mikeymike

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.