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| Truer Values Are Needed at the Banks (The debate over mark-to-market) |
| 2008-10-15 |
| I still feel like a teenager. But the face looking back at me in the mirror tells me otherwise. That's my daily mark-to-market. The intensifying debate over mark-to-market accounting is missing the point. The question shouldn't be whether regulators should relax or suspend the practice. It should be whether regulators should encourage banks to expand their use of it. The reason: Credit markets are already marking bank balance sheets to their own view of market values, or walking away in the absence of such information. That isn't going to change if the U.S. or Europe alters the accounting rules. If anything, it might give these investors yet another reason not to invest. What markets really need is more information about who is sitting on what losses. However, many banks and some governments want to row in the opposite direction. The American Bankers Association on Monday released a letter calling on the Securities and Exchange Commission to essentially gut mark-to-market accounting. Internationally, accounting rule makers Monday eased some mark-to-market rules. But it isn't clear whether this will be enough to appease the European Union, which may still move to water down the practice further. The argument against mark-to-market accounting is that it forces banks to use overly pessimistic market prices to value holdings. That triggers losses that deplete capital. Debt investors don't buy that. They believe that the values banks put on their loans, which mostly aren't marked, still don't adequately reflect losses that will result from the housing crisis. Investors have also cast a jaundiced eye on possibly understated losses on the securities that banks do mark to market prices. In other words, investors still think some bank balance sheets are cuckoo. Accounting rules should be used to remedy that situation, not make it worse. |
| Posted by:Zhang Fei |
| #5 Mark to market is dumb for non-tradable assets like mortgages. But securitized mortgages are dumb too. |
| Posted by: Nimble Spemble 2008-10-15 17:28 |
| #4 The cattle example/analogy is wrong. No cattle sold = no market price = not possible to mark to market on that day and the last available price would be used instead, ie the price they were bought for. Mark to market is wholly a good thing despite valuation issues with illiquid assets. |
| Posted by: phil_b 2008-10-15 16:54 |
| #3 And should fixed rate loans be appreciated on balance sheets when interest rates fall? |
| Posted by: Nimble Spemble 2008-10-15 15:58 |
| #2 If an asset is calimed that it cannot be valued (i.e. it's Level 3) then it needs to be listed and described transparently on the books. IMHO the accounts need to be split into 3 (1 for each level of assets) and any movement between levels accounted for. |
| Posted by: Bright Pebbles 2008-10-15 15:50 |
| #1 It seems to me that there is a similarity between the issues with Mark to Market and depreciation or appreciation of different assets. Mark to Market is the proverbial hammer. "To a man with a hammer all the world is a nail". Different types of assets need different valuation tools and this one seems clumsy at best. The following is cribbed from the EU Referendum site please go there for the whole thing. http://eureferendum.blogspot.com/2008/10/simple-explanation.html Talking to a farmer the other day, I was trying to explain the concept of "mark to market", and hit on this wheeze. Imagine, I said, it is 19 March 1996 and you have just bought 150 head of store cattle at £200 each that you are going to fatten up and sell in a few months. How much are those cattle worth? Simple arithmetic tells you that you have an investment worth £30,000. But this is 19 March 1996, which means the next day is 20 March 1996. On that day, health minister Stephen Dorrell stood up in parliament and announced a tentative link between the killer disease CJD and Mad Cow Disease (BSE). The meat market didn't go into free fall – it evaporated. I don't think a single beast was sold that day. So how much are your cattle worth, I ask my farmer. £30,000, he says - he had no intention of selling them. But if you had sold them on the market that day, how much? Er… there was no market. In that case, I declared – feeling very pleased with myself - their value was zero. That's "mark to market". You have to value on a "fire sale" basis, according to what your cattle – your assets – will fetch on the day. Now, imagine you are a bank. This is your "toxic debt" – your 150 head, nominally worth £30,000. On the basis of that holding, you have been allowed – for the purpose of this example – to borrow a maximum of ten times that amount, which you are allowed to lend, i.e., £300,000. This is called "leverage"........ ....You are now too highly leveraged. You are, in fact, insolvent. No commercial bank will lend you any money. ... Or you could go to the government for a "bail-out", in which case they'll "nationalise" your farm and put their own manager in. Whatever else happens, you certainly cannot lend any more money..... |
| Posted by: AlanC 2008-10-15 11:46 |