Mark-To-Market My Words
By Matthew Philips | NEWSWEEK
http://www.newsweek.com/id/192562
To most people, it's an arcane accounting rule. But to bankers, it's the whole ballgame: "mark to market" pricing is the practice of requiring banks to value their assets based on their current market value. Not what banks paid for those assets yesterday. Not what they could get for them in, say, a year or two when the financial industry has settled down. What they could get right now. Which is basically bubkes. Banks have been pleading for this requirement to be lifted since the credit crisis began, and last week they got their wish. Confused? Here are four things you need to know about "mark to market" in order to sound smart at a cocktail party.
1. Banks say mark-to-market pricing cost them billions.
When the housing bubble burst, the market for all those mortgage-backed securities vanished, leaving bank balance sheets larded with assets that no one wanted. So at the end of each quarter, banks had to write down billions of dollars of "toxic assets"—even though their value might've been artificially, and only temporarily, depressed. But if banks never intended to sell an asset in the current market, they reasoned, why should they be forced to value it as if they did?
2. The key players: five big-shot accountants in Connecticut.
Banks began lobbying Congress last year to do away with mark-to-market, arguing that they couldn't lend because it had bled away so much capital. Congress in turn put the heat on the Financial Accounting Standards Board, a group of five über-accountants based in Connecticut who write all the rules. After months of pressure, including threats to take away its authority, the FASB caved and voted to loosen the rule.
3. The new guidelines, and the fly in the ointment.
Banks can now use "significant judgment" to value assets. Translation: they can stop assigning doomsday values to securities they think will have more value down the road. The hitch: some investors fear the rule change will help banks disguise their garbage, which was part of what got us into this mess in the first place.
4. Bully for the banks, but will this actually work?
It'll help big banks like Citi recoup billions in losses. But it does little to solve the underlying problem: piles of troubled assets no one wants. And it might not help for long, because Treasury Secretary Tim Geithner plans to rebuild a market for the assets by handing private investors cheap credit so they can start buying them up.
Posted By: Pope's Banker @ 04/04/2009 8:23:31 PM
My house is worth $300,000. But under the new rules it is worth $5 million becouse I do not intend to sell it until it reaches that value. Based on that I will borrow $50 million dollars to buy more worthless property which I will revalue under the new rules, I expect to be able to leverage my way to billions of dollars and take over the world.
Posted By: Empedocles @ 04/04/2009 7:56:23 PM
On Bill Moyers last night, interviewed Wm. K. Black, who, as a regulator during the S&L scandals in the late 1980s. Black now has a book out, "The Best Way to Rob a Bank Is to Own One." In short, Black makes a compelling case that our bank executives are corrupt, and that the management of the big ones, plus the boards of directors ought to be summarily fired, and more honest, just as capable, people put in their place, just as if the FDIC were taking over the banks, placing them in receivership & selling assets to willing buyers & then going on with business on a new, better, footing. Mr. Black not only blames the Bush administration, but also the Obama administration, depending on that "regulator," Geithner to solve this problem. Geithner has been & still is in bed with the same people Paulson was, according to Black. I see this as a major crack in the Obama program to solve this economic downturn, ignoring, as Black says, the lesson of the Japanese in denying the insolvency of their banking system, leading to the "lost decade."
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