stvcomment

Obama's TARP 2 Signals an End to Mark to Market

seems you could have a sort of moving average type mark to market to smooth out the excesses whether up or down.


On Jan 15 12:41 AM johngonole wrote:

> With all the great comments here I can't believe I still get to make
> this suggestion. Keep in mind I don't know what the current accounting
> rules are regarding mark to market but bear with me anyway. First
> we must have mark to market accounting otherwise the markets, investors,
> speculator, and even management of companies will have no idea how
> good or bad their company's financial condition is. Without mark
> to market accounting we might as well torpedo the economy now. Who
> should get a loan, etc... The structural problems with this type
> of or lack of accounting are endless.
>
> The problem with mark to market accounting is that sometimes markets
> are irrational or inefficient due to liquidity or lack of information.
> The solution is obvious. Depending on what type of security is being
> held one uses the long term beta (a measure of volatility) to adjust
> the market value of the asset based on a moving average. The more
> volitile the term beta of underlining asset the shorter the moving
> average used to price the asset. For example a stock with a beta
> of 2 would basically have to be marked to market at the current trading
> price. However a stock with a beta of 0.5 might be allowed to be
> marked to market with a 360 day moving average.
>
> In the current mortgage situation I heard of some mortgage backed
> securities being priced at 9 cents on the dollar mainly due to the
> lack of demand when fear was at a fevered pitch. This instant mark
> to market destroyed financial institution balance sheets causing
> everyone to unload these types of assets at the same time. This
> caused prices to plunge further setting off a devestating chain reaction.
> Now if mortgage values were priced using a 2 year moving average
> then the downward spiral would have never happened to the degree
> it just did. Likewise banks couldn't have written up the value of
> their securities as fast as they did. The point is that we need
> to eliminate the potential for illiquid markets to force companies
> to write off investments that everyone knows are worth more than
> they are in the long term.
>
> If I plan on holding a 30 year mortgage security backed by someone
> with excellent credit who has been steady in making payments for
> 20 years and has plenty of equity does it make sense that the security
> should have to be written down because of speculative forces in the
> security marekets.
>
> I just think there can be some commen sense written into the mark
> to market accounting rules to reduce volitility of company balance
> sheets thus allowing for the markets in whole to adjust to realities
> gradually.
>