Mark-to-Market: The Bogeyman of the 1930s Is Back 65 comments
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I wonder how many people realize that FDR got rid of mark-to-market accounting in 1938 after it virtually destroyed the banking sector. According to Brian Wesbury and Robert Stein, mark-to-market accounting was the law of the land for most of the Great Depression until it was outlawed by FDR in 1938. Wesbury and Stein report that the rationale for mark-to-market accounting in the 1930s seems similar to today’s argument for the rule: the need for greater price transparency based upon the efficient markets hypothesis in the banking sector.
FDR rejected the arguments of the efficient markets crowd because he thought that mark-to-market accounting contributed to the Great Depression. For approximately 70 years after FDR’s decision, banks operated without mark-to-market accounting and the economy didn’t have the threat of another depression. Years later Milton Friedman wrote that mark-to-market accounting was responsible for the avoidable failure of many banks in the 1930s. Maybe it is just coincidence, but immediately after mark-to-market accounting was restored in 2007 the banking sector started into a death spiral. Unfortunately, even though history seems to be repeating itself, few people are trying to learn from the past. Even so, today’s Congressional hearings on mark-to-market accounting are hopefully the first step towards stopping this terrible man-made economic disaster.
From the Wesbury and Stein article:
….The history seems clear. Mark-to-market accounting existed in the Great Depression…Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.
Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away.
Because these accounting rules force banks to write off losses before they even happen, we lose time. This happens because markets are forward looking. For example, the price of many securitized mortgage pools is well below their value, based on cash flows. In other words, the market is pricing in more losses than have actually, or may ever, occur. The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans.
And this affects growth. By wiping out capital, so-called “fair value” accounting rules undermine the banking system, increase the odds of asset fire sales and make markets even less liquid. As this happened in 2008, investment banks failed, and the government proposed bailouts. This drove prices down even further, which hurt the economy. And now as growth suffers, bad loans multiply. It’s a vicious downward spiral…
…In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting. This gave banks time to work through the problems. At the same time, the U.S. cut marginal tax rates and raised interest rates, which helped lift economic growth. Time and growth allowed those major banking problems to be absorbed, even though roughly 3,000 banks failed, without creating an economic catastrophe…
…In the 1930s, because mark-to-market accounting existed, we limited the amount of time available to fix problems…
…Anyone worried about repeating the errors of….the U.S. in the 1930s should focus on the policies that impeded recovery. Suspending mark-to-market accounting is a cost-free way to buy time. It does not allow banks to sweep bad loans under the rug. Bad loans are still bad loans, and banks cannot hide from them. Not suspending it, while at the same time interfering in the economy with massive stimulus and bank nationalization, is a recipe to undermine both time and growth and therefore hurt the economy even more.
The mark-to-market problem is particularly baffling to me. I don’t understand why the U.S. has to keep on repeating the mistakes of our fathers and grandfathers. Is it hubris? Do current financial leaders and policy makers believe that they are smarter than past generations and don’t need to learn from the past?
The list of reasons why mark-to-market accounting is a bad idea and should be eliminated is really long. But the biggest reason is that it is blamed for killing banks and helping put the U.S. into a deep depression. We shouldn’t be testing fate to see if the blame is misplaced or not. Instead, mark-to-market accounting should be re-repealed and FDR’s 1938 decision should be reinstated.
Yesterday the House Financial Services Committee held hearings on mark-to-market accounting and FASB announced that they are going to rework the rules. Hopefully we will follow FDR’s example and this terrible accounting rule will be rejected as a financial bogeyman that has come back from the dead to terrorize us.
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This article has 65 comments:
It's not that they funded asinine private equity deals, stupid commercial construction deals, and dumb home purchases.
It's that they have to mark their book of securities made up of these bundled loans to market, so they argue that the prices they could get for those securities in the markets are "artificially" low — or in some cases, that there is NO market for them.
If only they could avoid marking those assets to market, or use their super- duper net present value and cash flow MODELS — which, surprise, surprise, say the "real" value of those securities is higher — then the banking system would be fine. We could all go back to the wonderful world of yesteryear.
There's just one giant problem with htis type of thinking ...Pretending Something's Worth More Than It Is Doesn't Change Reality!
Look, the problem isn't that there's NO market for these bad securities. The problem isn't that the prices are "artificially" low. The problem isn't how we account for these assets. The problem is that the industry doesn't want to acknowledge that today's prices are the REAL prices.
There are tons of bidders out there for this crappy paper at the right price. Vulture funds, hedge funds, private equity investors: They're all raising billions and billions of dollars to scoop up cheap real estate, inexpensive bundles of mortgage backed securities, and distressed buyout loans.
However, banks and regulators just don't want to admit reality. They're hanging on to the garbage securities, hoping against hope that they won't have to sell at the true market prices so now the government is busy trying to figure out ways to prop up the reprted price of the garbage rather than forcing banks to take their medicine now, even if it means the result is that they have to temporarily be nationalized or put into receivership.
It is easy to understand why Policymakers are afraid of mass insolvencies. So they're trying to figure out how to do something akin to the early 1980s use of Regulatory Accounting Principles (RAP), which papered over insolvencies in the Savings & Loan industry.
Of course, papering over the problem didn't mean it went away. No surprise, then, that the unofficial nickname for RAP used to be Creative Regulatory Accounting Principles. You can figure out the acronym yourself
It's time to quit playing games to stoke the markets and solve the problems by facing reality.
No amount of mark-to-magic accounting can save many of these banks with home values down 50% in some parts of the country.Add to that HELOCs and credit card losses,with profitable lines of business shrinking at the banks...and lending down.
This just creates zombie banks for years to come,helped along by the Government.
the inventor of the dividend discount method of stock valuation, titled "Fifty years of investment analysis"
in which he analyzes financial aspects of the great depression. On p. 45. one finds the paragraph
"What the bank examiners ought to have done was to let the banks carry their bonds at cost, not market, so long as the bods were not in default. This change in rules was adopted years later, long after the damage had been done."
Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis published in Blooberg. Other loans include mortgages and business and consumer loans for which loss reserves are maintained.
So its hard to understand how modifying mark-to-market practices will stem the flow of losses because most of the losses are occurring in asset classes not subject to MTM.
But it will be interesting to see what direction the proposed changes in mark-to-market accounting takes as there are guidelines for different asset classes. For instance level 1 assets, are priced to liquid market prices; how can you change that?
Anyway, I think the benefits of mark-to-market accounting in the form of greater transparency for outweigh any claimed adverse consequences of the practice.
No amount of mark-to-magic accounting can save many of these banks with home values down 50% in some parts of the country.Add to that HELOCs and credit card losses,with profitable lines of business shrinking at the banks...and lending down."
Mr. Doom, I have to disagree with you on this post. In your statement that home values are down 50%, you make the very case for getting rid of hard line Mark to Market. House prices have fallen 50% - not 100%. The marks on some of these portfolios are pricing in a devaluation on the underlying asset secured as worth 10 to 20 cents on the dollar - if not at zero for certain tranches. I will be the first to admit that a HELOC is probably worth nothing due to the value drop - IF the borrower walk tomorrow - if they don't walk, assuming it is worthless is dangerous as well. The Credit Card debt is worth Zero as it is non-recourse and probably spent on crap - if the borrower defaults. But a lot of these tranches on loans are on 1st lien Mortgages, and 90% of Americans are still CURRENT which means that those loans are still worth Par. You can argue the risk may be higher due to unemployment rising, however, if the asset is still getting cash flow, and the asset underneath is not at 20 cents on the dollar if liquidated, it is pretty hard to believe that M to M is accurate. And on that logic, M to M in the bubble would have way overvalued the same asset, even though it was quite clear that it's price was unsustainable. Think this through before just using a general paint brush of "Mark to Magic" or "Mark to myth" - I think what should happen is Mark to Cash flow to future earnings - or Mark to future Ammortization. That makes a lot more sense, and hopefully FASB sees it that way as well.
"For approximately 70 years after FDR’s decision, banks operated without mark-to-market accounting and the economy didn’t have the threat of another depression."
quoted for preservation.
Let me think...
I wonder how much Mr Sunshine's firm is in the hole ...lol
...lol...lol
ALOT!!! :)
I think Mr Sunshine's firm should be eliminated....plus his posts here !!! lol
Are you really who you say you are?
I wasn't aware that Wesbury and Stein had overcome the #1 rule of economics - there's no such thing as a free lunch. A "cost-free" way to buy time? And here I thought time was the ultimate limited resource: Einstein couldn't figure out how to buy it, but Wesbury and Stein have surpassed it. They ought to cease their economics and shift to advanced physics.
little problem: are all the BIG BANKS in EUROPE AND ASIA going to allow AMERICAN BANKS to "ESTIMATE THE VALUE OF THEIR ASSETS" SHARPLY UPWARD" ... without doing anything, I DON'T THINK SO....
maybe many international player's will even avoid dealing with American Investment Banks and/or remove their money... This could doom Big American Investment Banks, if the rest of the world IS NOT INVITED TO THE PARTY!
when America starts printing dollars...you think the REST OF THE WORLD is NOT going to do the same thing? Everyone is trying to depress the value of their currency to help their declining exports.
you think you have an ILL-LIQUIDITY PROBLEM NOW in the GLOBAL MARKETPLACE...
at least in the present there is a BASIS OF PARITY between ASSETS of big international investment banks (and the banks themselves) because of "mark-to-mkt!"
Let EVERY BIG INT'L BANK START adjusting their PAPER ASSET VALUES...and we'll have a contest to see WHO CAN CLAIM THE BIGGEST AND BEST ASSET BASE!
Unfortunately we live in a "global economy" ...oil, currency, int'l Real Estate deals, etc.
Not to mention selling additional bonds and preferred stock ON THE INDIVIDUAL BANKS, with the selfsame banks determining the VALUE OF THEIR OWN (MOSTLY BAD)PAPER.
THE PHRASE "PANDORA'S BOX" COMES TO MIND.
IF YOU WANT TO DO THIS: IT WILL HAVE TO BE DONE "GLOBALLY" will all PLAYERS HAVING ACCESS TO EACH OTHERS ASSET VALUATIONS. you would need to set up an UNBIASED INTERNATIONAL MONETARY OVERSIGHT AGENCY TO OVERSEE THIS. KIND OF LIKE A "WTO" FOR BANKS. Kind of think that might be difficult... "client/deal transparency." Wouldn't you like to know, in detail: What your competitor was arranging with "what client" that you might persuade to use your bank, etc....
How about the big foreign investors WITH ASSETS in our big International Banks... think they'll cheer LETTING THE FOX IN THE HEN HOUSE... SET ASSET VALS... I think that would be a problem, too....
appears this DISBANDING of "MARK TO MARKET" will be a little more complicated THAN CONGRESS JUST PASSING SOME EMERGENCY LEGISLATION...
FLASHROB
For the second purpose, I see its value. And given the current mess, I would stay it is working just fine.
Yes, mark-to-market may exacerbate the current situation and lead to more bankruptcies, but it is not the cause. The cause is the excessive risk taking even in the presence of this rule. Instead of causing the situation today, the rule exposed the problems earlier, and helped to avoid a even more desperate situation down the line.
Just ask yourself, if the mark to market rule was not restored in 2007, would we have avoided the fundamental problems that are manifesting themselves in the situation today? If these problem are not exposed today, would that be a better scenario for the financial industry and the economy in the future?
So did the rule lead to the financial crisis we have today, or was it reintroduced to curb the excessive risk taking and accounting irregularity that was the root cause of the mess today?
The prevailing theory of macroeconomics suggests that raising interest rates does not typically lift economic growth. Secondly, the marginal tax rate until '86 was 50%, was dropped in the middle of the '80s, but was raised again twice in the mid and late 90s.
Also "In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy."
Completely unsubstantiated statement. Consumer debt grew 315% from 1989 to 2007, while real GDP grew only 60%. From 2001-2005, there was $6.71 T issuance of MBS, which is equal to the entire nominal GDP of 1989. There have been 17 consecutive quarters of home price contraction in the recent time frame, with prices down 35% nationally. The peak declines in 1982 and 1990 were 14% and 10% respectively. More loans, to more people, minimal gain in real income, and much worse asset price plunge.
MtM may be a problem or it may exacerbate a problem, but one isn't going to convince anyone with arguments that get the facts wrong. Would MtM accounting have caused financial collapse in the 80s, or would not having MtM now have prevented this crisis? Both seem doubtful and little evidence is presented.
"Because these accounting rules force banks to write off losses before they even happen, we lose time. This happens because markets are forward looking."
So because markets look to the future value, rather than present cash flows, we lose future value.
Either markets are intrinsically superior for pricing things or they're not. Which is it?
I suggest that proper markets - markets with exchanges and regulation that trade a relatively uniform and well-audited inventory of goods ARE superior for pricing. Fake market that foster self-dealing and information asymmetry are crap.
Shakespeare wrote: "The fault, dear Brutus, lies not in our stars, but in our selves..."
I suggest that the fault lies not in our mark-to-market, but in our market itself.
the general rule is that companies are required to carry assets at the lower of cost or market value. lower being the operative word. in some cases market values can be written back up, not to exceed cost. rules depend on the industry, the asset and circumstances in general, e.g. whether losses are deemed permanent or not.
mark to market accounting is not the underlying problem. overleverage and off balance sheek risk are the twin elephants in the room that laid waste to the financial services industry. had mark to market accounting rules not existed these problems would have surfaced at the point where cash began to dry up and obligations couldn't be paid. that's exactly what brought down AIG, Lehman, Bear Stearns and Wachovia...all major financial institutions that were badly overleveraged.
i have no doubt that mark to market accounting could be improved. but no way should it be eliminated, leaving it up to some greedy, self-serving crook, disguised as a CEO, to decide whether to disclose bad assets on his books.
On Mar 13 08:13 PM f(x) wrote:
> I have never taken an accounting class. Can someone tell me if the
> Mark-to-market rule helped banks look better than they were in a
> good economy? If that is the case, is it right (ethical) to abandon
> it just because now it hurts the banks in a bad economy?
What is better a mark-to-market (MTM) accounting or any other "creative one"?
If we have a complete trust in integrity, honesty, competence and a "super crystal ball" of our financial leaders, let them use their "creative accounting".
As for me, the majority of the Western world financial leaders have
- failed too often
- lied too often and too much
- shown total incompetence
- been outright criminals
Consequently, the MTM accounting is not perfect but I have more trust in free-market pricing mechanisms rather than in banking executives.
Finally, the statements that
1. "FDR got rid of mark-to-market accounting in 1938 after it virtually destroyed the banking sector."
All FDR efforts and "Great Deals" did not end the Great Depression. The WWII has done it. FDR was a demagogue responsible for deepening the Depression and unnecessary prolonging it for too long. These are the fact.
2. "Years later Milton Friedman wrote that mark-to-market accounting was responsible for the avoidable failure of many banks in the 1930s."
Milton Friedman is not a God. He was a very good economist and populist but he was not always correct.
Dr. Friedman ideas about the Great Depression, its causes and ways to prevent its repetition are just his views. Dr. Friedman theory that "tight" monetary FED policies were the driving force of the Depression are very simplistic. Just printing more money would not prevent the Great Depression then. Limitless printing of monopoly-money and endless "stimulus" spending will not solve the present financial catastrophe. Contrary to this baseless hopes, these reckless financial policies will greatly worsen the present economic and financial ills.
Well, that allows for this giant loophole no one ever talks about.
The easier you make lending, the more people will borrow, therefore, the value of the property the loan was made on rises because its easier for more people to take out loans to pay a higher price for it. The more this happens and the more those loan values keep rising, the more the banks keep reporting them as "profits" in their books, the more "artifial money" they have in their books to lend.(Remember, the banks dont truly make a profit if the value of a property rises, it's the owner of the property that makes the profits if he sells it for a higher price. All the bank can do is sell the mortgage to another institution if there's a "market" for it. Yet, according to MtM, they can mark up the value of that loan, even if they dont sell it). The more they are allowed to do this, the better their books look, therefore, they lend more. That makes it extremely easy and tempting to make irresponsible loans. Why not? The more you lend, the more those loans you have will go up in value. Except, there's a ceiling to everything. That's what happened in the 1920's (the same loophole existed then) and thats exactly what happened in the 2000's.
Yet, no one ever talks about that. All they talk about is the damage it does on the way down. Which is real, mind you, except now it's the reverse. Now, the banks have to mark down loans, even if they are making a profit on it. Remember, banks are still making a profit on the interest they receive every month. They only lose money when a loan is defaulted by the client.
Think about that the next time you argue about "mark to market". Its a double edge sword. It cuts what appears to be a path to glory on the way up, when its really doing is gaining momentum to cut your head on the way down.
On Mar 13 11:04 PM MTM wrote:
> How come no one mentions the damage that mark to market does on the
> way up? No one talks about it. MtM allows financial institutions
> to mark up items as profits, such as loans, to their so called "current
> market value" even if they never sell it.
>
> Well, that allows for this giant loophole no one ever talks about.
>
>
> The easier you make lending, the more people will borrow, therefore,
> the value of the property the loan was made on rises because its
> easier for more people to take out loans to pay a higher price for
> it. The more this happens and the more those loan values keep rising,
> the more the banks keep reporting them as "profits" in their books,
> the more "artifial money" they have in their books to lend.(Remember,
> the banks dont truly make a profit if the value of a property rises,
> it's the owner of the property that makes the profits if he sells
> it for a higher price. All the bank can do is sell the mortgage to
> another institution if there's a "market" for it. Yet, according
> to MtM, they can mark up the value of that loan, even if they dont
> sell it). The more they are allowed to do this, the better their
> books look, therefore, they lend more. That makes it extremely easy
> and tempting to make irresponsible loans. Why not? The more you lend,
> the more those loans you have will go up in value. Except, there's
> a ceiling to everything. That's what happened in the 1920's (the
> same loophole existed then) and thats exactly what happened in the
> 2000's.
>
> Yet, no one ever talks about that. All they talk about is the damage
> it does on the way down. Which is real, mind you, except now it's
> the reverse. Now, the banks have to mark down loans, even if they
> are making a profit on it. Remember, banks are still making a profit
> on the interest they receive every month. They only lose money when
> a loan is defaulted by the client.
>
> Think about that the next time you argue about "mark to market".
> Its a double edge sword. It cuts what appears to be a path to glory
> on the way up, when its really doing is gaining momentum to cut your
> head on the way down.
>
>
>
On Mar 13 12:06 PM Tony Zeppetella wrote:
> Good article. I have been opposed to the trend towards mark-to-market
> accounting for years in the life insurance industry, where it makes
> even less sense. There are two groups that favor MTM. The accounting
> theoreticians and the traders who believe that a market price, even
> if not readily discernible, encompasses all truth in the universe.
> They look up to the trading boards as if they were looking to the
> gods on Mount Olympus for universal truth. Both of these groups ignore
> a simple mathematical fact: If assets values on the balance sheet
> are viewed like a sine curve, the entity will periodically go bust.
> Financial intermediaries cannot exist under this standard. Then only
> government can supply capital for businesses to operate at all.
Mark to market can not contribute to inflating a balance sheet bubble because assets can not be marked above cost, regardless of market price.
If anyone wants to debate this position, can they submit a further comment?
Mark to market accounting is the trojan horse of short sellers. It subtly meshes well to their agenda.
A DCF model is both more accurate and more realistic, but it is the enemy of short sellers.
ETFnerd - - -
Can you elaborate on your comment? I would like to learn some details about: "...utterly clueless about accounting, and has never picked up the financial staments of a bank."
All this discussion about mark to market accounting for banks makes me think about my own personal history. In 1972 my wife and I built our dream home on a large wooded hilltop "estate parcel" of 21 acres. It was not an estate house, but was large (almost 3000 square feet) and substantial for its time. We used every cent we had, took the maximum mortgage we could get, borrowed an additional $10,000 from my father and took a youthful plunge into being "house poor".
Over the next 8-10 years the house was never worth (if we had wanted to sell) as much as we had put in. The mortgage was probably never significantly under water, but certainly was marginally so. During that time we were never free of credit card debt or auto loan debt. If we had been subjected to mark to market accounting we would have been insolvent for most of the time from 1973-1982. Only the inclusion of the present value of assumed future earnings would have created a positive net worth.
In late 1982 I started a 401(k) retirement savings plan through my employer. In the 80's real estate values appreciated in our area and my career took off after years of struggling to keep pay increases up to cost of living. From 1983 on there was no question about solvency (even by mark to market rules, without allowing the house value to rise above cost). With three children of college age between 1988 through 1995, my balance sheet would have been negative had I included an estimated present value of college expenses. However, I had financial discussions with my children when they were in high school and came to agreements with them that they would contribute to their higher education costs. Two of the three used the excellent community college in our area for two years before going to four year state universities (instate students). All three worked enough while going to school full time to pay most of their expenses outside of tuition, which I paid for two of the three. The third had tuition paid by scholarships. As a result, I was able to support the three through college out of earnings cash flow. One of the three graduated from college with only $4,000 in debt, the second graduated debt free and the third had more than $10,000 net worth upon graduation.
Individuals are not banks and should not necessarily be held to the same accounting standards. However, I find it interesting that I would not have survived the 1970's if I had personally be subjected to mark to market accounting rules. My story emphasizes how the passage of time can assuage financial distress.
Of course the banks were stupid and their problems were not caused by MTM. But the question is about whether MTM is wise for banks given the possibility that it is causing the banking industry to take down the entire economy with it. Even if the crisis ends, it may be that MTM is not compatible with traditional bank leverage levels of 10-12X and if we want MTM we can only have banks with leverage of 2X, and therefore much higher borrowing costs. That's probably not the right decision for the economy of the future.
On Mar 14 11:00 AM John Lounsbury wrote:
"Individuals are not banks and should not necessarily be held to the same accounting standards. However, I find it interesting that I would not have survived the 1970's if I had personally be subjected to mark to market accounting rules. My story emphasizes how the passage of time can assuage financial distress."
There are two reasons (at least) why individuals and banks should not be held to the same accounting standards. Individuals are not making bets backstopped with trillions of the public's money and they are not selling regulated securities to individuals that want to assess their financial position in a fair and transparent manner. Those differences make your personal story somewhat irrelevant.
For all those clamoring for more regulation to protect the public from the greedy banks, I don't understand this rush to abandon one of the regulations that helps protect the very same public.
These big banks took on a lot of bad financial products.. essentially they are worth 60 cent, 40 cents, maybe much less on the dollar than face value. How do you value that? With the real estate market on a downward trend back to the historical mean, how are these banks going to properly write off the losses? Sure you may pick a different accounting method than mark to market, but that still won't replace awful fundamentals.
The major problems are
- Political corruption and outright fraud
- "High" living Americans are addicted to using borrowed money without any intentions of paying back
- "Easy" lending provided either by financial institutions and/or by the government itself
Yesterday, the reckless and irresponsible "easy" lending was provided mostly by banks. Now, the US government stepped in providing "easy" money.
Living "high" on drugs is never good. Yesterday, the reckless and irresponsible "easy" lending led to major banks failures. Tomorrow, the US government will go broke.
Unfortunately, there is no ways to go back to "yesterdays". It is too late. Only when Americans will get off drugs, the clouds will start to clear.
As to FDR's actions on FV. One expert. Lynne Turner, former Chief Accountant of the Securities and Exchange Commission, testified before Congress this past week that he beleive the action by FDR to stop FV accounting actually extended the depression. Again, your view of the facts is contrary to experts in the field.
Those who are lay people on this site - please, don't beleive everything you hear. You either need to do your own analysis if you are able or talk to and listen to REAL experts.
"I thought this was a credible article until I stumbled over your assertion in it that mark to market accounting was outlawed by FDR from 1938 to 2007 for 70 years. Mr. Sunshine, one minute checking your facts would have kept you from presenting yourself as someone who is utterly clueless about accounting, and has never picked up the financial staments of a bank.
Sorry ETFnerd, but my research further supports Mark Sunshines assertion. It is true that Roosevelt rescinded the Mark-to-Market rule.
Futhermore it is ridiculous to force balance sheet adjustments when prices fluctuate.
Fatcat wrote:
"No amount of mark-to-magic accounting can save many of these banks with home values down 50% in some parts of the country. Add to that HELOCs and credit card losses,with profitable lines of business shrinking at the banks...and lending down."
Well Fatcat, did it every occur to you that in this economic climate Mark-to-Market accelerated the decline in home values and in general speeded up the economic decline and accelerated the decline in home values.
A more reasonable approach for Mark-to-Market might be a moving average price over a year. This would slow down the decline.
I wonder how much smaller and slower the current decline would have been with a more reasonable rule.
en.wikipedia.org/wiki/...
nice and easy, close the gap and leave the market work...
we all want a AIG private jet at discount prices!
This is a weak article. I would love to read an article outlining the reasons mark-to-market should abolished, but this article provides absolutely ZERO! However, as you can see in the quote above, he does insinuate that there might be some reasons out there --- but he's not willing to personally elaborate on them.
The only thing the author really argues is the following:
"But the biggest reason is that it is blamed for killing banks and helping put the U.S. into a deep depression. "
But his entire argument is circular. He *assumes* that M2M caused both the Great Depression and the current crisis, yet offers no evidence. He merely implies that 'it's probably not a coincidence'.
He gives very little historical background. He merely suggests that M2M was the law of the land before FDR abolished it in 1938. However, the SEC Acts weren't passed till 1933 and 1934 --- FOUR YEARS AFTER THE DEPRESSION BEGAN! Hence, the Federal government had no control over accounting standards before that time.
It's true; the accounting standards used in private practice before the SEC Acts might have required M2M --- but consider the fact that only about a quarter of the companies out there even bothered to hire auditors at that time.
Plus, if M2M was 'in use till 1938', when did we start using it and how many years did we go before the banking crisis of the Great Depression?
Overall, while I appreciate hearing reasoned arguments for or against M2M accounting, the author provides nothing of the sort. This is a weak article that blunders its way through history, assumes correlation equals causation, never bother to address the actual economic climates of the respective times, and completely ignores the entire regulatory structure put in place in 1933 and 1934 that required public disclosure by all publicly-traded companies --- perhaps that's why we've never had a banking crisis till now?
On May 1993 the FASB issued SFAS 115 effective for fiscal years beginning after December 15, 1993. The following is paragraph 12:
"TRADING SECURITIES AND AVAILABLE-FOR-SALE SECURITIES
12. Investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price. [Mortgage-backed securities that are held for sale in conjunction with mortgage banking activities, as described in FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities, shall be classified as trading securities. (Other mortgage-backed securities not held for sale in conjunction with mortgage banking activities shall be classified based on the criteria in this paragraph and paragraph 7.)]"
[bracketed section was superceded by paragraph 5 of SFAS 134]
This evidence positively disproves Mr. Sunshine's assertion:
"For approximately 70 years after FDR’s decision, ***banks operated without mark-to-market accounting*** and the economy didn’t have the threat of another depression."
***my emphasis added.
Anyone with a modicum of accounting knowledge would have immediately known that the above statement by Mr. Sunshine was absurd, which led me to suspect his stated credentials. Another way of knowing his statements were false was to pick up the financial stmts of any large financial institution prior to 2007.
The takeaway is that you shouldn't believe everything you read, and that easily checked facts can derail an argument.
idea.sec.gov/Archives/...
On page 68, there is a section called: "Mark-to-Market (MTM) Receivables/Payables" which shows the mark-to-market assets and lisbilities of Citigroup's derivative contracts.
Again I quote what Mr. Sunshine wrote: "Maybe it is just coincidence, but immediately after mark-to-market accounting was restored in 2007 the banking sector started into a death spiral."
I encourage anyone who attended Mr. Sunshine's accounting classes to seek a refund.
People supporting MTM base on one belief :
"Anyone who tell lie should be punished"
Let this 72 old man tell you the true :
"Human is dirty,we need to cover some of our dirty
parts in order for this world to function normally
(I mean normally not perfectly)".
All bankers are dirty & greedy.They caused this crisis
but if MTM wasn't be restored on 07,there should be
no crisis or more precisely -- no one know there is
a crisis as on the last 70 years after Franklin Roosevelt suspended MTM in 1938.
The real world is about "COMPROMISE".You just can't totally kill all bad guy in
order for this world to function.
Under MTM,it is just like asking all our congressman to
report if anyone have a mistress.If anyone have,then
they have to go.I can assure you that 60-70% of the
congressman have to go & the government will collapse.
FASB restored MTM due to Enron.But no accounting rule
can prevent people like Enron CEO to cheat,this kind of
people just write any number in their book.Accounting
rules can only control honest people.MTM has no use
on company like Enron but too strict on all others.
MTM fuel (not caused) the great depression in the 30
& Franklin Roosevelt suspended MTM in 1938.I hope Obama
has the same courage.
Supporter of MTM will be equal to asking all women to be naked ,100% transparency for man to find a honest
wife.I don't think it will work in real world.
Human is dirty,we need to cover some of our dirty
parts in order for this world to function normally
(I mean normally not perfectly).
sorry, thet's Citigroup's 2005 annual Report. :)
I'm no expert on these issues, but then neither are most of the pro MTM commenters. However, I do know what two major experts have said on this issue in the last week or so.
Warren Buffett said in his CNBC interview that he is fine with MTM accounting as a pure accounting issue. But, he said that problem is that regulatory action, such as capital raising, should never be taken, based solely on MTM accounting. He also said that with the possible exception of Citi, that all of the big banks will be fine if the Feds just back off now.
Buffett also said in this year's annual shareholder letter, that while he is ambivalent about MTM accounting, he actually enjoys the huge mispricing of assets that sometimes results, so he can scoop them up on the cheap. So much for efficient markets and the purported beneficial impact of MTM.
Jamie Dimon said largely the same thing in his latest speech as Mr. Buffett did in his interview. He added an interesting wrinkle. He said that ideally the regulatory capital requirements for banks should be intentionally countercyclical. That is, larger capital requirements in good economic times and lower requirements in bad times. Is true that genius sometimes sounds so simple, or is it that simple truths sound like genius in the land of fools?
The reason this financial crisis did not tank as deeply as it has now were/are the existence of:
Glass Steagal Act
FED
FDIC
SEC
Uptic rule, etc.
Some of the major reasons for this crisis now are:
Repeal of Glass Steagall Act in 1998
Removal of Uptic rule
Passing of Community Redevelopment Act (1978)
Creation of Derivatives (unregulated)
Creation of Credit Default Swap (this is a real biggie)
Creation of CDO's (many banks no longer hold many of the mortgages in their potfolio..example: Countrywide)
To blame MtM as the cause does not hold water. It was reintroduced in 2007 because it became very apparent to FASB that the bank risks had to be gotten out of hand and had to be Fair Valued. Its reintroduction has actually saved the world from a much deeper crisis. Keep the MtM now and maybe, we will be free of anther financial crisis for 20 years or until people forget and repeat the same mistakes again.
Thank you for answering my question. I appreciate your effort to educate a non-accountant.
I do not understand why someone gave you a thumbs down for giving me requested feedback.
The market is irrational in pricing these assets because of the uncertainty of the future stream of payments generated by the pool (emotion again). Many financial figures on a balance sheet are reasoned quesses but a better way of determing the reasonable value of these assets is historical cash flow discounted by expected impairments to future cash flow. The same thinking is applied to accounts receivables via the allowance for doubtful accounts.
FASB is ruled by mindless theoticians that make decisions based on intellectual BS rather than on common sense.
R Williams
Former CPA
because price is being determined by emotion.3 12:12 PM market ace wrote:
> Sure everyone knows the problem with the banks isn't all the crappy
> securities and loans they're loaded up with. It's not that they took
> on too much excessive risk, lending against assets whose value is
> plunging.
> It's not that they funded asinine private equity deals, stupid commercial
> construction deals, and dumb home purchases.
>
> It's that they have to mark their book of securities made up of these
> bundled loans to market, so they argue that the prices they could
> get for those securities in the markets are "artificially" low —
> or in some cases, that there is NO market for them.
>
> If only they could avoid marking those assets to market, or use their
> super- duper net present value and cash flow MODELS — which, surprise,
> surprise, say the "real" value of those securities is higher — then
> the banking system would be fine. We could all go back to the wonderful
> world of yesteryear.
>
> There's just one giant problem with htis type of thinking ...Pretending
> Something's Worth More Than It Is Doesn't Change Reality!
>
> Look, the problem isn't that there's NO market for these bad securities.
> The problem isn't that the prices are "artificially" low. The problem
> isn't how we account for these assets. The problem is that the industry
> doesn't want to acknowledge that today's prices are the REAL prices.
>
>
> There are tons of bidders out there for this crappy paper at the
> right price. Vulture funds, hedge funds, private equity investors:
> They're all raising billions and billions of dollars to scoop up
> cheap real estate, inexpensive bundles of mortgage backed securities,
> and distressed buyout loans.
>
> However, banks and regulators just don't want to admit reality. They're
> hanging on to the garbage securities, hoping against hope that they
> won't have to sell at the true market prices so now the government
> is busy trying to figure out ways to prop up the reprted price of
> the garbage rather than forcing banks to take their medicine now,
> even if it means the result is that they have to temporarily be nationalized
> or put into receivership.
>
> It is easy to understand why Policymakers are afraid of mass insolvencies.
> So they're trying to figure out how to do something akin to the early
> 1980s use of Regulatory Accounting Principles (seekingalpha.com/symbo...),
> which papered over insolvencies in the Savings & Loan industry.
>
>
> Of course, papering over the problem didn't mean it went away. No
> surprise, then, that the unofficial nickname for RAP used to be Creative
> Regulatory Accounting Principles. You can figure out the acronym
> yourself
>
> It's time to quit playing games to stoke the markets and solve the
> problems by facing reality.
>
You need to think a bit deeper about this. 85% of the worlds wealth is in the hands of 20% of the people. In America only about 50% of Americans even own stock. This past year saw a great deal of wealth lost by the wealthy. They want it back, and what you need doesn't really concern them.
Evidence: Paulson (the guy who removed leverage limits from investment banks) some how got to be in charge. He said all was well and then gave us TARP. We all know how well that went. money to parties, bonus money until public pressure became so great, Thain, Lewis (he had a hand in the bonus pool, and is currently fighting the government, and took 20B). Corporate jets from detroit. In Summary there were no strings attached, and we have no idea where it went. Next is the TALF. A trillion dollars of our money to allow private equity, hedge funds, and investment banks to buy securities (Remember these are the same folks who sold this worthless paper to the world). Low interest, taxpayer money will ensure that they can't loose too much. It had pay restrictions so hey didn't take advantage of the offer and had them removed from the bill.
Now it is Mark to market they are working on. Adam Smith described what happens in credit bubbles in Wealth of Nations in 1776. Exactly what is happening now, and they didn't even have mark to market accounting then.
If you don't believe me that is find, But read some of Nassim Tableb's recent statements. This guy is smarter than me, he worked as an options trader, and is considered a world expert on risk management. I have watched him directly say you can't trust the banker's, they don't have anyone other than their own best interest in mind. I believe him, and before you buy into what is being told to you remember who wants it to happen, how much money are the spending to make it happen, and how much money they stand to benefit it it does happen.
I can give you many logical arguments as to why we shouldn't get rid of Mark to Market, but many people have done so. Therefore, I thought I would try to expose a little of what you aren't seeing.
Obama is using the FDR playbook to transfer power from the private sector to the government.
He is paying the teachers to encourage educators to teach the young he is the greatest.
As far as mark to market accounting goes, banks acted like hedge funds that played games with their marks. There can't be different sets of rules for investors and the rules of the game cannot keep on changing. The problems are too big for the government to clean up on its own and private capital knows what the banks hold. Even if the banking stocks rally, the investor base looking to deploy capital to buy distressed assets will remain on the sidelines until they feel comfortable there is not a giant seller lurking on the first uptick (the banks).
These gyrations in the stock market are quite similar to The Great Depression.
online.barrons.com/mdc...
On Mar 14 01:47 PM 123jdp wrote:
> I am so tired of non-accounting experts espousing views on FV. Please,
> buddy, 157 did not change when and where FV is applied. So, the
> premise of your article is completely false. We have been applying
> FV for decades and been doing mark to model for over a decade that
> I know of. This is nothing new. And, by the way, most community
> banks, the loudest compaliners about 157 and FV don't have many assets
> to which FV applies. Loans are carried at historical cost with an
> allowance for loan losses determined on a probably and estimable
> (FAS 5) basis. This is not FV. The real problem here is the banks
> don't want to admit to themsleve or their regulators that they have
> some loans that need reserves and that they have used bad models
> in the past for FV assets. As well, the regulators, like the OCC
> are in bed with the entities they regulate. They have been in these
> banks and seen the accounting and done nothing. Now they are in
> bed with the banks who made bad decisions, followed by bad or at
> least slow accounting.
>
> As to FDR's actions on FV. One expert. Lynne Turner, former Chief
> Accountant of the Securities and Exchange Commission, testified before
> Congress this past week that he beleive the action by FDR to stop
> FV accounting actually extended the depression. Again, your view
> of the facts is contrary to experts in the field.
>
> Those who are lay people on this site - please, don't beleive everything
> you hear. You either need to do your own analysis if you are able
> or talk to and listen to REAL experts.
nobody says it better than you!
A+ for your post!
On Mar 13 12:12 PM market ace wrote:
> Sure everyone knows the problem with the banks isn't all the crappy
> securities and loans they're loaded up with. It's not that they took
> on too much excessive risk, lending against assets whose value is
> plunging.
> It's not that they funded asinine private equity deals, stupid commercial
> construction deals, and dumb home purchases.
>
> It's that they have to mark their book of securities made up of these
> bundled loans to market, so they argue that the prices they could
> get for those securities in the markets are "artificially" low —
> or in some cases, that there is NO market for them.
>
> If only they could avoid marking those assets to market, or use their
> super- duper net present value and cash flow MODELS — which, surprise,
> surprise, say the "real" value of those securities is higher — then
> the banking system would be fine. We could all go back to the wonderful
> world of yesteryear.
>
> There's just one giant problem with htis type of thinking ...Pretending
> Something's Worth More Than It Is Doesn't Change Reality!
>
> Look, the problem isn't that there's NO market for these bad securities.
> The problem isn't that the prices are "artificially" low. The problem
> isn't how we account for these assets. The problem is that the industry
> doesn't want to acknowledge that today's prices are the REAL prices.
>
>
> There are tons of bidders out there for this crappy paper at the
> right price. Vulture funds, hedge funds, private equity investors:
> They're all raising billions and billions of dollars to scoop up
> cheap real estate, inexpensive bundles of mortgage backed securities,
> and distressed buyout loans.
>
> However, banks and regulators just don't want to admit reality. They're
> hanging on to the garbage securities, hoping against hope that they
> won't have to sell at the true market prices so now the government
> is busy trying to figure out ways to prop up the reprted price of
> the garbage rather than forcing banks to take their medicine now,
> even if it means the result is that they have to temporarily be nationalized
> or put into receivership.
If you want to change M2M, do it during the good times.
But no, nobody wants to remove M2M during the good times, because M2M makes you look good - it inflates your assets when times are good - and so your share price shoots up. And government also collects more taxes.
Now M2M is making you look bad, and you want to change the rules? That's having it both ways! This is like playing Monopoly or Checkers, when you lose, you say "okay now who has the least money or seeds is the winner!".
On Mar 14 11:59 AM Josh Stern wrote:
> Most of the negative comments on this article don't accurately grasp
> the topic it addressing. To be blunt about it, the thesis is not
> that MTM caused the banks problems. The thesis is that the combination
> of MTM and lots of banks with problems causes D-E-P-R-E-S-S-I-O-N
> (or something close to it).
>
> Of course the banks were stupid and their problems were not caused
> by MTM. But the question is about whether MTM is wise for banks
> given the possibility that it is causing the banking industry to
> take down the entire economy with it. Even if the crisis ends,
> it may be that MTM is not compatible with traditional bank leverage
> levels of 10-12X and if we want MTM we can only have banks with leverage
> of 2X, and therefore much higher borrowing costs. That's probably
> not the right decision for the economy of the future.
>
the link substantiating this in near the bottom.
1. From what I read, MOST of "mark to market" accounting only applies to THE DERIVATIVE TYPE ASSETS PORTION of a SMALL PERCENTAGE OF BANKS (namely those BIG INVESTMENT BANKS like Citi, Wells, Bac, etc.)
2. So, the ASSET VALUATIONS of THE BULK OF BANKING, the regionals and locals (the vast majority of the banking community)...are NOT CURRENTLY USING "MARK TO MARKET" anyway, just the LARGE INVESTMENT BANKS...and MOSTLY ON "REAL ESTATE TYPE DERIVATIVES."
So, changing MARK TO MKT will NOT AFFECT THE BANKING SECTOR as a whole that much...but it sounds GOOD... like Congress and the Administration, and Wall St. can ALL HOPE FOR the rally in FINANCIALs TO CONTINUE before THEY HAVE TO GIVE YOU THIS BAD NEWS....
MARK TO MARKET WILL JUST SHORE UP THE BALANCE SHEETS OF THE FEW GIANT INVESTMENT BANKS...it will have little impact on the MAJORITY OF BANK ASSETS in the aggregate AS THESE BANKS are NOT USING "MARK TO MARKET" anyway!
In fact, I think MOST OF THE BIG INVESTMENT BANKS want TO KEEP "MARK TO MARKET" in place...BECAUSE...
1. they feel THEIR STOCK VALUES HAVE ALREADY TANKED EXTREMELY and are NEAR BOTTOM. So, why would they want to change the rules if they anticipate a PRICE RISE IN THEIR STOCK...they would WANT TO BE ABLE TO "LEVERAGE" THEIR ASSETS UP with a recovery because of OPEN MKT FUTURE POTENTIAL (what led to the original financial bubble)...AND NOT HAVE THEIR ASSETS REVALUED and CHAINED TO "some historical or logically anticipated cash flow of non-defaulting mortgage payments..." AND THOSE VALUES, WHICH WILL ONLY TANK IN OUR "REAL FUTURE" due to MORE JOB LOSS, MORE DEFAULTS and DEGRADING OF ASSET VALUES "HELD BY ALMOST ALL BANKS" albeit IN A SLOWER MORE ERODING FASHION without THE VOLATILITY of "OPTIMISTIC FANTASY VALUES OF THE FUTURES MARKETS."
2. Also, while MARK TO MARKET is IN PLACE... these BIG INVESTMENT BANKS CAN CRY BROKE, OR NEAR BANKRUPTCY...and have the GOV fund them with "TENS OF BILLIONS" OF DOLLARS...which they WOULDN'T "NEED OR GET" if as they say they were STARTING TO MAKE PROFITS but they still need gov tarp help...because of declining asset vals. (their asset vals would go UP instantly if they were tied to real current potential valuations of housing...like .60 on a dollar, instead of .10 on a dollar that they would get in the "speculating global mkts.")
essentially the problem for the big investment banks is this:
rescind "mark to market" AND THE BIG INVESTMENT BANKS suddenly have their ASSETS valued UP (one time only by changing this rule).
now, at first this looks good...but the NEGATIVE implications FOR THESE BIG INVESTMENT TYPE BANKS are:
1. they can't use "asset based leverage" in a recovering mkt TO MAKE THEIR BALANCE SHEETS LOOK BETTER THAN THEY REALLY ARE (this won't happen in any event for a "long time" anyway... with continued job loss and more mortgage declines and defaults) but THE BANKS ARE LOOKING OUT FURTHER DOWN THE ROAD...and do NOT WANT THE POTENTIAL TO basically DAY type TRADE in a "bear type rally" with "a one time upward asset reval" hindering them....they can do better if assets stay at "mark to mkt" so they can have "speculator fueled leveraged upward asset valuations."
2. plus they can't cry FINANCIAL FAILURE LOOMING TO THE GOV for more taxpayer funding.
bottom line: rescinding "mark to mkt" jells the value of investment bank assets, even though it raises financial stability of these banks, and WOULD HURT THEM "in their view." Now, they really do have ONLY POTENTIAL REVENUE STREAM and futures mkt speculation on that to recover their huge drop in stock price.
... if and when the mkt recovers...it slows IMPROVEMENT to their balance sheets...because the element of "mark to mkt" which allows "leveraged upward speculation" INCLUDES ASSETS and NOT JUST REVENUE STREAMS based on new biz.
I hope this is clear...a bit fuzzy even to me...maybe someone can read this and repost more clearly...
anyway: the news and economic factors AREN'T GOOD FOR ANY BANKS in my thinking.
1. regional and local banks will continue TO HAVE THEIR ASSETS deteriorate due to job loss and more defaults and declines in real estate.
(and as I indicated, they are NOT MARK TO MKT...but valued more accurately to real buyers in the mkt and not "remote speculators."
2. big investment banks are subject to declines for the same reasons, whether we have "mark to mkt" or not.
3. there is all the GLOBAL BANK implications if we rescind or modify "mark to mkt."
here's the link about the PERCENTAGES OF BANKS using "mark to mkt"
messages.finance.yahoo...
here's also a link about the global implications of tinkering with "mark to mkt"
seekingalpha.com/user/...
flashrob
MARK TO MARKET WILL JUST SHORE UP THE BALANCE SHEETS OF THE FEW GIANT INVESTMENT BANKS...it will have little impact on the MAJORITY OF BANK ASSETS in the aggregate AS THESE BANKS are NOT USING "MARK TO MARKET" anyway!
this should START AND read:
RESCINDING MARK TO MARKET WILL JUST SHORE UP THE BALANCE SHEETS OF THE FEW GIANT INVESTMENT BANKS...it will have little impact on the MAJORITY OF BANK ASSETS in the aggregate AS THESE BANKS are NOT USING "MARK TO MARKET" anyway!
sorry, for the error
flashrob
I should Celebrate your Delusions, because it has been and will be profitable as they are shattered. But I would prefer to preserve a small shred of what this Country once was.
And if these assets have such great, unrecognized value, let all who are in favor of suspending MTM take all of their pay in the securities that do not have actual assets behind them- the bets on bets on bets that our wise ELITES foisted upon us. Let's see then how much faith they REALLY have in these CDO's etc.
This I believe is the argument that can win over those that don't 'get' the gist of the real debate here. The problem is from a PR perspective mark to market accounting 'sounds' very reasonable and those that argue against it are lableled as charlatans wanting a quick fix by hiding losses
The irony is that as it stands mark to mark accounting and lending ( again ) have and will make bubbles and busts exagerrated. Our society and economy need to take the opposite tack ( Jamie Dimon agrees ). Not only should accounting be based on cash flow models so should lending in all its variety of structures. Do this and 2008 does not occur as the real estate bubble has no way of forming. Neither does 1999 or 1929 as margin use would have not existed for stocks that did not meet the cash flow worth to allow the public and institutions to lever up. ( institutions should have the freedom to lend any dollar amount to anyone but the risk to lender and lendee should be flagged by some type of exclusion to normal lending resulting in higher rates and setasides by the lender for capital risk i.e. it should not be a normal course of business )
The business cycle will always exist but it could be significantly mitigated with applied common sense.
If successful, the modification of mark to market accounting and the application of a baseline of cash flow lending on all assets could alter the economic landscape in dramatic fashion and begin a new economic reality that could permanently alter the overly cyclical nature of the business cycle in a way that brings unprecedented prosperity.
In the end it could be that the huge flaws uncovered in fair value accounting may eventually lead to the realization of the embedded flaw that George Soros referred to in Alchemy of Finance as Reflexivity.
The theory that lending based on overvalued assets during booms and undervalued assets during busts is responsible for creating such havoc within the capitalist system and if left to its own devices leads to financial chaos.
PART I
1.Rescind “Mark to Market” accounting. Mark to Market Accounting is mostly used by BIG INVESTMENT BANKS TO VALUE the DERIVATIVE PORTION of their ASSETS (like CDO'S, etc.) This means this kind of asset IN BAD TIMES is highly DELEVERAGED and might be worth .10 cents on the dollar in the speculating global financial markets. However, in reality the underlying home mortgage might be worth .60 cents on the dollar in the REAL WORLD MARKET of people actually pricing a home purchase. So, rescinding MARK TO MARKET ACCOUNTING would immediately allow big banks to GREATLY INCREASE THEIR ASSET VALUES on their books. The result is THESE BIG BANKS would no longer be in DESPERATE FINANCIAL CIRCUMSTANCES...and WOULD NOT NEED MUCH GOVERNMENT/TAXPAYER ASSISTANCE.
These LARGE INVESTMENT BANKS would SURPRISINGLY prefer to STAY WITH “MARK TO MARKET” ACCOUNTING... WHY? Because the government has promised not to “let them go under” and so they get “TENS OF BILLIONS” in YOUR TAX DOLLARS...because of an “accounting oversight!” THEY ONLY NEED MONEY BECAUSE OF THIS RULE!
BUT WHY WOULD THEY PREFER TO HAVE “MARK TO MARKET” RULES CONTINUE. Because if THEIR ASSETS ARE IMMEDIATELY revalued upward, those assets would be jelled to MORE STABLE REAL WORLD VALUES in a one-time accounting rule change. Now, these big investment banks like to gamble (like with derivatives, etc. on the global mkts) and IF THEIR ASSET VALUES WERE LESS FLUID...THEY WOULD NOT BE ABLE TO MAKE “HUGE GAINS” in the event of a sustained recovery because of LEVERAGED SPECULATION in the FUTURES MKTS.
So, they want to GO BACK TO THE CRAPS TABLES, AND THE GOV POLICIES ARE FUNDING THEM SO THAT THEY CAN DO THIS.
On the other hand, if their asset values are “less fluid” by rescinding “mark to market” accounting their assets will go up and they will be out of financial trouble for NOW...but as Real Estate declines and foreclosures continue (MOSTLY DUE TO JOB LOSS), those SAME ASSET VALUES will GO DOWN (but slowly) making them ultimately a LESS ATTRACTIVE INVESTMENT...as they will not be attractive to speculators on the derivatives markets, because THEIR ASSETS ARE NOT VERY FLUID. So, what's really at stake here IS NOT BIG INVESTMENT BANKS GOING OUT OF BUSINESS ...but Washington worried about declines in the STOCK PRICES of these BIG INSTITUTIONS (remember the gov can keep them alive even with “mark to mkt,” so, obviously they can keep them alive a couple years down the road, as their stock prices continue to deteriorate...
The banks prefer to have the chance of RETURNING TO HIGHLY LEVERAGED BIG TIME GAINS IN THE THE FUTURES MKTS. Meaning they want to GO BACK TO BUBBLE PROFITS!
Rescinding “mark to mkt” would force them to only have the potential to make modest conservative profits, and they and their buddies don't want that. They got to much greed for that!
Just, Washington protecting their “buddies” on Wall St. is how this looks to me. Not, everyone in Washington, though. Look at who supports “mark to marketing” and who is AGAINST IT. Those against “mark to market” and in favor of rescinding it ARE THE GOOD GUYS in my opinion!
PART II
OK, supposing we RESCIND “MARK TO MARKET!” WHAT HAPPENS?
Well, the first thing THE BIG INVESTMENT FINANCIAL INSTITUTIONS suddenly are not in SUCH BAD FINANCIAL SHAPE. THEY NO LONGER NEED MUCH GOVERNMENT ASSISTANCE!
Now, those HUNDREDS OF BILLIONS OF TAXPAYER DOLLARS CAN “GO BACK TO THE TAXPAYER” (NOT WALL ST.) TO FUND A RECOVERY PLAN WITH SOME REAL POTENTIAL AND IMMEDIATE RELIEF for the INDIVIDUAL TAXPAYER, those who have lost their jobs, and those who are in danger of losing their jobs.
HERE'S HOW IT WOULD GO:
AN IMMEDIATE LARGE TAX REFUND FOR CALENDAR YEAR 2008 TO ALL INDIVIDUALS IN THE NEIGHBORHOOD OF 50%!!! (LADDERED A BIT MORE TO THOSE AT LOWER INCOME LEVELS)
BUT: THE TAX REFUND WOULD BE GIVEN IN THE FORM OF TREASURY COUPONS with specific purchase designations and TIME LIMITS. These refunds would not be able to be used for SAVINGS, etc.
for example: a coupon might be good for 20% credit toward the purchase of a new car, and/or have the option of being used to pay down your Credit Cards. You would not be able to pay off your Credit Cards in a lump sum, but might be allowed to double your minimum monthly payment. You could also use some to pay down your mortgage, and this would be variable depending on whether you had, for example, lost your job. The idea is the Income Tax Refund Coupons HAVE TO BE USED IN CERTAIN WAYS WITHIN CERTAIN PERIODS OF TIME. The details to do such a thing are not very complicated (I could do it in less that a week, so I'm sure the Gov can.)
Essentially, this results in a HUGE IMMEDIATE INFLOW OF CASH INTO ALMOST ALL BIZ AND SECTORS OF THE ECONOMY BY ALMOST ALL TAXPAYERS, THEREBY SHORING UP MOST OF THE CONSUMER ECONOMY TO FURTHER STEM DOWNSIZING AND JOBLOSS IN MOST BUSINESSES AND SECTORS.
THIS IS NOT “PIE IN THE SKY” INFRASTRUCTURE PLANS that require MUCH STUDY, AND RETRAINING OF THE WORKFORCE.
WE NEED QUICK HELP...THE BOAT OF THE ECONOMY IS SINKING FAST...WE CAN'T SPEND OUT TIME/MONEY REDESIGNING THE NEXT BOAT...THE ONE “WE ARE IN” IS SINKING AND TAKING ON MORE WATER AS WE DEBATE, ETC.!!!
So, forget Wall St. and THINK ABOUT “MAINSTREET!” ...AND NOW!
The big financials are GOING TO LOSE ANYWAY, MARK TO MARKET OR NOT, THE WORLD ECONOMY WILL CONTINUE TO DECLINE, AS WELL AS REAL ESTATE AND JOB LOSS, THE DAYS OF THE BIG FINANCIALS AND HIGH PROFIT SPECULATION ON DERIVATIVES IS FINISHED, OVER, KAPUT, THEIR ASSETS WILL ONLY CONTINUALLY DECLINE – QUICKLY UNDER “MARK TO MKT” RULES OR SLOWLY IF YOU RESCIND “MARK TO MKT!'
... KEEP THEM ALIVE OF COURSE, but DON'T STAKE THEM FOR MORE GAMBLING!
BUT, IF WE RESCIND “MARK TO MKT” THE ECONOMY HAS SOME CHANCE TO START COMING BACK FOR REAL BY FUNDING THE CONSUMER, INSTEAD OF WALL ST!
FLASHROB
However, now that the debate has started I guess I shoudl weigh in…I disagree with everyone who thinks that mark to market accounting is a small problem or of limited application. And, yes, for those of you who think I have lost my memory or sanity I have not. I do remember lower of cost or market accounting, vividly in fact. However, it is the intersection of the expansion of mark to market accounting and the capital markets (or lack thereof in the current market) that is killing the banking sector.
And, I noticed that not a single comment related to 141R which went effective on 1/1/09 and effectively expanded mark to market accounting to all financial assets of all banks. Now, I know that 141R only applies in a merger situation but the effect of that rule is to make all bank management teams run their institutions as if they are constantly applying 141R to their portfolios. 141R is just starting to infiltrate through the banking system but give it a little time…it will infect all banking decisions in short order.
I also didn’t happen to notice anyone discussing the ability of companies to manufacture earnings by pretending that they aren’t going to repay their liabilities and marking them to market. Two of the bigger abusers of that part of the rule were Lehman and Bear (RIP for both of them). As I recall Merrill was pretty big in that game of pretend as well.
I hope the debate continues and that FASB, the Administration, the SEC and/or Congress fix this rule.
Obviously, bad assets are just plain old bad and shouldn’t be treated as anything other than bad. Accounting rules shouldn’t be used to make bad assets look good or delay the recognition of credit losses.
But by the same token the efficient market’s thesis (which underpins mark to market accounting) has severe limitations and if misapplied (as I believe the current version of mark to market accounting is doing) creates terrible distortions. The market isn’t all knowing and always correct and that is because the market often doesn’t have real information about the real borrowers behind the loans that are being priced, the market doesn’t have the time to digest the information and the market just isn’t liquid enough to price all the different loans that exist (it isn’t liquid enough to effectively price all of the publically traded companies that exist).
Thanks for reading and thanks for commenting.
Sir, you hold yourself out to be a credentialed expert in accounting. I contend that you are a fraud.
On Mar 14 07:42 PM ETFnerd wrote:
> For further evidence, here is the Citigroup Annual Report from 2006
> which does not apply SFAS 157.
>
> idea.sec.gov/Archives/...
>
>
> On page 68, there is a section called: "Mark-to-Market (seekingalpha.com/symbo...)
> Receivables/Payables" which shows the mark-to-market assets and lisbilities
> of Citigroup's derivative contracts.
>
> Again I quote what Mr. Sunshine wrote: "Maybe it is just coincidence,
> but immediately after mark-to-market accounting was restored in 2007
> the banking sector started into a death spiral."
>
> I encourage anyone who attended Mr. Sunshine's accounting classes
> to seek a refund.
Those who want to quash M2M believe that everyone is as stupid as they are; that you can fool all the people all the time and than a scam can go on without end.
Sweeping the cat $hit under the rug does not make it go away. It simply ensures that a mess that you should have held your nose and cleaned up immediately is allowed to stink and fester endlessly. It is an attempt to avoid doing the right thing so that someone else will have do do it later for you. It is dishonest and immoral as it generally means that folks who had nothing to do with creating the mess are now left to clean it up. It is an attack on the financial prosperity of our children. It is selfish and sinful.
Just because something appears to work does not make it right. Madoff's con appeared to work for a long time as did Enron, LTCM and all the other obvious Ponzis. The credit Ponzi days are numbered. It's time to man up and do the right thing before it turns into WW3.