Barron's Is Way Off Base Regarding Mark to Market

Barron’s Jacqueline Doherty seems to think banks brought their mark-to-market accounting problems on themselves, by investing too much in securities. That’s nuts. Doherty misses three huge points:

1. If banks did not hold as many securities as they do, many more would have failed. In a liquidity crisis, where bank runs can kill a bank, a bank’s only source of liquidity is its securities portfolio. If you think securities prices are under pressure, look at whole loan pricing and try to sell loans quickly.

2. Fair value is a relative concept, based on the holder's cost of funds. A relatively healthy bank's cost to carry is lower than the market's required rate of return. Accordingly, the securities’ value to banks is higher than the "market" price.

3. Securitization and capital requirements are the reason banks hold more securities now than they did in the past. It’s more capital-efficient for a bank to hold securities instead of whole mortgages. This makes sense because its securities are generally less risky: most securities on a bank's balance are highly rated and have substantial subordination below them. So banks give up yield for liquidity, capital efficiency, and safety.

Doherty’s right, though, when she points out MTM’s pro-cyclical effect--which has helped take a bad situation and make it much worse.

Comments

[cranyinnyc:]

Zach

I thought you have followed the banks for some time? Why have you not pointed out that Mark-to-market while it affects GAAP equity it has no impact whatsoever on banks' regulatory capital and therefore is not procyclical. Only when the bank determines part of the loss to be an other than temporary impairment (OTI) will it impact the bank's regulatory capital. The same would apply if the asset was classified as hel to maturity. Secondly, by far the largest component of risk facing the banks is the credit risk imbedded in their loan portfolio. Loans (other than those held for sale -which are marked to market) are held for investment and are not subject to mark to market.

Feb 18 08:36 AM

[bobreilly:]

Market Value assumes a willing seller, among other factors. When these loans are NOT for sale and will be held to maturity, the market value should be ascertained by a combination of existing risk of loss, prevailing interesting rate and other perinent factors. NOT THE *PRICE* FROM A FORCED LIQUIDATION SALE!

DUH!

Feb 18 09:50 AM

[monday1929:]

I have tons of expired Bank Puts from 2005 and 2006. The "market" (to use your quotes around the basis of capitalism) obviously mis-priced them during a mania- to what Govt. agency should I go begging, hat -in- hand, for a refund?

Feb 18 01:31 PM

[American in...:]

When my house goes down in value, the bank still uses market pricing to determine its value.

Why should the banks be allowed to use marking-to-market to make assess the net equity of potential lenders and be exempt itself from the same principle?

Some writers are so transparently in bed with the banks ...

Feb 18 02:07 PM

[the humble ...:]

And what is the prevailing interesting rate in your thinking if not the present market price?

DUH

On Feb 18 09:50 AM bobreilly wrote:

> Market Value assumes a willing seller, among other factors. When
> these loans are NOT for sale and will be held to maturity, the market
> value should be ascertained by a combination of existing risk of
> loss, prevailing interesting rate and other perinent factors. NOT
> THE *PRICE* FROM A FORCED LIQUIDATION SALE!
>
> DUH!

Feb 18 02:29 PM

[satguru:]

Mark-to-market is the the only way to value everything. If you don't have any market i.e. nobody to buy what you are selling, there is no market value. Only when you have a buyer do you have value. I don't understand these pseudo financial intellectuals.
I had my house on the market in 2007 for $750,000 and got no buyers for it but there were other similar homes that had sold for about that price. I dropped my price to $699,000 a few months later and still no buyers so I pulled my house off the market. Right now the value has been set at about $500,000 since two homes in foreclosure sold for that price. Nobody will pay me $699,000 or $750,000. Right now the market has set it at $500,000. This is the problems with banks. I still in the back of my mind think the house is worth more but I know it is not. My only choice is to wait it out until house prices go up but I have the luxury of time which the banks don't. I can hold on to it forever. If the house goes on foreclosure the bank can either mark to market and sell or hold on to it. What's so difficult with this concept.

Feb 18 03:35 PM

[vreporter:]

Under certain conditions, banks CAN hold to maturity.
That's what's wrong with the "forced" accounting from MTM.
MTM will be addressed somehow for those conditions.
Cynics and nationalists beware!

Feb 18 11:06 PM

[lefty37:]

What is wrong for a bank to hold a mortgage to maturity?
Example----- When a mortgage payment is paid, the bank can then reloan the payment and repeat the process 11 more times in that year. On a thirty year mortgage, the first payment is over 90% interest. Do the math. That was the way it used to be done sucessfully. But, of course, this is too simple for today's times.

Feb 19 06:18 AM