FASB Softens Mark-to-Market Rules: Better Late than Never

The FASB finally voted to soften the mark-to-market accounting rules. Well, better late than never. The Board revised the rules to allow companies to use their judgment to a greater extent in determining the "fair value" of their assets. The board also made it easier for companies to avoid having to take impairment charges against earnings when they suffer losses on their investments, especially when there are fire-sale transactions in the market.

This is helping the bank index bounce, but the whole market is rallying this morning. Housing stocks are among the leaders, as are retailers and energy. So the rally is really broad-based, which is good to see.

Europe was up big this morning also, after the ECB voted to cut rates .25% to 1.25%. This cut was actually smaller than expected, which is helping the Euro rally big time vs. the dollar.

Asian markets also soared overnight, on optimism that M2M would be relaxed here in the US. Hong Kong surged +7.4%, while Japan spiked +4.4%. The G20 leaders also decided that they will double the resources of the IMF to $500 billion, which can be used to support developing nations. I have heard that Eastern Europe is quite the mess right now.

Oil is higher today, rising to $52; but gold is lower, breaking below $900 level; the 10-year yield is higher to 2.76%; and the VIX is only -1.5% lower to 41.66. This is barely below the 200-day. I would have expected it to be lower on a big rally like today. A tad worrisome.

Trading comment: I have been trading a few stocks for short-term trades. I took profits on RIMM today ahead of earnings, and trimmed VMW on a big spike. I think stocks could pull back after RIMM reports, and possibly on tomorrow's jobs report.

I have not made any major ETF trades lately. In my aggressive accounts, I am buying a hedge position in SDS in case a pullback does materialize. But bigger picture I would still look to use pullbacks to add more long exposure.

Disclosure: Long VMW, SDS

Comments

[FlyingAfrican:]

As an accountant, the relaxation of mark-to-market rules is a travesty.

These were trading assets, and should be valued as such.

Amortised cost should only be used if the asset is being held to maturity.

Already using discounted cash flow, while a valid valuation model, only works if the certainty of the cash flows is known. In the case of MBS and CDOs the default risk is unknown.

At best, the FASB / SEC should allow / recommend banks to state their estimated value and the model they use in the disclosure notes, along with their intention (i.e. to hold to maturity) and their financial ability to hold such assets to maturity (ie. no forced sale).

In addition the Fed should temporarily just relieve the banks of their capital requirements (and lower it to say a negative amount... hahaha).

It makes no sense that the market rallies off the relaxation of mark to market rules. People think this will stop the nationalisation and bankruptcy of banks, it won't. When these ARMs reset this quarter the bloodbath will continue. Discounted cashflow when cashflow = 0... results in a $0 value.

Remember an asset is only worth what someone is willing to pay for it

Apr 02 03:00 PM

[Ishortyou:]

the prices are set by a simple supply and demand relationship, now banks can build their fantasy land or house of cards in their books and look good from the outside.

Apr 02 06:01 PM