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Wednesday, December 9 2009 |
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- The U.S. Financial Accounting Standards Board (FASB) will discuss mark-to-market guidelines at a board meeting Monday. The FASB says it will focus on "additional application guidance that would clarify how mark to market is used in illiquid markets." Earlier today, FASB chairman Robert Herz told a House subcommittee that new rules could be implemented within three weeks.
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This news story has 39 comments:
When there is only a single bidder/buyer there is no true value, only distress value. A DCF model is a much better and more consistent indicator of value in most market environments.
FASB is too rigid and self-serving to recognize this.
When there is an active market, buyers equate the two - current price=current value. They obviously hope that value will increase over time making the price they paid a good deal. Sellers? Well they either got their good deal or decided it's time to get out for any number of reasons.
When there is no market or a thin market, what is the value? Is it face value, what you paid, zero, something else?
As dixie alludes, in these situations market value= distress value, which is not necessarily the best measure of value for all the other holders of the asset. The seller has its own reason for accepting the market/distress price, however other owners may have a longer term horizon and have a different concept of value. Whatever concept that is needs guidance so that other investors are not misled.
It's good the FASB is looking into modifying mark-to-market rules as applied in illiquid markets. Mindless application of mark-to- market over the last year and a half have caused a lot of incorrectly interpreted and unnecessary financial disasters. I just wish FASB understood the concept of urgency.
In terms of the stock market, suspending MTM would be terrible, who would buy bank stocks? you have no idea what you are buying, you may be buying a worthless scrap of paper. The government is repeating step by step the mistakes of Japan, we will have zombie banks for the foreseeable future. Terrible.
you own a large commercial property, say a large Vegas Casino/hotel. It has positive cash flow, making all its debt payments on schedule etc., but if you tried to sell it, no one can finance a deal that large in todays market...It's value should be zero?
On Mar 14 01:00 PM manya05 wrote:
> Let me get this straight (I am neither an accountant, nor a financial
> expert). I have an asset for which there is no market (e.g., I cannot
> unload it at any price). Isn't it logical that its value be zero?
> nobody wants my asset, shouldn't its value be zero on the books?
> I cannot do anything with it. Yes, maybe in a month, or three months,
> or next year, there will be a market for this asset...then, I put
> it back on my books and show a value for whatever the market says
> its worth is. But maybe that day will never come.
>
> In terms of the stock market, suspending MTM would be terrible, who
> would buy bank stocks? you have no idea what you are buying, you
> may be buying a worthless scrap of paper. The government is repeating
> step by step the mistakes of Japan, we will have zombie banks for
> the foreseeable future. Terrible.
Thanks. JL
While it's true that mark to market accounting accelerates (perhaps prematurely) asset writedowns which immediately impacts company balance sheets, it's also true that mark to market accounting prevents overinflating balance sheet assets which could lead to gross misallocations of capital to companies whose asset values will never recover. Even worse, companies with overvalued poorly performing assets will likely induce managers to take bigger near term risks with fresh capital to improve the balance sheet problems hidden from shareholders in company financial statements not using mark to market accounting.
The answer has to be somewhere in between or, more desireably, both. Companies should have to provide balance sheet pictures with mark to market and historical value or some measure of expected present value.
This transparency would permit investors to evaluate or challenge the CFO's assumptions and make an informed investment decision.
As for derivatives, that's a nightmare which will look ugly no matter how you mark it. Right now all the bamkers and regulators keep pretending its not there. We still are waiting for disclosure on this topic.
You would think stockholders would have a right to see what their executives are doing. Especially when such actions may equate to positions 10x greater than the company's capital base and are well known for pushing any given financial instutuin to credit downgrades and even bankruptcy. When we say a capitalit market we mean shareholders are the owners of companies, not CEOs, board members, regulators, or the government.
Currently bank laws are allowing executives to treat their companies as feifdoms and its stockholders as peons un justified in the right to even question or demand information as to what they are doing with the stockholder's assets.
I frame this as a stockholder's rights issue more than a government regulation issue because the ones most at risk are the shareholders, sadly we can't depend on administration after administration from upholding and enforcing the laws, and it should be very clear when all is said and done that shareholders are the owners of a company and are entitled to information regarding their company.
Anyway, thanks for listening to my add on blurb about shareholders rights which I am a voracious advocate of.
But I don't think it's unreasonable to require a view on the financial statements of both. By requiring companies to provide both Mark to Market and either Mark to Model or some other PV calculation, you're giving investors the opportunity to manage risk tolerance. Some conservative investors may choose to invest in companies where the Mark to Market and Mark to Model value variances (MMMMVV) are quite low. Others may see greater risk and opportunity in the companies with higher variances. Unquestionably, the risk adjusted present values of high and low MMMMVVs should not be the same. Investors should be able to make an informed decision as to whether or not they want to invest in high or low MMMMVV companies.
I believe my solution provides that.
In my view, not disclosing both values is dangerous because investors will not know how to rationally value assets.
The problem the banks have is that the money is already lost and it hasn't been recognized. Blaming mark-to-market is disingenuous at best.
On Mar 13 07:19 PM Vanderpool wrote:
> I have read that if this change is passed it will be bad for the
> stock market. That to me seems illogical. I expect it will be a benefit.
> Any other opinions?
On Mar 14 07:08 AM mikeymike wrote:
> If banks are allowed to not show their true value, but their "model
> value" instead, this bubble too will burst and it will not be pretty!
> I expect this will be the case.
your interchange is/has provided an excellenet educational opportunity for those of us still trying to grasp the concepts, consequences and investible thesis.
I do believe our financial system is currently insolvent based on the amount of toxic assets on the banks books. But I do not want to mark these asset to market as i fear that puts great depression II on the table.
We can only hope their is a reasonable solution that stabilizes the system, punishes those that took too much risk and rewards those that didn't.
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).
This FEAR, is precisely every one is praying to get rid of the MTM rule! Considering what Wall Street shenanigans have done on their balance sheet, in the past (Enron!), NO one will trust their Market to' Whatever they fantasize' value. This increases the opacity and reduces the confidence, when we need more transparency in the market place! There will be complete lOSS of confidence of our Financial Institutions!
Considering their balance sheet is full of MBSs, CDOs CDSs which are all declining rapidly as their VALUES (derivatives) are derived from Home mortgages (values), Auto loans CC loans etc. You don't have to be Sherlock to fore see the decline in the value of latter assets in the coming months! So will be, Banks' capital base with regard to liability.
GE declared only 2% of their balance as MTM rest - 98% is opaque. Look at it's stock price!
Supposing one (applying for Life Ins) diagnosed with cancer, you start blaming the doctor for divulging the truth and want to find one who will agree that you are not 'that bad' re your health!
There is a word for it, DENIAL! We now, are collectively and insanely in denial! You think things are worse now. Wait, after removing or even 'modifying' MTM according to wishes of holders of these toxic assets.
Who is going to trust their numbers?
D-2 will be here faster than you think!
In my opinion, only those securities that the company expects to sell, mature or otherwise dispose of in the next year should be market to market. The longer term holdings should stay on the books at cost less a charge for "permanent" impairment that should be amortized over the remaining life of that pool of assets. The permanent impairment deduction should be based on DCF analysis of the securities remaining in the pool.
Remember, the attest statement says in part that the financial statements fairly reflect the financial postion of the company as of a certain date. When there is no market for a major asset that is valued on a mark to market basis, the attest statement becomes invalid. Valueing non-marketable securities to market is nonsensical.
Anything received back on the asset would be recognized as income ratably over 12 quarters. (Treated as financial reporting income, not for tax reporting. Most of what is coming back is return of principal.)
This takes all the judgment and monkey business out of valuation. It smooths the writedown in a predictable way and gives every quarter's aggregate writedown an opportunity to be offset by an aggregate gain engineered with a bias of twice the writedown rate.
The concept of regulatory capital needs an overhaul, and should be based on cash flow liquidity. If you can pay your operating expenses and cover all account withdrawals each month, you're still in business baby.
P.S. As far as investors are concerned, I believe most of them have already been wiped out. The people who own bank stocks today are traders. True investors will not become owners of bank stocks until there is transparency and a clear direction toward future profitability and financial strength.
standard guy, is advocating doing away with Mark to Market rule!
If you own non marketable assets,they are not assets,
the US citizens have been fooled enough.Follow FASB rules,and prosecute the senile Greenspan.
On Mar 13 07:19 PM Vanderpool wrote:
> I have read that if this change is passed it will be bad for the
> stock market. That to me seems illogical. I expect it will be a benefit.
> Any other opinions?
We need to end this charade and call a spade a spade. If the banks are bankrupt, they should be out of business. I assure you that there are plenty of banks worldwide that not bankrupt, are very solid and healthy, and would welcome the opportunity to serve the US market.
FASB memebers should be put into prison or hanged in the public square. Saddam Hussien could not have done any worse than FASB even if he had stockpiles of WMDs. Osama Bin Ladin could not destroy the American economy despite his heroic or rather evilish efforts.
FASB in one fell swoop destroyed the American economy and the whole world, and is still destroying everybody, with a stroke of the pen. Truly the pen is more powerful than any gun man can invent. The road to hell is paved with good intentions, as the saying goes.
Be deer in this market. Stay clear of the bears and bulls that false pump the market for their greedy gain. Don't forget China might be pulling back its buying of gov't bonds, so don't tell me there isn't political tension to make the market rally.
When nobody wants to buy your product today, your product has zero value. This is how capitalism works. Even IF there are buyers in the future, as of today, it has no value. And that's a big IF.
Removing Mark to Market is to hide the truth today, to live in hope, to borrow from the future, and that's another bubble.
On Mar 14 09:45 AM dixie wrote:
> Mikeymike, me thinks you misunderstand "true value".
>
> When there is only a single bidder/buyer there is no true value,
> only distress value. A DCF model is a much better and more consistent
> indicator of value in most market environments.
>
> FASB is too rigid and self-serving to recognize this.
you are the naive one.
you think investors will be so stupid to believe that suddenly everything is okay because M2M is removed?
do you think that investors, especially foreig purchasers of our treasuries, will be so stupid to believe that assets for which there are no buyers today have any value? do you think they will be satisfied by the assurance that these assets will find some buyers some day in the future?
sure, everybody lies. but if you are caught lying, few will believe you again. they won't invest in you again, at least not long term.
On Mar 14 07:41 PM Adult wrote:
> All the above comment are writen by naive kid !
>
> 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.
>
if u need to change your rules midway in order to look good, many will lose confidence in you. and few will want to invest in you.
On Mar 15 10:22 AM ron_paulite wrote:
>
> you are the naive one.
>
> you think investors will be so stupid to believe that suddenly everything
> is okay because M2M is removed?
>
> do you think that investors, especially foreig purchasers of our
> treasuries, will be so stupid to believe that assets for which there
> are no buyers today have any value? do you think they will be
> satisfied by the assurance that these assets will find some buyers
> some day in the future?
>
> sure, everybody lies. but if you are caught lying, few will believe
> you again. they won't invest in you again, at least not long term.
>
>
This "dilemma" is really very simple to understand.
A big reason that banks got into serious trouble is because they <strong>took risks and were far overleveraged, & were not honest with their banking peers & the financial community.</strong&... If we look at the level of their deceit, dishonesty, fraud, and corruption from a historical perspective, it's off-the-charts. Trust and confidence are primary prerequisites to a sound financial community.
<strong>Fast Forward to March 2009:</strong>
So now FASB is considering a modification that will allow banks to "Mark-to-Fantasy", instead of:
- maintaining a 10 to 1 leverage that is safe
- building trust and confidence in the financial community
- being honest and admitting their past mistakes.
If FASB relaxes the rules tomorrow, the fraudsters may have a "field day", and the market may rally in the short term . . . until we all realize, once again, that there is no trust or confidence in the financial systems of this country.
It's gonna be interesting!
On Mar 14 04:09 AM jeandit75 wrote:
> Once and for all, let's say it loud and clear that the markt to market
> rule is a true benefit for banks because they will stock bleeding.
> When the virtual economy starts to drag the real economy we have
> to make choises. Yes banks have been bad at managing their risks
> over the past few years but we need them and we need them to be able
> to do what they have to do which is to lend. With the end of the
> mark to market, the tarp money will no longer go to increase the
> banks equity but start circulating in the system. This is a second
> derivative phenomena. If the banks stop bleeding, the market can
> therefore stabilize and look for improvement down the road. This
> was desperetaly needed. Any contrary opinions welcome.
TaurusTrader
On Mar 13 07:19 PM Vanderpool wrote:
> I have read that if this change is passed it will be bad for the
> stock market. That to me seems illogical. I expect it will be a benefit.
> Any other opinions?
On Mar 13 07:19 PM Vanderpool wrote:
> I have read that if this change is passed it will be bad for the
> stock market. That to me seems illogical. I expect it will be a benefit.
> Any other opinions?
On Mar 14 01:00 PM manya05 wrote:
> Let me get this straight (I am neither an accountant, nor a financial
> expert). I have an asset for which there is no market (e.g., I cannot
> unload it at any price). Isn't it logical that its value be zero?
> nobody wants my asset, shouldn't its value be zero on the books?
> I cannot do anything with it. Yes, maybe in a month, or three months,
> or next year, there will be a market for this asset...then, I put
> it back on my books and show a value for whatever the market says
> its worth is. But maybe that day will never come.
>
> In terms of the stock market, suspending MTM would be terrible, who
> would buy bank stocks? you have no idea what you are buying, you
> may be buying a worthless scrap of paper. The government is repeating
> step by step the mistakes of Japan, we will have zombie banks for
> the foreseeable future. Terrible.
If we do institute mark to market, are we prepared as a country to have a large number of our banks go bust every time we have a recession? How about the local banks and credit unions? Their asset value falls with the economy also.
Present value of a cash flow is a sound way of setting value if you have a relatively consistent cash flow. For example, the energy industry uses it almost exclusively to set yearly values on exploration and development projects on their Balance Sheet, pipelines and even whether they should invest in service stations are subjected to PV cals. But, for the bank the problem comes with what the discount rate should be and what are the discounted residual values of the investments.
Market price on the other hand, is great for potatoes, oranges and lots of other stuff but has little or no meaning in valuing derivatives. If I want to raise money fast by selling a derivative with a face value (par) of say a couple hundred million dollars or so I’m going to have a problem. I might not sell it this week or even next. It definitely doesn’t mean the asset is valueless, it’s still generating cash. So does it mean that two identical derivatives have different values based upon how fast one wants to sell?
To use the example raised here in this thread that a casino with a positive cash flow is facing a balloon mortgage payment in five/ten years. The fact that it can’t pay of its mortgage in five years is irrelevant. Most investors I know would much rather just keep collecting the interest that is paid from the positive cash flow. Inflation will look after the mortgage eventually, hopefully not to soon.