cranyinnyc

FAS 157: Let the Tweaking Begin

Another misinformed attempt to blame the problem on accounting rules rather than high leverage and weaken underwriting.

Other than temporary impairments in not new nor was it a product of FASB’s move toward more reliance on of fair market values. It existed in the S&L crisis.

Other than temporary impairments are only taken on assets that are designated by the banks as held to maturity and as a result the assets were valued at amortized historical cost. Such impairments are not automatic when the fair value is below amortized historical cost. In fact management has wide latitude and only has to book OTI charges when it is clear that even if they held the security to maturity they would not realize the amortized cost. Such OTI hits have been very modest thus far. They are not why banks face capital pressures.

By the loans are accounted on an analogous manner. When the banks expect they will not be repaid the full loan balance they are required to make provisions for loan loss reserves.

Stop trying to blame accounting you are only enabling zombie banks.



On Mar 15 08:43 AM bruggs wrote:

> The issues on mark-to-market are numerous. The biggest issue that
> has hurt banks in the past year is related to Other Than Temporary
> Impairment charges. This is where fair value accounting is absolutely
> broken. If a bank estimates that they will incur a loss in the future
> on an investment due to credit issues, it must mark that investment
> to market through earnings immediately (which hits capital).
>
> For example, many banks as well as the Federal Home Loan banks have
> securities which were originally Aaa that now have estimated losses.
> These estimated losses occur over 20 or 30 years and might be 2 or
> 3% of the balance. With market liquidity so strained, these securities
> are trading at 40 to 50% unrealized losses. So banks write off 50%
> of the bonds through earnings when they expect to receive 97% of
> the principal back.
>
> This accounting is non-sense. Allow the banks to mark the investment
> down by the estimated losses and not the fair value (when little
> or no bonds are trading). There are other OTTI examples like this.
> OTTI accounting needs to be reformed now.
>
> If loans were accounted for in this same manner, the entire banking
> industry would be undercapitalized. Banks are entities which raise
> deposits to fund illiquid assets. They earn net interest income cash
> flow from these assets and liabilities. Most banks (excluding the
> larger banks with broker dealers) do not actively trade assets. Why
> account for these activities using trading levels? It makes no sense.
>
>
> Let the banks get back to serving their purpose. Regulators need
> to restrict trading activities in the future to make sure the larger
> banks that were trading do not hurt the rest of the industry. Accountants
> need to reform the accounting policies to properly report the activities
> and cash flows of the banks (especially the banks which take deposits
> and lend without trading).

FAS 157: Let the Tweaking Begin

Another misinformed attempt to blame the problem on accounting rules rather than high leverage and weaken underwriting.

Other than temporary impairments in not new nor was it a product of FASB’s move toward more reliance on of fair market values. It existed in the S&L crisis.

Other than temporary impairments are only taken on assets that are designated by the banks as held to maturity and as a result the assets were valued at amortized historical cost. Such impairments are not automatic when the fair value is below amortized historical cost. In fact management has wide latitude and only has to book OTI charges when it is clear that even if they held the security to maturity they would not realize the amortized cost. Such OTI hits have been very modest thus far. They are not why banks face capital pressures.

By the loans are accounted on an analogous manner. When the banks expect they will not be repaid the full loan balance they are required to make provisions for loan loss reserves.

Stop trying to blame accounting you are only enabling zombie banks.



On Mar 15 08:43 AM bruggs wrote:

> The issues on mark-to-market are numerous. The biggest issue that
> has hurt banks in the past year is related to Other Than Temporary
> Impairment charges. This is where fair value accounting is absolutely
> broken. If a bank estimates that they will incur a loss in the future
> on an investment due to credit issues, it must mark that investment
> to market through earnings immediately (which hits capital).
>
> For example, many banks as well as the Federal Home Loan banks have
> securities which were originally Aaa that now have estimated losses.
> These estimated losses occur over 20 or 30 years and might be 2 or
> 3% of the balance. With market liquidity so strained, these securities
> are trading at 40 to 50% unrealized losses. So banks write off 50%
> of the bonds through earnings when they expect to receive 97% of
> the principal back.
>
> This accounting is non-sense. Allow the banks to mark the investment
> down by the estimated losses and not the fair value (when little
> or no bonds are trading). There are other OTTI examples like this.
> OTTI accounting needs to be reformed now.
>
> If loans were accounted for in this same manner, the entire banking
> industry would be undercapitalized. Banks are entities which raise
> deposits to fund illiquid assets. They earn net interest income cash
> flow from these assets and liabilities. Most banks (excluding the
> larger banks with broker dealers) do not actively trade assets. Why
> account for these activities using trading levels? It makes no sense.
>
>
> Let the banks get back to serving their purpose. Regulators need
> to restrict trading activities in the future to make sure the larger
> banks that were trading do not hurt the rest of the industry. Accountants
> need to reform the accounting policies to properly report the activities
> and cash flows of the banks (especially the banks which take deposits
> and lend without trading).

FAS 157: Let the Tweaking Begin

This is incredible. So many people who know nothing about accounting are leaping to the conclusion that all these problems banks are experiencing are either the result of or exacerbated by mark to market. Nonsense!
First, only assets (and liabilities) designated by the bank itself as TRADING assets are subject to mark-to-market accounting with the gains or losses impact earnings and consequently regulatory capital. Let me repeat the banks acquired the assets and THEY decided they wanted to use mark-to-market accounting because they INTENDED to trade the assets not hold them to maturity! Nobody 'forced' the banks to do this.

Second, when there no longer is a functioning market for a trading asset the banks can use Level 2 or Level 3 methods to value the assets (Level 1 is to use available quotes). Level 2 method looks to functioning markets of similar assets to derive key inputs such duration, discount rates etc. that the bank will use to value the assets based on its cash flows (so called marked-to-model). Level 3 can be best described as mark-to-myth. Assets valued this way have nothing to do with any quotes. The bank forecasts cash flows and durations then values these cash flows using discount rates they believe appropriate.

So assets that were once so liquid that the banks bought them to trade (i.e. never had the intention to hold them to maturity) but now there is a wide gap between what the bank thinks they are worth and the bids they are getting (if any) are now valued by the banks at values they think they are worth and not at the bid price.

Assets the banks designated as available for sale are subject to the same mark-to-market rules as the trading assets but the resultant gain or losses do not effect income (the gains or losses net of taxes are booked directly to equity through accumulated other comprehensive income or AOCI) nor do they have any impact on regulatory capital (AOCI is excluded from tier1 or core capital).

Third, the overwhelming majority of the banks’ assets (and more importantly the banks credit exposure and source of future losses) are valued at amortized historical cost.

Mark-to-market has neither forced banks to sell assets at prices they consider too low nor has it forced them to raise capital or sell other liquid assets to meet capital demands.

So why is mark-to-market ‘pro cyclical’ and why will its removal help?

Accounting Rule Changes Creating False Rally in Financials

I am sorry but clearly you have no idea of mark-to-market acccounting for banks.

First, only assets (and liabilities) designated by the bank itself as TRADING assets are subject to mark-to-market and the gain or losses impact earnings and consequently regulatory capital. Let's dwell on this for a moment the banks acquired the assets and they decided they wanted to use mark-to-market accounting because they INTENDED to trade the assets! no one 'forced' them to do so.

Second, when there no longer is a functioning market for a trading assets the banks can use Level 2 or Level 3 methods to value the assets (Level 1 is to use availble quotes). Level 3 can be best described as mark-to-model -it has nothing to do with any quotes. The bank forecasts cashflows and durations then values these cashlows using discount rates they believe appropriate.

So assets that were once so liquid that the banks bought them to trade (ie never had the intention to hold to maturity) and now turns out that there is a wide gap between what the owner and the potential buyer thinks they are worth are now valued by the banks at values they think they are worth and not at the bid price.

Assets the banks designated as available for sale are subject to the same mark-to-market rules as the trading asstes but the resultant gain or losses do not effect income (they are booked directly net of taxes to equity through accumulated other comprehensive income or AOCI) nor dor they have any impact on regulator capital.

Third, the overwhelming majority of the banks assets (and more importantly the banks credit exposure and source of future losses) are valued at amortized historical cost.

Mark-to-market has neither forced banks to sell assets at prices they consider too low nor has it forced them to raise capital or sell other liquid assets to meet capital demands.


On Mar 15 03:01 AM ccerenz2 wrote:

> This author clearly doesn't understand the negative downward pressure
> that Mark to market has on assets in a declining market.