What’s going on with MTM these days?
As the great mark-to-market debate winds down, it appears that pragmatism has overcome rule keeping zeal.
The strict reading of the rules has been deemed as too pro-cyclical, and the FASB bent to the Congressional timetable. It is a decision that was fair, consistent, on time and appropriate. It was also a decision in which neither side was completely satisfied with the outcome, which in many cases can be the sign of a good compromise.
Opponents of M2M demanded the use of a market price for non traded securities, claiming that it extinguished nuanced examination and removed the possibility of biased estimates. But in the end the FASB clarified the rules, recognizing that this “liquidation based” price method for illiquid assets contravenes accounting conventions that have traditionally been applied to other types of assets, such as plant and equipment.
This exact and inflexible application of the rule reminds me of the famous military logic of “Burning down the village to save it.”
Accounting should reflect economic activity, not drive it.
The latent complaints will ring in into the empty forum, but the debate is over.
Some bonds are worth what someone will pay for them. Liquid securities
Some bonds are worth what their economic value is. Illiquid securities
For illiquid bonds, the mark to market has two components.
An institution has to mark down immediately the loss on the security that is real, or caused by credit losses, directly to earnings and Tier 1 capital .
The part of the devaluation, or “loss” in a security that is caused by a lack of liquidity, is charged to “Other Comprehensive Income”.
This final ruling by the FASB is not a get out of jail free card. The loss components are explicit, stated and accounted for.
There can be no complaint mounted on a lack of transparency argument.
We will resume the debate once we have a few field examinations, and we find out how the clarified FASB instructions are being applied. We might end up back here, the debate back on.
Until then, we will continue to publish news and other regulatory updates.
