Mark-to-market accounting stays, albeit 'clarified'

Mark-to-market accounting will remain the standard for the banking industry’s books: The financial-system bailout signed into law by President Bush today won’t require that the Securities and Exchange Commission suspend mark-to-market rules, as some House conservatives had wanted.

Instead, the House went along with the Senate’s language on the issue, giving the SEC the authority to suspend the rules, but not mandating the move.

As noted in this previous blog post, the banking industry has been agitating against mark-to-market rules, which require financial institutions to value securities on their books at current market prices. Many bankers assert that the rules have unfairly ravaged their balance sheets because, they say, market values of mortgage-related securities are unrealistically low, reflecting the massive uncertainty over the housing market.

Under political pressure, the SEC and the Financial Accounting Standards Board eased up on the rules in a "clarification" issued Tuesday. The change may allow banks to avoid further huge write-downs of mortgage assets. That was enough to satisfy House conservatives, for the moment.

But we haven’t heard the end of this.

The bailout law requires the SEC to conduct a study of mark-to-market accounting, assessing the effects on banks’ finances. One question Congress wants addressed is "the impact of such accounting on bank failures in 2008" -- in other words, are the bookkeeping rules hastening the demise of banks without good reason?

Congress wants the study completed in 90 days.

Comments

[Richard Woon]

Any suspension of mark-to-market is bad for investors and eliminates transparency. Bookkeeping does not end hasten the demise of any business - bad business practices do.

[jhankey]

Mark to market requires that bankers tell the truth about the value of their assets. How can this be a debatable point? How can requiring less honesty help instill confidence in the banks?

This sort of lying to your face is classic baning practice, however, hearkening back to the "Great Depression". Back in those days, a "depression" was a slight, temporary tick downward in the economy's growth, while a "recession" was a full blown contraction of the economy, a "bust" cycle. President Hoover tried to assure the American people that they shouldn't worry, that "this isn't a recesssion, it's only a depression."

Mark to market means "tell the truth". The bankers want $700 billion, and the right to lie. The new legislation gives the SEC permission to allow lying.

Allow me to run on, and observe that BobA, WFB, and jpMorganChase 1) doubtless helped to create the paper for billions of dollars in bad loans, and then 2) sold this poison paper to their unsuspecting rivals. That they did not get caught holding the bag is obvious; and further suggests that they are either incredibly lucky, or else knowing perpetrators of this disaster. As their rivals have fallen, they have bought them up for cents on the dollar (or less) and THEN ask the government to hand them 700 bil, insanely profitable at our expense of course. Pretty slick. They should all rot in jail.

[Maggie Knowles]

The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting. If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.

The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds. No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged. Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.
~~~~~~~~~~London Banker, http://londonbanker.blogspot.com/

[paul graham]

Have the mark to market rule cause additional instability, yes. Has this caused more banks to fail, yes! Are the banks over leveraged, yes! Is this part of good accounting, yes! Is it a good idea to temporal suspend this rule, yes!

Its never a good idea to tighten accountability rules during a crisis, it simply that mark to market rule was introduced at the wrong time.

[Joseph Roberts]

The problem with mark-to-market accounting is that it conceals the true value of financial assets. It does not provide transparency; on the contrary, it gives an inaccurate valuation. If a bank intends to hold an asset to maturity, the value of the asset is the present value of the cash flows, not the price that someone else sells a similar asset for. Also, supporters of mark-to-market should remember the perverse way it results in false "profits" when a previously marked down asset is later marked back up. Investment banks have reported hundreds of millions in profits generated by mark to market accounting, all because of trades in similar assets.

[Joegun]

We in the commodity trading industry mark our positions to market every month, it's the accurate thing to do. If banks want to continue to raise capital, they will need to generate this kind of confidence in the quality of their financials.