mikeymike

Mark-to-Market: The Bogeyman of the 1930s Is Back

It is the right of congress to "provide capital" or coin money as I see it.


On Mar 13 12:06 PM Tony Zeppetella wrote:

> Good article. I have been opposed to the trend towards mark-to-market
> accounting for years in the life insurance industry, where it makes
> even less sense. There are two groups that favor MTM. The accounting
> theoreticians and the traders who believe that a market price, even
> if not readily discernible, encompasses all truth in the universe.
> They look up to the trading boards as if they were looking to the
> gods on Mount Olympus for universal truth. Both of these groups ignore
> a simple mathematical fact: If assets values on the balance sheet
> are viewed like a sine curve, the entity will periodically go bust.
> Financial intermediaries cannot exist under this standard. Then only
> government can supply capital for businesses to operate at all.

FASB Unlikely to Suspend Mark to Market

Irony at its best.


On Mar 13 11:04 AM Chris B wrote:

> The underlying problem is that investment banking and commercial
> lending are inherently incompatible activities.
>
> Investment values should be marked to market. To do otherwise is
> to claim that the owner has some special insight into the asset's
> performance and future value that every other participant in the
> market lacks. That clairvoyance is not likely. I can have an opinion
> that an asset is worth $500k, but if the markets disagree, who am
> I to put my opinion in my financial books - especially when my whole
> business model is based on booking gains from buying and selling
> investments and I fully intend to sell this investment in the future?
>
>
> The value of traditional commercial loans that the bank plans to
> hold until maturity, on the other hand, should be based on an estimation
> of present value based on future cash flows, impaired to the extent
> that similar loans are defaulting.
>
> There are three solutions to this subtle difference.
>
> 1) Reinstate something like Glass-Steagal, requiring commercial lenders
> to be separate businesses from asset-flipping commercial banks. Apply
> strict and universal mark-to-model guidelines to commercial lenders
> and mark-to-market to investment banks. Split Citi, BAC, and JPM.
>
>
> 2) Allow banks to identify individual assets as either investments
> or held-till-maturity assets and apply either mark-to-market or mark-to-model
> respectively. If a bank wants to change how the asset is categorized,
> for example if they wanted to sell a held-till-maturity asset, require
> them to list the effect of these changes on the balance sheet and
> describe each recategorization in footnotes. Allow only one recategorization
> during the life of the asset.
>
> 3) Require institutions with bank-like functions to report both mark-to-model
> and mark-to-market balance sheets.
>
> Of the 3 options, #1 seems the simplest / least vulnerable to abuse,
> despite its high initial cost in terms of industry restructuring.
> It also may have the benefit of providing for economic stability,
> because as separate institutions, commercial lenders will not be
> impaired by investment bank losses (this basic dynamic caused both
> the depression and the current crisis). That is, after all, the phenomenon
> we are trying to avoid in the future.

The U.S. Financial Accounting Standards Board ((FASB)) will discuss mark-to-market guidelines at a board meeting Monday. The FASB says it will focus on "additional application guidance that would clarify how mark to market is used in illiquid markets." Earlier today, FASB chairman Robert Herz told a House subcommittee that new rules could be implemented within three weeks.

If banks are allowed to not show their true value, but their "model value" instead, this bubble too will burst and it will not be pretty! I expect this will be the case.

LDK Solar: The Brightest Opportunity?

The last time I read the constitution congress writes the laws in this country. Politicians not outlawing and putting teeth against the naked shorting going on with LDK will be voted out of office. The sec isn't doing its job congressman wake up!

China Natural Gas: Bodisen Biotech's Hidden Gem

How about a follow up analysis on these two stocks.