vaughn

FASB Unlikely to Suspend Mark to Market

The issue is auditors. They don't like flexibility even if the FASB said loudly and clearly that market price is only one of the factors to be considered when evaluating the assets price in an inactive market.

The concept of mark to market is wrong. The mark to market is based on the assumption of liquidation, i.e., not a going concern. That means mark to market accounting assumes that an enterprise shall be valued on the liquidation basis, at a value that can be fetched now and right now, contrary to the nature of on-going business nature.

Under mark to market accounting, we have the ability to make all corporations insolvent. consider the following: If inventories are marked to market, then the last sale price in the internet will be used to mark down inventories, say, wallmart or target.As you are fully aware, the price on the internet sometimes can go extremely low.

How about a nuclear power plant? If a bankrupt utility was forced to auction off the nuclear power plant at 1/3 the value, that means all utilities having nuclear power plant must also mark down their nuclear power plant at 1/3 value which will immediately put all utilities in violation of loan covenant which will immediately put them into bankruptcy procedure.

Business must be valued on a continuing operating basis. Mark to market says business must be valued on the liquidation basis.

Mark to market is only useful in the monitoring of margin requirement, but is a weapon of mass destruction in measuring business operation.


On Mar 14 04:38 PM Harry Tuttle wrote:

> It is simply not true that Citibank's plight would be relieved by
> abolishing mark-to-market.
>
> In fact, the banks already enjoy a lot of flexibility to value assets
> at "model" which means it is worth what someone AT THE BANK says.
> In addition, loans are also reserved at the discretion of the bank.
>
>
> If you think this is too harsh consider the following. The total
> size of Citi's balance sheet is listed everywhere at 2 trillion.
> The astute analysts don't even bother to check the footnotes to "discover"
> that they have an additional trillion (with a "T") in off-balance
> sheet items.
>
> People who are desperate for the Dow to go up can convince Geithner
> and Bernanke to buy S&P futures, but not even this will change
> reality. The losses are real and not a product of accounting.

Congress Pushes M2M Reform: Suspension Unlikely, Revisions Guaranteed

Not all assets are mark to market, only level 1 assets with the active market price is mandated to use market price to mark. Level 2 and 3 are not marked to market based only on market price because market price for these assets are not fair price resulted from an active market.

The problem is: Auditors don't want to assume responsibility and they don't want to do the hard work by evaluating the value of assets going through various credit analysis, etc. So, auditors push to value level 2 and level 3 solely based on the market price which is totally out of whack due to illiquid market and thinly traded, manipulated market. so long as the market price is used to value level 2 and 3, auditors feel safe because the market price for these level assets during economic crisis is extremely distressed and thus the value of assets are extremely low.

The fix on the mark to market rule is simple: Just mandate the market price is not applicable to value the assets of which no representative market existed and no fair transaction price can be found. Thus will force auditors to do the hard work by evaluating the value of assets based on the credit analysis, cash flows, etc.

The problem is not in the FSAB #157 which does not mandate to use market price to value all level of assets. The problem lies in the auditors signing off the financial statements: They don't want to take the risk and they want to use the lowest price to protect their own butt, citing the consequence of Authur Anderson after the debacle of Enron.

Only when the FASB forces the auditor to assume the responsibility by mandating market price is not appliable in certain situations and shall not be considered, then the true spirit of FASB #157 fair value accounting (Yes, it is called fair value accounting, not mark to market accounting) can be implemented.

Look at Citigroup. It is said Citigroup reported a $10 billion net income and paid $3.5 billion tax to IRS for fiscal year 2008 while it reported over 40 billion loss due to mark to market practice imposed by its auditors.

Why Bank Nationalization Will Never Happen

Nationalization of the remaining big four (BAC, WFC, JPM and C) will not happen. The reason is simple: Treasury is not willing to shoot its own foot.

Folks, nationalization of banks means the total wipe out equity interest, including preferred.

How would you feel when treasury (oops, that's you) reported that it just suffered hundreds billion dollar loss for preferred in big four by nationalizing them, not to mention the triggering of CDS and the complication of derivative contracts written by them which will definitely bring down massive banks along with them around the world which will eventually bring down the USA itself.

Tell me, if you were Geithner or Obama, will you take the blame for lossing hundreds of billions and sinking the USA into the abyss. No, you won't, though you might say you should have done after you leave the office.

Why Bank Nationalization Will Never Happen

The total exposure of derivative is always almost misleading. Once the total exposure is netted, the net exposure is far less. And one must remember the value of derivatives is notional, not actual exposures. A 1 trillion notional exposure in interest rate derivative might have actual exposure in millions.


On Feb 16 03:16 PM phdinsuntanning wrote:

> Bond holder of JPM, MS, GS:
>
> JP Morgan Chase Bank held $91.7 trillion, in derivatives in the third
> quarter of 2007. One year later, it held only….$87.7 trillion: a
> shrinkage of $4 trillion. Now, JP Morgan’s assets are only $1.7 trillion
> in 2008, better than the $1.2 trillion they had in 2007. At least
> one financial institution is getting some benefit from the crisis
> and US government bailouts, but with a little bit of risk :). Good
> luck with MS and GS bonds

Will Banks Be Nationalized?

who will benefit from naturalization? The shorts, all others are losers, especially the government, given its preferred stock holdings and guarantees of assets. In Citigroup case alone, the government will suffer an immediate loss of 45 billion preferred, plus a circa 250 billion guarantee loss, plus the loss to cover deposit insurance, well, may another 250-500 billion loss. The naturalization of Citigroup will cause another chain reaction of loss to other banks, due to their holding of Citigroup's bank note, which will cause more banks to fail, eventually to bring down everything else, including the US government itself. when that happens, even shorts who benefit from the fallout of spreading naturalization rumor will also suffer when the society they live in is at total chaos.

America's Banks: Are They Really Insolvent?

The banking insolvency scare tactics is based on the worst case scenario ( ie, 50% housing default rate with 50% recovery rate, meaning a 25% loss) and that loss must be recognized now and right now. This ignores an important fact that default does not all happen at once: default happens over a period of time until the economy recovers.

It is likely that in 2009 a 5% default might happen, then banks will have to deal with that in 2009. However, given the actually zero rate of funding cost of banks, banks are in a position to earn huge spread to cover loan and credit loss.

For those argue that all banks must restart anew missed the point that banks, taken as a whole, are actually increasing lending. The current tight credit market is not banks' fault. It is the demise of the shadow banking system. Naturalization of all banks will not revive the shadow banking system and will make things even worse.

Shorts and vultures love the scare of naturalization. So far, Us has over 20 banks failure. Has any of the failed banks be naturalized? None, Nada, zero. It is clear that Us has no naturalized banks, only failed banks seized by FDIC.

America's Banks: Are They Really Insolvent?

Anyone saw any insolvent banks during Japan's lost decade? None, as long as the zero rate policy and unfettered access to the Fed are granted to banks too big to fail.

Vultures and Shorts are taking the wrong side of risk/reward if they keep shorting at this level.