The Horror, The Horror…
In case you haven’t heard, mark-to-market accounting is NOT completely dead. After the House Financial Services Committee leaned on the FASB to fix mark-to-market account in March of 2009 because it was unnecessarily destroying the capital of, in many cases, otherwise healthy financial institutions, the FASB acted quickly and changed the accounting guidance so that market values were still disclosed to investors but would not destroy their capital if they intended to hold investments longer than the duration of the fire sale. Now the FASB is making a push to go BACK to mark-to-market accounting! And this time it includes more than just investments. Read the article below for more details. The worst part of all of this is that not only will this impact a financial institution’s ability to implement their long-term business model of lending and investing, it will affect individuals’ and businesses’ ability to get loans!
Stop This Horror Before It Starts Again – Forbes Magazine, June 28, 2010
If you enjoyed this post, make sure you subscribe to our RSS feed!
Update from FASB
Click on the link below for a summary update directly from the FASB on where they are at with regard to their changes on the subject of accounting for financial instruments . . .
FASB Technical Plan and Project Updates – FASB.org, March 10, 2010
If you enjoyed this post, make sure you subscribe to our RSS feed!
Warren Buffett on MTM
Here is a sensible view of mark-to-market from none other than Warren Buffett. He weighs both sides of the debate. While he’s not for suspension of mark-to-market, he proposes the best way to handle mark-to-market is to continue to report those market figures to investors, but not write-down capital based on these numbers. Exactly Warren!
Additionally, one of the greatest investors of our time is stating that at their current market prices, some of these “toxic” assets – distressed mortgages – represent the best potential returns going forward because they are trading below fair value. This is further evidence that the market, or liquidation value of many of these securities is well below their true economic value.
Conclusion: Mark-to-market accounting rules are forcing banks to write their securities down to values well below their economic value.
If you enjoyed this post, make sure you subscribe to our RSS feed!
Kudlow & McTeer on MTM
See the attached video to hear year yet another prominent figure calling for changes to mark-to-market rules. Former Dallas Fed President Bob McTeer talks to Larry Kudlow about why accounting policy makers don’t want to change the rules.
If you enjoyed this post, make sure you subscribe to our RSS feed!
Steve Forbes on MTM
It appears that Steve Forbes feels as strongly about modifying mark-to-market rules as we do. View this video below. When Larry Kudlow asked Forbes what he would like to see the Treasury Department do to help our economy recover besides changing mark-to-market, Steve Forbes responds . . . “change mark-to-market.”
Watch Steve Forbes on CNBC below.
If you enjoyed this post, make sure you subscribe to our RSS feed!
Problems with MTM
Heads up . . . this is an excellent article from the Viewpoint section of American Banker, [$$] Repeal Mark-to-Market to End Crisis. George Sutton does a great job of articulating some of the main problems with using mark-to-market accounting for banks . . . who are LONG-TERM investors. He says . . .
I was a regulator in the 1980s, during the savings and loan crisis when all kinds of depository institutions failed in numbers second only to the Great Depression’s toll.
During this time I heard one Federal Deposit Insurance Corp. official say they generally lost about 20% of asset value when liquidating a bank. Some people wondered whether, by that measure, banks should be required to hold 20% more capital to cover potential liquidation losses. If so, there would be virtually no solvent banks. Of course, that is not an appropriate standard because it presumes every institution would be liquidated – and value is lost in liquidation that is preserved in a going concern.
Yet that in a nutshell describes mark-to-market accounting, which the Financial Accounting Standards Board, or FASB, decreed as the accounting standard for all U.S. financial institutions, beginning in 2007. This rule says assets held by a bank or other type of lender have no value other than what they can be sold for each day – an appropriate measure for common stock but flat-out wrong for income-producing assets such as loans and interests in loan pools.
A bank has options when markets become dysfunctional, as they are now. Lenders do not have to sell loans. They can always hold their receivables and live off the payments. The payment streams have real value well above their sale value in the current market. The mark-to-market standard assumes that the value of the payment streams is inherent in the sale price. What this does not take into account is market disruptions during which buyers will not pay full value for a loan.
As a result, mark to market undervalues income-producing assets during a market downturn and severely undervalues them during a severe disruption like today’s.
If you enjoyed this post, make sure you subscribe to our RSS feed!
Yingling Comments on OTTI
Ed Yingling, President of the American Bankers Association (ABA), released a statement yesterday expressing concern that Other Than Temporary Impairment (OTTI) is being overlooked. In our opinion, he hits the nail on the head with his comments. The real issue surrounding mark-to-market accounting is OTTI, which is an accounting rule that in some cases can force banks to write down performing securities to the liquidation value which in a distressed market is far less than their intrinsic value.
We concur with Ed’s statement that the OTTI model used by international accounting standards is superior to the U.S. approach and consistent with all other financial assets. While the Financial Accounting Standards Board (FASB) is in the process of reviewing mark-to-market rules, they should give this topic of OTTI full consideration. We’ll take it a step further by adding that U.S. GAAP and the International Accounting Standards Board (IASB) have already committed to “converging” their rules over time. Read more
If you enjoyed this post, make sure you subscribe to our RSS feed!
Our Varsity Team goes to Washington!
Key members of our team are hitting the road to spread the word again about mark-to-market issues. Phil Nussbaum and Brian Battle will be visiting with various members of Congress to increase awareness of the impact of M2M issues and, more importantly, help them understand this complex issue. The crushing impact of mark-to-market on our banks and our economy is far too important to be overlooked or examined improperly, so Phil and Brian will be explaining the intricacies and unintended consequences that have resulted from mark-to-market rules and discuss potential solutions with our lawmakers. Check in later for an update when they get back!
If you enjoyed this post, make sure you subscribe to our RSS feed!
