We all know that the worth of something is what someone is ready, willing and able to pay for it. That's akin to saying "see Spot run" in economics. If a public sale or auction of a bank's assets are sold for 20 cents, and other banks hold the same assets, at what price/value should these assets be carried at on the books of the other banks, sans subsequent sales? At an arbitrary price set by the owners of the assets...or by the market? Sorry, ocean jockey, your premise does not carry any water.

[Dan]

Please, Please,Please read about where your money has been going before you give any support to this Bailout.
From an article in The Toronto Globe and Mail, Canadas most credible news paper.
"Until a few days ago, when people talked about London's bankers, they always mentioned a little place in Soho called Movida, where one night an investment banker spent £26,000 ($49,300) buying his half-dozen friends a few dozen bottles of fine champagne, which he simply sprayed all over the room like a Formula 1 victor. He then happily picked up the £15,000 cleaning tab"
The article then gets far worse.
If you want to read about the disgusting amount of money we give to this crowd, please go to this link
http://www.reportonbusiness.com/servlet/story/RTGAM.20080930.wrbankslondon01/BNStory/Business/home

If you find this article credible,please , can someone help me spread this around? I'm not savy at this.

Same newspaper reported that Britains 2nd biggest Bank(Bank of Scotland) told its investors in JUNE to get to safety, there was a financial meltdown coming in fall 2008.
Fortis was also predicting this in June I guess that means a lot of people were just waiting to short sell this whole sad affair.

[Jeff]

I think mark to market had a lot to do with this current crisis.. forcing these financial companies to mark these illiquid securities to market each month is a totally arbitrary requirement that is A) a crucial factor creating this spiral and B) would cost $700 billion less than today's failed proposal to do something about.

Here's a great article on the topic if your interested.
http://www.greenfaucet.com/blogs/hanlons-pub
The new bailout plan needs to deal with this.

[Rob McMillin]

"Mark to market is not about honesty.....while it is NOT the root cause of the current crisis...it is now a huge contributing factor in the illiquidity of the financial sector"

What on earth does this mean? The entire reason a "mark-to-market" suspension is even being spoken of is that there was a bubble in real estate prices that has since popped. If the securities that have been wrapped around home mortgages are now worth more than the properties they are allegedly secured by, this makes them likely default candidates, and this must be priced in.

The blog Calculated Risk recently ran a series of short quotes on this subject:

http://calculatedrisk.blogspot.com/2008/09/mark-to-market-quotes.html

The most important one came from JPMorgan Chase & Co. analyst Dane Mott:

"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."

[Samuel Margolies]

We are witnessing the making of sausage in a dirty kitchen from which we shall all experience distress. Yet we are so eager to eat. A bolder plan, one which would allow established accounting principles after a flushing of the sytem, can be found at www.debtrealignment.com If you have a better idea, I want to hear it. There are none.

Samuel Margolies - Las Vegas

[Robert NO longer in LA]

What? LIAR loans for the Banks! Been there, done that...STOP the Wall Street Blackmail! Stop Congressional EXTORTION!!! Viva Sanchez - NEVER thought I'd say THAT, but she is ON to something....we can help; get rid of tired old fools that have been in Congress far too LONG...we need Representatives and Senators who represent US, not boot-lickers and butt-kissers for Frank, Dodd, Clinton, Lieberman and Pelousy.

[Samuel Margolies]

I refer you to the article below that spells out the potential dangers with Credit Default Swaps (CDS) in CNN Money on 9/30/08. The CDS issue must be brought into the rescue plan and at the least discussed as to its implications and realities. I believe we are looking at the wrong end of the horse.

If some CDS cannot be called in unless of a continued mortgage meltdown then it is the mortgages themselves that must be addressed. Freeze all mortgages. Rewrite them at a 6% fixed rate, if they are currently higher, at their present value. Fund banks and lending institutions with credits for difference between new loans and old mortgages. This solves 3 problems: 1) banks can lend, they are more liquid with decreasing problems with mortgage loss; 2) people can more easily stay in their homes, payments can be made; and 3) credit default swaps are not called in. The latter must not happen. If this is not part of the solution, there is no solution.

And further, CDS must be regulated. We cannot have them put at risk financial institutions. This is not a way to run a railroad.

We need a plan, but we need a plan that is going to work as comprehensively as possible.

The CNN Money article is at:

http://money.cnn.com/2008/09/30/magazines/fortune/varchaver_derivatives_short.fortune/index.htm

For a bold plan that tackles the whole mess, see www.debtrealignment.com If you have a better idea, let's hear it.

Samuel Margolies - Las Vegas

[James Monachino]

Institutional Confidence Crisis

Now you see it and now you don't. Not sure how that will play on the Institutional level. I know I am not interested in dancing with a financial partner who is on the edge of bankruptcy. Besides, if everyone doesn't have to mark to market than everyone is doing well as long as they don't sell anything.

I understand the convenience of the fix but it just adds more smoke and mirrors when we should be working toward more consumer protection and financial transparency.

James Monachino

James Monachino

[RB]

Harry absolutely nailed it, short and sweet:

"This 'bailout' is merely a device to raise undervalued securities to their previously over inflated values."

[Peter A]

If we will not have mark-to-market rule, then we should establish an open exchange. The open exchange will help us determine the willingness to buy and sell these assets and also provide us with transparency. At any case, we should not change the rule in the middle of crisis. Changing rule now will make it even worse.

[P J Evans]

Instead of paying the investment banks what they want their paper to be worth, why don't we fix the underlying problem of mortgages that are about to default? Get the base turned rightside up and a lot of problems will go away. Not all of them, because these guys have been slicing-and-dicing mortgages into Monopoly money (and Greenspan didn't do anything about that when he had the chance).
And Paulson's still working with Goldman Sachs (even after leaving - and he got a huge parachute, too) to their benefit but not ours; why else did they have a guy at a meeting that should have been all Fed and government?

[Rob McMillin]

From Samuel Margolies' linked website:

http://www.thedebtrealignmentinitiative.com/Debt_Realignment.html

Here's his big idea:

"It is proposed that an Economic Summit be called among the nations of the world. At this Summit, with agreement among all national legislatures that this be done only once, it shall be ordered by all governments that in all ledgers, all balance sheets, all accounts in the computers around the world, and on the books of all central banks and institutions all debt be transferred as an asset, as a credit, to all creditor's accounts in their respective banks either in real terms or as a ratio of the present debt, to be determined, to get all on an even playing field as of January 1, 2009.

All creditors receive payment.

All debt will be released and all debtors released from their obligations. All holders of debt will be credited. The goal is zero global debt among nations.

No one loses anything but the debt. No one suffers. The creditors get their money. The debtor nations lose their debt -- worldwide. This is not debt forgiveness. This is the essence of debt realignment."

Let's try this with credit cards: the government releases everyone from paying their credit cards, and then there will be no debt. And, because there is no debt, there is nothing to forgive, and there is lots of credit around!

It's so childish, I'm surprise Bernanke hasn't proposed something like that.

[martscan]

Rob McMillin: You are exactly right. It is childish.

[carol hughes]

Why should the banks be able to sell to the Federal Government market to value instead of market to market. At forclosure these homes are selling for peanuts. The goverment is bailing them out and we are footing the bill. Why should they be getting more for the home then anyone else can get who is selling their home right now.

[martscan]

Why does the Treasury HAVE to BUY these junk assets? The interest alone on the dough we will have to borrow to fund this plan is scary. I was pleased to see Paul O'Neil, the former Treasury Secretary, suggest that the govt guarantee the price of these assets..effectively putting a floor under them and making them risk free investments...don't you think new, private entities would be formed to buy billions of this stuff...I do. Further, the govt can loan dough to banks to boost capital...at X number of interest rate points to assure their speedy repayment. This sure as hell would clean up balance sheets and put banks' reserve requirements on safe footing at a lot less than $700B....which, knowing govt.....would probably end up at $3 or $4B.

[martscan]

In my prior post I meant "...end up at $3 or $4 TRILLION."

[whs806]

When you value assets using "mark to the market" it creates a huge problem of overaluing assets in boom periods and undervaluing assets in bust periods. In normal periods it works faily well. There are problems with valuing homes, land, businesses, etc. Why? Things get blow out of proportion due to greed and fear! How do you legislate that? Using average values or any other process also will also have pros and cons. Go figure! But don't ask congress to help!

[JChan]

Unfortunately, anyone who believes this economic situation will 'correct itself' with even a $700 Billion TARP needs to look at the relevant stats just to see how much deep doo doo we're all in with the exploding deficit and the easy lending credit practices of the past two decades to create jobs. We do need jobs, but as we've now all learned the hard way, perhaps not those of a debt selling economy. We need jobs to help retool our economy.

Ed Hamilton has a great web site here that will amaze you ! : http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html

Unfortunately, it would be nice to sugar coat the bitter pill he illustrates with those statistics, but as I've said repeatedly in my my 2007 and 2008 blog entries http://atomic-motor.blogspot.com/2008/01/cat-power-wakeup-call.html

My view is we're all in for a rough ride, simply because of historical forces at play in the overall technology based part of our economy we're all now a part of. Hang on tight, for continued roller coaster rides are ahead as our nation and world retools for the quantum century fast approaching, and as the oil age goes out with an earthquake.

-JChan
Dallas, TX