UPDATE # 2: The lefties don’t like the change. I suspect this is because it will interfere with Geithner’s takeover of banks.
We are trying to get banks to write down their toxic assets. The longer this takes, the longer the financial industry will be crippled by uncertainty about what lurking horrors are concealed in banks’ balance sheets. This rule really, really does not help.
The point is that many banks think those assets are of value and don’t want to give them up, especially after seeing the fools in Congress behavior.
UPDATE: Here is another view of the AIG bailout which makes the case that BK would have been better. This is all interconnected and I think history will see this as a financial panic, not a depression. I do have one correction. Greenberg blames Obama but the early stages of this were under Bush and Paulson should share the blame.
I have been concerned about the Mark-to-market rule introduced by the FASB two years ago in the wake of the Enron scandal. It has exacerbated the current banking crisis and today the FASB relaxed the ruling, keeping it for some purposes but suspending it for bank capital requirements. The result has been a big market rally. Let’s hope a few more sensible steps appear.
Changes to fair-value, or mark-to-market accounting, approved by FASB today allow companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost net income. Firms could apply the changes to first-quarter results.
It has been counter productive, as usual. It’s OK when there IS a market but there is none right now so they get marked down to zero. For some, that is appropriate but not all.
William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, has called fair value “a major cause” of the credit crisis. Robert Rubin, the former Citigroup senior counselor and Treasury secretary, said Jan. 27 the rule has done “a great deal of damage.”
the Senate voted 89-8 for an amendment to the Fiscal year 2010 budget resolution (S. Con Res. 13), introduced by Sen. John Thune (R-SD), which would prohibit any future greenhouse gas cap-and-trade initiative from increasing gasoline prices and electricity rates for U.S. households and businesses.
God ! Common sense may be breaking out !
As University of Colorado professor Roger Pielke, Jr. points out, “The entire purpose of cap and trade is in fact to increase the costs of carbon-emitting sources of energy, which dominate US energy consumption. The Thune Amendment thus undercuts the entire purpose of cap and trade.” In other words, it is impossible to vote for the Thune amendment and support cap-and-trade and be consistent, candid, or straight with the American people.
Well, Duh !
Tags: cap-and-trade, FASB, mark to market
I see your points about banks’ assets held cratering their attractiveness to any buyers. And yes, it did miracles for goosing stocks the last 2 days. However, I’ll take the other side of the bet which is that whenever you allow an institution to value their assets along the line of some mathematical model x number years into the future, you are handing them the keys to a truck loaded with fudgecicles. The models that were used in all these credit swaps, as one example, were some of the keys to the current washout since they mathematically backed out virtually all risk. And we now know how erroneous it was to rely on those models.
So color me skeptical and festoon me with ribbons of mistrust.
Down the road these new mark-to-model valuations will be stealthily used by smart shorts, just as these same shorts had the inside track on the gaseous swap bubble. The bally-hooed uptick rule will slow them down, but there are many paths to Shortworld. I have great esteem for shorts, for they serve as de facto regulators of the bubble clowns. And what most people never get is that the shorts get out just about when the public catches on. It’s the public panic selling that takes the market too far below value. Plus, the shorts have already gone long by buying everything the public is dumping. To paraphrase Dirty Harry…a trader’s gotta know true values.
I don’t disagree in principle. It’s just that we are in a unique situation right now where there is no market for the assets and all are considered of zero value although only 10% of mortgages are delinquent. Those CDOs are probably worth 50% of face value. For example, see this story.
Once the new accounting rule takes effect, banks will have new incentive to keep the assets directly on their books, say bankers. That is because the rule states that banks can use their own judgment on asset values as long as there are no willing bidders to set a market price.
“There is no clear definition of what a toxic asset is,” said Christopher Hoeffel, president of the Commercial Mortgage Securities Association. “Some bankers are saying, ‘I don’t want to sell these assets, because the loan might still be good — and if I hold it to maturity, I might get my money back.'”
I’m a lot more skeptical. Banks are practically being encouraged to lie. CEOs afraid of losing their jobs will have every incentive to drag this out as long as possible. And, using mark-to-wishful thinking means the financial reports will be worthless as a gauge of a bank’s financial health. It’s all part of the delusion we can somehow reinflate the bubble, when the bubble is going to keep deflating.
The government keeps talking about the need for transparency, but acts in the opposite direction.
I think the banks will have a problem convincing people that they are solvent if they aren’t. My ex-wife is an FDIC executive liquidating a couple of banks in Riverside. I rely on her description of the situation to see what the worm’s eye view is. No, she is not the worm. She sees the crap as soon as it appears. She spotted Countrywide as a criminal enterprise 15 years ago.