FASB Fights to Restore Mark to Market
J.P Morgan Chase, Bank of America, Citigroup and Wells Fargo are aligned in opposition to the Federal Accounting Standards Board (FASB) proposal. Approximately $2.8 trillion of their loans could be affected, or about 40 percent of their total assets. The impact would be even greater on smaller banks that keep more of their assets in loans that aren’t marked to market.
Pressure for the change is coming from Congress’s belief that the FASB watered down mark-to-market rules and these loose rules contributed to the financial crisis. Banks were not required to pay sufficient attention to market value in the time leading up to the crisis, estimated losses were inadequate, and banks were unprepared for the credit crunch.
On the other hand, many bankers and bank regulators believe the rules exacerbated the crisis by causing the value of some loans to fall excessively.
Under the FASB proposals, banks would show loans at historical cost and then adjust them for both loan-loss reserves and market values so investors could see the gap between what management has held for losses and what investors may believe the loans are actually worth.
The second proposal would require banks to divide holdings between those they trade and those they hold. Tradable assets would affect profit immediately. Non-trading assets would also be marked to market but would be categorized as shareholder equity called, “comprehensive income.” Mark-to-market is pro-cyclical. It should be used on liquid, available for sale assets only, and marked to their “economic” value, not “market” value.
Warren Buffett was incorrect when he said that derivatives and cds’s have the potential to be weapons of mass destruction for the financial markets.They’re only vehicles. The destructive force lies within the enriched plutonium at the center. It’s so simple a sixth grader can figure it out. It’s Mark to Market accounting. By abandoning historical valuation of non liquid assets, ie. real estate, we allowed the market to be artificially inflated to high, and to be shorted to low. We have turned the real estate market into a commodities market and its as unpredictable as an orange crop. Municipalities are now suffering the wrath of falling tax revenues from falling asset valuations and so are several states. The end game appears to be U.S. debt. After Californias bonds get rated down to junk and some other states follow suit it will be up to congress to appropriate funds. Looks like more debt for us and more fast easy money for the predators. It started out as a bubble bath but its turned into a toilet bowl, its like a maelstrom in the center of the sea and were all riding the rim waiting to be sucked down into the deep dark abyss. Good luck to all. I’m an optimist, but I cant even afford to protect my real estate holdings that I own free and clear. They’re just liabilities now.