Backlash Against Mark-to-Market Accounting

Is that the start of a backlash against mark-to-market accounting I hear off in the distance? I think it is! Available evidence:

1) In his latest letter to shareholders, Marty Whitman says the notion that prices determined via marks to market always deserve 100% weighting is "arrant nonsense." "Market prices deserve little or no weight, when the portfolio consists of performing loans and in-force policies [and other types of illiquid securities] held to maturity," he adds.

2) Holman Jenkins writes in yesterday's WSJ ($) that "'[M]ark to market,' an accounting and regulatory innovation of the early 1990s, has proved another one of Washington's fabulous failures--that is, if the goal were curing market uncertainty through 'improved' accounting practice." 

3) Christopher Whalen, co founder of Institutional Risk Analytics, argues in the FT today that, "Given that most securities and loans do not have liquid, actively traded markets, it seems fair to ask: why did the US adopt the fair value accounting standard in the first instance? While it may be reasonable to apply fair-value rules to actively traded securities, for the vast majority of assets that are illiquid, historical cost remains the only reasonable and consistent way to report the value of financial assets."

That makes three -- I call it a trend! Conditions will soon be in place for a roaring bull market in griping about FAS 133. 

P.S.: If the current crisis can spur the Fed to call emergency meetings to cut interest rates, why can't the FASB (or whatever they call it now) call an emergency meetings to change accounting rules? Just a thought. . .

Comments

[User 108022:]

If MTMarket doesn't work so well why were affected institutions using MTModel pricing that was so wildly off realistic values. In turn this feeds the creation of more of these monsters with unwise financial characteristics. A MTModel that does not take the world outside the security itself is inherently unsafe. I understand liquidity, size, etc. affects price but MTModel makes implicit assumptions about the market that may or may not be true. The only truth you will find is when you go to buy or sell is price. And MTModel was wrong, bad pricing.

2008 Mar 07 12:29 PM

[richandmer:]

I applaud your article. MTM seems to have taken hold of the financial markets and appears to be a major reason the markets are falling so much. Panic sets in when investors hear the values are dropping even though everything else is in good shape. I hope this sets the stage for some changes.

2008 Mar 07 03:07 PM

[gebby:]

maybe there can be a moratorium on MTM for a period of time. the markets are responding to fears of bad marks and only those with the right assets and dep pockets get to survive.

i dont own any bonds and i am geting hurt in my stock names. the market is being driven by fear.

2008 Mar 08 12:26 PM

[canama:]

MTM is only questionable for Level 3 and some Level 2 assets. It is insane to use a purelypeculative instrument like the ABX index as a basis for marking all illiquid MBS assets.

I also question the concept of requiring unrealized losses to be recognized (OTTI losses on AFS assets). AIG has been forced marked down nearly $30B without realizing a single $1 of losses.

2008 Sep 16 11:02 AM

[redplane500:]

I was wondering if you or some of your readers can you answer this for me: When holders of mortgage-backed securities write down the value of these securities, do they based it on: (i) the “fair value” of the MBS as determined by the rating agencies; or (ii) the collective market value of the underlying collateral as determined by independent third-party appraisals? I am finding it very hard to understand why the write downs in the value of these mortgage-backed securities as reported in various publications, do not seem to correspond to the drop in the value of the underlying collaterals.

2008 Sep 16 10:23 PM