CalTexan

In Defense of Mark to Market

Obviously, I "exxagerated" when spelling exaggerate in this comment....


On Mar 26 12:30 PM CalTexan wrote:

> I, and millions of other Americans are still paying our mortgages.
> The banks/insurers that own these as Mortgage Backed Securities are
> still receiving some sort of an income stream from them. Now if I
> remember my Finance 101, the cash flow from a performing asset discounted
> by some interest rate gives that asset a Net Present Value, and although
> it may be pretty low, I don't think it's zero. I believe we should
> Mark Troubled Assets to Current Cash Flows on an annual basis up
> to the face value of the loans. This would solve a whole host of
> problems:
>
> 1) Simplicity-It's not hard to figure out the CURRENT value of the
> asset. Cashflow is this. Interest rate is this (30 yr bond? Fed Funds?
> Prime +2%? 30 yr fixed mortgage? I don't know what interest rate
> to use, that's what Tim and Ben should decide). Voila!!! Value is
> this. Easy. Simple. No models. No complex formulas. Here is what
> its value is TODAY. (Actually this IS a little like Mark to Market
> when you think about it...)
>
> 2)Transparency-If a loan is nonperforming the cash flow from it decreases
> and its value goes down. It should be written down and a charge taken.
> No chicanery, no manipulation, just facts. If it's performing, it
> has SOME value. The current arrangement was put in place (from ENRON
> and WORLDCOMM experiences) to prevent assets worth nothing being
> valued at something. The unintended consequence now is that assets
> worth something are being valued at nothing.
>
> 3) Policy-If the Fed needs to slow down the economy, it can raise
> interest rates, the value of the asset producing cash flow goes down,
> the business writes it down, it has less regulatory capital and reduces
> lending. If the economy needs stimulus the Fed decreases the rates,
> the value of the asset producing cash flow goes up, banks have greater
> regulatory capital available and can lend more to aid economic activity.
> (If the economy needs some extra juice, you even have the option
> to temporarily lift the "Face Value Max" restriction)
>
> 4) Cost-With this solution, you don't need programs, TARP, TALF,
> Bank Nationalization or $2 Trillion in extra Federal Spending to
> make up for the PRIMARILY PAPER LOSSES on the Balance Sheets of banks.
> All you need is someone with knowledge of Finance, GAAP and a little
> common sense to revise the rules, figure out what discount rate to
> use, then let the banks revise their balance sheets, income statements
> and begin to lend again so the current economic "crisis" can finally
> be over....
>
> Bottom Line? We're talking about PAPER and how you RECORD things
> on PAPER. The problem right now is we have a rule that forces us
> to exxagerate our PAPER losses (and oh by the way it allowed us to
> also exxagerate our PAPER gains when there was a market, isn't that
> short term speculation?!?!?!) and it's having an effect on the REAL
> economy. It's a RULE. Change it. It will take 15 minutes. Pro forma
> Bank Balance sheets and earnings statements for the past 3 years
> with both methods and see how their regulatory capital situation
> looks. It can't hurt to at least give it a TRY....

In Defense of Mark to Market

I, and millions of other Americans are still paying our mortgages. The banks/insurers that own these as Mortgage Backed Securities are still receiving some sort of an income stream from them. Now if I remember my Finance 101, the cash flow from a performing asset discounted by some interest rate gives that asset a Net Present Value, and although it may be pretty low, I don't think it's zero. I believe we should Mark Troubled Assets to Current Cash Flows on an annual basis up to the face value of the loans. This would solve a whole host of problems:

1) Simplicity-It's not hard to figure out the CURRENT value of the asset. Cashflow is this. Interest rate is this (30 yr bond? Fed Funds? Prime +2%? 30 yr fixed mortgage? I don't know what interest rate to use, that's what Tim and Ben should decide). Voila!!! Value is this. Easy. Simple. No models. No complex formulas. Here is what its value is TODAY. (Actually this IS a little like Mark to Market when you think about it...)

2)Transparency-If a loan is nonperforming the cash flow from it decreases and its value goes down. It should be written down and a charge taken. No chicanery, no manipulation, just facts. If it's performing, it has SOME value. The current arrangement was put in place (from ENRON and WORLDCOMM experiences) to prevent assets worth nothing being valued at something. The unintended consequence now is that assets worth something are being valued at nothing.

3) Policy-If the Fed needs to slow down the economy, it can raise interest rates, the value of the asset producing cash flow goes down, the business writes it down, it has less regulatory capital and reduces lending. If the economy needs stimulus the Fed decreases the rates, the value of the asset producing cash flow goes up, banks have greater regulatory capital available and can lend more to aid economic activity. (If the economy needs some extra juice, you even have the option to temporarily lift the "Face Value Max" restriction)

4) Cost-With this solution, you don't need programs, TARP, TALF, Bank Nationalization or $2 Trillion in extra Federal Spending to make up for the PRIMARILY PAPER LOSSES on the Balance Sheets of banks. All you need is someone with knowledge of Finance, GAAP and a little common sense to revise the rules, figure out what discount rate to use, then let the banks revise their balance sheets, income statements and begin to lend again so the current economic "crisis" can finally be over....

Bottom Line? We're talking about PAPER and how you RECORD things on PAPER. The problem right now is we have a rule that forces us to exxagerate our PAPER losses (and oh by the way it allowed us to also exxagerate our PAPER gains when there was a market, isn't that short term speculation?!?!?!) and it's having an effect on the REAL economy. It's a RULE. Change it. It will take 15 minutes. Pro forma Bank Balance sheets and earnings statements for the past 3 years with both methods and see how their regulatory capital situation looks. It can't hurt to at least give it a TRY....

The Wonders of Mark-to-Market: Simultaneously Well-Capitalized and Insolvent

It's a little known fact I've read recently that Mark to Market accounting rules were last repealed by.......

FDR in 1938!

They didn't reappear until....

2007!

So all these people saying "Well, we had it in the good times, we can't change the rules now that times are bad" appear to be a little off base.

If we had Mark to Market in the 1990's, the economy would have gone spinning down into the toilet then, but we didn't. Because we didn't, banks, the government and the economy had the time required to work things out.

Mark to Market doesn't give you time. You've got to make up the difference between original price and whatever the market dictates. Today. In Cash. Otherwise you are deemed insolvent. When this rule is enforced in an economy that is extremely dependent (ours) on the flow of credit (read money paid back over TIME) to maintain monetary velocity, you have a recipe for complete disaster, which is exactly where we're headed if someone doesn't address it. Soon. Hopefully it won't be 9 years after the start of the Great Recession before we figure out the easiest, quickest and cheapest solution was actually the best thing that should have been done first...