Obama's TARP 2 Signals an End to Mark to Market 21 comments
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President Obama is just what the market doctor ordered. Investors in financials (XLF) were initially racked with fear at the thought of losing the remaining $350 billion in TARP funds to distressed homeowners and small businesses but I don’t think this is a negative for financials at all. I have a variant view on TARP 2. I think this move suggests that mark to market is about to be repealed by the new SEC which will pave the way for a sustained financial recovery.
Smart people do smart things. When one takes a look at the 2008 crisis and asks what could have been done differently the answer sticks out like a sore thumb: REPEAL MARK TO MARKET ACCOUNTING! The chairman of the SEC, and I’m not going to leave out President Bush or Secretary Paulson, decided that the entire financial system should be pushed to the brink of collapse in order to keep this ridiculous accounting regulation in place.
This decision to hang on while the confidence of the American people dwindled was the single dumbest decision our government made. Trillions of dollars would have been saved from government bailouts and market losses, not to mention the millions of jobs that would have been preserved had the SEC correctly managed this crisis. Americans should be furious at the fact that our own government misdiagnosed again and again the root cause of the financial crisis. For some unknown reason they didn’t listen to those like Steve Forbes who gave common sense suggestion after common sense suggestion to get rid of this thing, they didn’t listen to former FDIC chairman William Isaac, and they certainly didn’t listen to me when I recommended it back in July of last year. Before I get too worked up on this issue it’s important to remember that 2009 isn’t 2008. Leadership is about to change. Obama has selected Mary Schapiro as the new chairwoman of the SEC and if you read into Obama’s TARP 2 announcement, mark to market is about to get tossed.
What am I seeing that others are missing? I’m seeing a new President who is sick of throwing money at an accounting mishap. He’s not going to give another dollar to the banks. This doesn’t mean that he’s going to let them fail. Absolutely not. It means he is going to make sure they won’t need any more balance sheet help. There are several alternatives to the current law that would work just fine, he’ll pick one of them; maybe it will be the solution that they came up with in Europe (by the way it only took them one week to figure it out). Obama’s memo to congress about TARP 2 basically was a green light to investors that the worst is behind the financial sector.
By eliminating the baggage of mortgage backed securities from financial balance sheets, many of these companies will be free to begin lending again and their stock prices should begin to recover. The obvious winners will be Bank of America (BAC) and JP Morgan (JPM). Two solid banks that turned themselves into titans as they beefed up during the crisis. Acquiring Merrill Lynch and Countrywide was a brilliant move by CEO Ken Lewis as was the merger of Bear Stearns by CEO Jaime Dimon. In the short run investors have been worried but in the recovery they will be giddy. The opportunity to buy BAC under $11 and JPM under $30 before the market catches wind of a possible mark to market change is a wonderful opportunity. Obama is about to clean this mess up.
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This article has 21 comments:
Where did the crisis start? Subprime.. Then it spreads to business, prime etc etc.. Why? And how did it happen so fast? Because the financial industry takes a HUGE hit of confidence... Why?
Well, MTM rules played a DISASTROUS part in it.. Forced to mark to paniced markets, banks showed humongous MTM losses, which triggered even more panic, and on and on and on it went... Now these paper losses will be realized.. we got what we wished for...
How did we get from $300 billion subprime issue to trillions of depression style problems so fast? Perception, IMO. Induced by paniced MTMs.. All my opinion..
The first useful lesson is that prompt and accurate recognition of losses is essential. In the early 1990s, Japan did not have in place effective frameworks for disclosure and provisioning with respect to non-performing loans. This gave financial firms incentives to postpone the disposal of their non-performing loans, and the country plunged into a negative spiral of credit crunch and deterioration of the real economy. Based on this bitter experience, Japan improved disclosure requirements, clarified the rules on write-downs and provisioning, put in place a prompt corrective action scheme, and established an early warning system that enables the supervisors to conduct intense monitoring of banks before they become undercapitalized. In order for supervisors to act promptly, it is effective to have a regulatory framework in which they can make judgment in an objective manner.
From this standpoint, prompt disclosure by U.S. financial firms of the losses on financial instruments is encouraging. Challenges do remain, however, including the methodologies for valuation of financial instruments in cases where their market liquidity dries up, and the lack of data on exposure to complex financial products that are comparable across financial firms
All mortgages, regardless of underlying debtor quality, have the same face value? Again, I must be missing something. Just having a new president, even if it were one with depth of economic experience and education (Volker?) could hardly eliminate the need to mark assets to market.
However, I do see that it would eliminate all of the paper losses of the financial industry in one fell swoop. Then, it would not appear as though we have any problems at all in the financial industry and no more bailout funds would be needed.
Truth and confidence appear to be uncomfortable bedfellows in the eyes of our leaders.
Two points:
1. Changing the accounting method does not change the facts. It does not change the value of what is in a company's books. Nor the possibility that these assets may increase or decrease in value
2. Where were the opponents of mark-to-market 5 years ago? Can Mr. Schwarz post a link to a past article, where he was pointing out that all these mark-to-market profits were phony and that companies P/E ratios based on these mtm profits were wrong? An article where he was pointing out that bonuses based on mtm profits were wrongly given?
This is really a call to shoot the messenger. Can anyone claim this isn't anything more than sweeping what ails us under the rug.
Really, this isn't the problem. The problem was created over more than a decade of public policy decisions that shaped the real estate market. Most of these policy decisions inserted various degrees of moral hazard. Add to that a low interest rate environment, and poor oversight and we have created a tsunami of our own doing. Why should we blame the weather channel for reporting it?
The SEC and FASB accountants are ideologs. They lack common sense.
Millions of jobs are lost, and trillions of taxpayers' money are thrown away because of these people!
A mortgage is a long term security much like a bond, so you would contend that the market value today of a specific long-term bond is not an accurate valuation for a financial firm that owns it?
On Jan 14 02:10 PM Jason Schwarz wrote:
> Mark to market has turned the investment world into a group of fearful
> day traders. The health of our financial system should never be
> tied so closely to short term real estate fluctuations. Marking
> long term securities at short term valuations makes no sense at all.
> We need to provide our great banks like Bank of America, JP Morgan,
> Wells Fargo, etc... with a better system to be able to weather future
> real estate corrections. Returning to a system that values the long
> term over the short term is severely needed. This post-Enron experiment
> has gone terribly wrong and I am continually shocked that the masses
> don't see it.
In any case, the author is dead wrong about Mr. Obama being just what the doctor ordered -- socialism got us here...extreme socialism will only make it worse.
If mark-to-market were to go away tomorrow, all these "toxic" liabilities on banks' balance sheets would be restored in value and slide on over to the asset side of the sheet. Now there's nothing to off-set the excess reserves that have been juiced some 385,000% since August.
That almost $1 trillion could wander right into circulation in no time.............
The problem with mark to market accounting is that sometimes markets are irrational or inefficient due to liquidity or lack of information. The solution is obvious. Depending on what type of security is being held one uses the long term beta (a measure of volatility) to adjust the market value of the asset based on a moving average. The more volitile the term beta of underlining asset the shorter the moving average used to price the asset. For example a stock with a beta of 2 would basically have to be marked to market at the current trading price. However a stock with a beta of 0.5 might be allowed to be marked to market with a 360 day moving average.
In the current mortgage situation I heard of some mortgage backed securities being priced at 9 cents on the dollar mainly due to the lack of demand when fear was at a fevered pitch. This instant mark to market destroyed financial institution balance sheets causing everyone to unload these types of assets at the same time. This caused prices to plunge further setting off a devestating chain reaction. Now if mortgage values were priced using a 2 year moving average then the downward spiral would have never happened to the degree it just did. Likewise banks couldn't have written up the value of their securities as fast as they did. The point is that we need to eliminate the potential for illiquid markets to force companies to write off investments that everyone knows are worth more than they are in the long term.
If I plan on holding a 30 year mortgage security backed by someone with excellent credit who has been steady in making payments for 20 years and has plenty of equity does it make sense that the security should have to be written down because of speculative forces in the security marekets.
I just think there can be some commen sense written into the mark to market accounting rules to reduce volitility of company balance sheets thus allowing for the markets in whole to adjust to realities gradually.
You are correct, but for the wrong reason. The assets in question were incorrectly marked-to-model during the unsustainable real-estate <b>rise</b>...
Now, you can choose not to let those values fall on the balance sheet, but that doesn't mean that any sensible investor is going to believe your accounting.
On Jan 15 12:41 AM johngonole wrote:
> With all the great comments here I can't believe I still get to make
> this suggestion. Keep in mind I don't know what the current accounting
> rules are regarding mark to market but bear with me anyway. First
> we must have mark to market accounting otherwise the markets, investors,
> speculator, and even management of companies will have no idea how
> good or bad their company's financial condition is. Without mark
> to market accounting we might as well torpedo the economy now. Who
> should get a loan, etc... The structural problems with this type
> of or lack of accounting are endless.
>
> The problem with mark to market accounting is that sometimes markets
> are irrational or inefficient due to liquidity or lack of information.
> The solution is obvious. Depending on what type of security is being
> held one uses the long term beta (a measure of volatility) to adjust
> the market value of the asset based on a moving average. The more
> volitile the term beta of underlining asset the shorter the moving
> average used to price the asset. For example a stock with a beta
> of 2 would basically have to be marked to market at the current trading
> price. However a stock with a beta of 0.5 might be allowed to be
> marked to market with a 360 day moving average.
>
> In the current mortgage situation I heard of some mortgage backed
> securities being priced at 9 cents on the dollar mainly due to the
> lack of demand when fear was at a fevered pitch. This instant mark
> to market destroyed financial institution balance sheets causing
> everyone to unload these types of assets at the same time. This
> caused prices to plunge further setting off a devestating chain reaction.
> Now if mortgage values were priced using a 2 year moving average
> then the downward spiral would have never happened to the degree
> it just did. Likewise banks couldn't have written up the value of
> their securities as fast as they did. The point is that we need
> to eliminate the potential for illiquid markets to force companies
> to write off investments that everyone knows are worth more than
> they are in the long term.
>
> If I plan on holding a 30 year mortgage security backed by someone
> with excellent credit who has been steady in making payments for
> 20 years and has plenty of equity does it make sense that the security
> should have to be written down because of speculative forces in the
> security marekets.
>
> I just think there can be some commen sense written into the mark
> to market accounting rules to reduce volitility of company balance
> sheets thus allowing for the markets in whole to adjust to realities
> gradually.
>
The PRICE is perception of 'intrinsic VALUE in a time frame' It is determined by the SELLER and the BUYER. It is a subjective assessment by each party, by supply and demand provided there is perception of ------ (over valued, fair or undervalued). As long there is no transaction, no problem = SHUT DOWN. Is this we want? Crisis of confidence?
I can claim that my house is worth 2 M in my view ( Mkt to Fantasy). As long it is NOT in the Mkt, no body will challenge me. Try to sell or get a HE Loan. You will get an ordinary (?fair) valuation plus what's called 'FIRE SALE ' evaluation (Mkt to Mkt). Which one you think the BUYER is going to relay on in Buyer's Mkt (like now)?