Mark to Market rules

[due_indigence]

There's a House subcommitte scheduled next week to review mark-to-market accounting rules (here in the US obviously). This is one of those irresistible 'pen-stroke' issues that makes everything better. I'm sure the industry is pushing hard for it. Of course the argument is that the prevailing realizable values of many bank assets are 'artificial' given the current deleveraging phase and prevailing distress. How we're any more 'artificial' today than we were at pre-bubble bust values is an issue that surely will be glossed. Nonetheless the financial sector may get a bounce here.

Any thoughts?

[Chomsky]

Re: Mark to Market rules

More fake accounting. As you said, no one ever complains when the market is on its way up.

I think this will give the markets a bounce, but fundamentally the situation won't change -- there just aren't enough credit-worthy companies or individuals to lend to.

Question: If mark-to-market is suspended, suddenly making the banks' balance sheets superficially look a lot better, and somehow they find more credit-worthy customers, will all those reserves the Fed has stuffed into the system burst forth?

[petertribo]

Re: Mark to Market rules

I am continually amazed that these folks talk about transparency, faith, trust when their actions are destroying same. Suspending or loosening the already loose accounting rules only create more suspicion and distrust among those who follow this Disaster.

Maybe they will get a boost from the decreasing pool of the gullible, ignorant and naive but only short term. That pool of suckers is diminishing as this Disaster unfolds.

I would suggest that the folks at the top running all these Zombies do not believe each others' books and that is a major part of the problem. The Government must guarantee their "loans" and dealings with each other. And as the Disaster continues how many other Zombies are being created in other parts of the economy who also now need accounting relief?

The longer the Game runs the more these folks can loot the system.

[flintlock]

Re: Mark to Market rules

Exactly, when all the confidence is lost, so is the whole system. As all this unfolds, we'll only see more and more fraud and deception revealed. Makes people want to just stuff money in the mattress rather than give it to these scoundrels.

[chekre]

Re: Mark to Market rules

well if they can get certain aspects of it right such as GE has a bunch of real estate that they claim is a long term hold with cash flow they don't want to sell...so mark to market really does not work....lets say i have a $100,000 cash flow from an apartment building the market goes to hell but i am not selling i still have my cash flow

[swgprop]

Re: Mark to Market rules

Before you summarily reject the concept of changing the "rules", first consider the efficacy of the rules. Mauldin provides some food for thought here.

Rules have consequences. And sometimes they have unintended consequences. If I told you that the US government was going to give multiple tens of billions of taxpayer dollars to hedge funds and private investors, you would justifiably not be happy. I think the word angry would come to mind. But that is exactly what is happening, as a result of rules that were written for a time and place seemingly long ago and far, far away. Further, we are looking at potentially much larger sums being lost in the bank bailout (can we say hundreds of billions?), a reduced lending capacity at banks and, in general, a worsening of the very problems at the core of the crisis.

...

"The problem, of course, is that the MTM (mark-to-market) results have little to do with the intrinsic value to a bank of a loan or a security that it plans to hold to maturity. In a bank, the decline in a loan's value is offset with a forward-looking provision for loan losses. The decline in the loan prices net of loan loss allowances is not due to credit deterioration; it's the result of the distortions and speculation in the world's financial markets. Mark-to-market accounting isn't improving the transparency of bank accounting. It has reduced it, with enormous and growing damage to our economy and prospects.

...

[icm63]

Re: Mark to Market rules

Does Fair Value Accounting + Credit Default Swaps = Global Deflation?

But today we wanted to return to the issue of fair value accounting and whether this last remnant of bubble-think is not driving us into the proverbial Thresher (SSN-593) scenario, straight down into the deepest trench of an economic correction that is well-beyond crush depth. Over the past several months, we have come to the conclusion that we must make a correction in the FVA rule. We see two issues:


First, FVA relies on efficient market theory, namely that short term price = value and that consequently income, assets and liabilities should be adjusted in real time to reflect same. (This is the same problem with CDS pricing, BTW, as we discussed in our last comment, ("To Stabilize Global Banks, First Tame Credit Default Swaps," Janury 21, 2009.) We think that the collapse of all of the other market efficiency based constructs, from structured assets to hedge funds, ends the discussion of derivative notions such as FVA.
Second, FVA fails to recognize the historical role of depositories, pensions and insurance companies as repositories for long-term value and consequently as havens from swings in short-term market pricing and economic trends. The whole point of capital adequacy regulation, with the notable exception of broker dealers, is to give such institutions the freedom to take the long view. FVA makes the long view impossible and basically turns what are supposed to be low-beta, low risk, highly solvent hold-to-maturity vehicles into mark-to-market liquidations every day via the CDS markets.

Just as you cannot buy bad assets from an insolvent bank at "fair value" without worsening the insolvency, likewise when you mark down assets you are reducing the ability of the entire financial system to support leverage. When you combine the zero effective collateral and margin operating in the CDS market with the quarterly idiocy of marking down performing securities and loans to satisfy the advocates of FVA, it would be difficult to imagine the enemies of the United States constructing a more perfect weapon to bring about our collective demise.

My thoughts are these..

A property that returns rent is valued at what some one will pay for it, buy the market. NO matter how much rent is return, the valuation is based on risk. I understand CDS return a premium (rent) so why should they not be valued at market values, no matter what the premium (rent) is. Also the accounting used on the way up from 2003 to 2007 was just fine then ( bonuses paid etc), so whats so bad on the way down. Also how can some one value a CDS if it is very complicated and not transparent, if you have a property with a complicated lease agreement your valuation is very much effected. Once again the valuation and associated risk are equal. It seams to me the Accountants are the HEROS out there, the whistle blowers. Just how many SP500 banks balance sheets are 100% transparent then ? ( add GE to this list). I say get a real market (exchange) for the CDS for better or worse valuation, dont blame the accountants.

So why should the CDS valuation rules be changed, they maybe as it becomes political. But remember that CASH bonus where paid out on these PAPER valuations going up in the good times, so to help stop WALL STREET and now main street from going into massive deflation we need to change they playing field. So who is correct ??

Valuation is based on risk for return, and if the risk is high as transparency is low (CDS whats in it) and complications (CDS what are they real terms of agreement) are high then valuation will be low, just like a rental property (no matter what the cash flow is) !!!

[icm63]

Re: Mark to Market rules

well if they can get certain aspects of it right such as GE has a bunch of real estate that they claim is a long term hold with cash flow they don't want to sell...so mark to market really does not work....lets say i have a $100,000 cash flow from an apartment building the market goes to hell but i am not selling i still have my cash flow

- But for how long for, thats the question ?

If a CDS cash flow is $1 pa, value paid for product may only be $0.50

If you have a rental property earning $10,000 rent pa, worth $100,000 in the good times, at a yield of $10%, but in bad times, its market worth is $50,000, with a yield of 20%. A capital loss/write down of ($50k).
** NOTE: This yield swing is typical for retail investment properties.

Whats the diff btw CDS and rental property ?...Cash flow is not capital value.

[icm63]

Dear ED and EJ can you pass comment

ED/EJ whats your view on the M to M FV accounting !