CautiousInvestor

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

Whether we like it or not therer are similarities between what we are experiencing and what the Japanese experienced. In a keynote speech by Dr. Takafumi Sato, who played a role in the Japanese experience of the 90's, the very first thing he mentions is disclosure.

The first useful lesson is that prompt and accurate recognition of losses is essential. In the early 1990s, Japan did not have in place effective frameworks for disclosure and provisioning with respect to non-performing loans. This gave financial firms incentives to postpone the disposal of their non-performing loans, and the country plunged into a negative spiral of credit crunch and deterioration of the real economy. Based on this bitter experience, Japan improved disclosure requirements, clarified the rules on write-downs and provisioning, put in place a prompt corrective action scheme, and established an early warning system that enables the supervisors to conduct intense monitoring of banks before they become undercapitalized. In order for supervisors to act promptly, it is effective to have a regulatory framework in which they can make judgment in an objective manner.

From this standpoint, prompt disclosure by U.S. financial firms of the losses on financial instruments is encouraging. Challenges do remain, however, including the methodologies for valuation of financial instruments in cases where their market liquidity dries up, and the lack of data on exposure to complex financial products that are comparable across financial firms