Mark to Market: Time of Death 8:45AM, April 2, 2009 51 comments
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The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.
The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more.
Well, now that banks are all good in perpetuity (or at least until entire asset pools are remarked from par to zero), there goes the need for the PPIP. Hopefully this at least means that Bill Gross and Larry Fink won't make billions compliments of U.S. taxpayers. But don't take my word for it: the head of the world's largest hedge fund voices these very concerns. In fact, Dalio is so disgusted by the insanity in equity markets, rumor is he has moved out of trading equities entirely.
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Who would ever be willing to intermediate between liquid assets (deposits) and illiquid assets? What is basically being suggested is that any entity that wants to hold illiquid assets has to hold enough equity to withstand the lowest possible market value over the entire lifetime of that asset... which means the worst case NPV plus an undefinable and possibly infinite liquidity premium. What exactly is the benefit of a rule like this, if in fact the objective is to invest in illiquid assets and hold them to term?
Hedge funds and other asset managers are the worst forms of hypocrites about this issue (in large part because they can and do exploit illiquidity to make profitable short bets) How about we make a deal. I'll agree that everything should always be marked to market, if hedge funds, private equity funds, and everyone else agrees to post 100% collateral for their loans, in the form of US Treasuries.
The idea that mark-to-market provides a form of transparency is also disingenuos at best. All it really tells you is that a company is holding asset class X, which in the current environment has an impaired value made up of an unknown amount of actual value loss, plus some unknown liquidity premium. Anyone who thinks this actually helps to understand a balance sheet doesn't know what they are talking about. At the very best... and this is not likely... but at the very best it might give you some clues as to underlying asset classes and structures that are not otherwised disclosed. Its far more likely that it will be distorted by the need to find odball comparable trades in an illiquid market.
The only people who really support mark to market accounting are academic accounting geeks who place highly abstract theoretical concerns over any pragmatic considerations, hedge funds and other traders who have been able to exploit the problems m2m creates to reap huge profits, and idiots who don't know any better.
Which are you?
Just imagine it, they have now 3.9% unemployment rate early this year - the WORST they ever had for more than two decades.
Look at the US. One year and counting and the unemployment rate went from 4.6% to 8.1% or almost double already - what an excellent accomplishment.
The US must be doing the all the right things at the right time.
Told you, the US must never ever follow any of the economic measures Japan has implemented during their more than 20 years of deflationary recession. If the US follows any of those measures; the US will also suffer the WORST unemployment it would have suffered during the course of this deflationary recession.
Got it?
On Apr 02 03:10 PM Mad Hedge Fund Trader wrote:
> It will give just a temporary respite. See? All it takes was a little
> accounting rule change, and Great Depression II will go away. At
> least that’s what the stock market thought today, surging 300 points
> and blasting through 8,000 in the Dow, up 26% from its March 9 low.
> The only problem with this is that it was an absence of market to
> market rules that allowed Japan to lose a decade of economic growth.
> Investors and auditors will always assume the worst about asset valuations,
> unless proven otherwise. That’s what happened in Japan. Once the
> kneejerk short covering finishes, look out below, at least for the
> banks.
But why?
Are they profitable enough and expecting an economic recovery? So soon.
Mark to Market was their Genie during the upturn and their Satan during this 18 months of relentless downturn.
It is going to work again for their benefit if the economy suddenly goes into the first gear, then the second gear, then the third gear, etc.
Hallelujah!
On Apr 02 02:05 PM avalpert wrote:
> I'm sorry, but instead of reading press reports you should read the
> guidance itself. This is no where near the death of Fair Value accounting
> or the mark-to-market components of it. This changes guidance at
> the margins and is pretty much in line with how they have framed
> the issue since the fall.
Valuation of companies' assets is going to be difficult, and in long term can drive investors away due to doubts about the accuracies of banks financial statements.
A conflict with the Treasury's plan for taking the toxic assets away from the banks' balance sheets using the Public Private Investment Fund (PPIF) can happen.
According to the new rules, banks have incentive to keep the assets on their books, rather than selling them, and if they sell more losses can happen because it wont be easy to sell bad assets at statement price.
First, the truth is that probably no more than say 20% of the American public know what a balance sheet is let alone know how it works. I think many of you would agree that I am being nice here. I know I was one of them (that had no idea) even though I had run a very successful private company.
Then one day "BIG Corp" came to town and said...hey let us pay you millions. Perfect! Now I am at Big Corp and the first company they give me to run the first day the controller comes in to tell me that "hey our balance sheet is really clean." I think to myself for one second..I wonder what she meant.
Next thing I know...I am running a major portion of BIG Corp...and same controller tells me to watch out .....major portions of the companies balance sheet/s have "problems." Again..at first...I wonder what that means.
OH..WOW. You mean you can cheat your P&L with that balance sheet thing! I felt like Gomer Pile and the Pentagon. My "moment of Zen" came to me when I had dinner with the Regional Controller who was leaving to take a new job (a short time after my promotion) and he told me he was leaving because "its just not fun anymore now that you are here...we can't be as creative." I wanted "creative people" I just wanted them in the design department not in accounting.
I mean when you are work in the real economy running real businesses when you don't have any cash you cannot make the payroll...and things stop real fast. The sad truth is that many many people have no idea what this change means. But, I concur it is a license to lie cheat and steel. And I also concur (and it is very sad) that that is nothing new. But the whole "system" became "infected" with this kind of thinking..and the higher up you went (on average) the worse it was and is.
Now the accountants...the outside ones were a total joke in that time...late 90's early 2000's. I mean a total joke. The operators who were cheating using their balance sheets were more afraid of the internal audit people than PW. Eventually it caught up to all of them. I think that the AA experience produced enough "shock and awe" that even some of the most "creative" accountants decided that people could actually go to jail for what they were doing and decided that being some Con's "bitch" was not really high on their list of things to do.
The answer is simple...hey we will just make the rules more "flexible." This is tragic and eventually there will be hell to pay...but..not today.
Go Tyler...
Beware the people who have nothing to lose...
I was telling folks that they will bring up the averages just enough to draw the retail investor in and then pow. if you will notice the retain investor hasn't responded to the bottom call this time like the last one. so lets push it up a bit.
I have abandoned the american stock market period and am advising all friends to do the same. At least we can clearly see the manipulation now. until recently I would not have believed it.
I find it funny when people talk about capitalism, communism, socialism. The markets are rigged the same almost everywhere and I see very little difference between here and russia.
In russia the have the oligarchs, the ones with good connection so the kremlin get bailout and the rules change. In american we have the oligarchs (bankers) the one's with good connections to washington get bailout and the rules changed. can someone explain the difference.
Despite the massive unpopularity to the policies in Washington regarding the bailouts (tarp, talf, m2m, etc) they are pushed forward. this doesn't sound like representational democracy.
It appears to me to be taxation without representation. Didn't we have a revolutionary war because of that?
This entire fiasco make a mockery of our democracy.
On Apr 02 12:33 PM archman82011 wrote:
> <<I tell WFC: the trading in such securities has dried up for a reason!
> the reason being that no moron wants to buy those stupid assets,
> therefore you have to mark them at fire sale prices....!!!!!>>...
>
> Amen.
> But, we are in a market completely controlled by hedge funds now.
>
> The stock market goes up because hedge funds "want" it to go up.
>
> When they are done feasting, they simply decide to take it lower.
>
>
> Nothing is done for the benefit of the average american. It is all
> done to benefit the elitists, period.
>
> Invest accordingly.
"
This entire fiasco make a mockery of our democracy
"
I was going to comment, but enough good has already been said, especially the above .
At the same time we elected a guy who talked about change you realize real quick the only change was his skin color. Gm gets taken over, management forced out and has to restructure and bond holders take haircuts. Everything they do with GM they can't do with Banks?
"
Good one... For the record, I am neither Republican nor Democrat since there is no fundamental difference among the "parties".
“…Before MTM took effect, the Financial Accounting Standards Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by "historical" costs, or "mark to management," was folly.
The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio.
Obfuscating sound accounting rules by gutting MTM rules will only further reduce investors' trust in the financial statements of all companies, causing private capital -- desperately needed in securities markets -- to become even scarcer…”
His basic argument was MTM is a very small part of the asset base, too much fuss about nothing.
(MF for short), where the value of any asset is just what I say it is (remember "Alice in Wonderland"? and the white queen??). Once again Wall St. reigns supreme while the rest of us scramble to hold on to our pitifully shrunken savings. That's what happens when you are persuaded to believe in the prevailing myths about wealth creation.
On Apr 03 12:30 PM mgcolin wrote:
> Everyone knows the best equities should be priced at 6X 10 year trailing
> earnings and the big banks are bankrupt. They just can't accept
> it yet. They will - see Japan.
Where is mainstream media coverage of these stories? I guess 90% of the American sheople wouldn't understand this if they watched a 30 minute seminar. Better to show really important news clips of has-been pop starlets adopting babies in sub-Saharan Africa.