Murphy: Mark-to-Market Should Have Been Required for Monoline Insurers

April 25, 2012 by · Leave a Comment
Filed under: Financial Crisis, General 

In a recent Financial Times Alphaville article, risk management and regulatory capital expert David Murphy explains his position that monolines – insurers whose sole line of business is bond insurance – would not have played as big of a role in the financial crisis if they were required to mark credit risk to market.

Consequences of mark-to-market mostly vary around volatility issues, says Murphy. “You have to fund losses caused by credit spread volatility; you have to support the risk of credit spread volatility with some equity; and the risk of the position includes the risk of movements in the non-default component in the credit spread,” he says, noting that a non-mark-to-market holder would not have these issues.

But the unfunded risk – risk that is not marked to market – begat methods by the insurance industry to avoid the potential volatility, says Murphy.

Though many insurers before the crisis did mark risk to market, Murphy “believe[s] that the availability of the non-mark-to-market model in the early 2000s acted as kind of a ‘gateway drug,’ getting some insurers into credit risk taking.”

IASB Mulling Change in Fair Value Rule

The International Accounting Standards Board (IASB) is said to be modifying its rules on fair value accounting, according to IASB board member Stephen Cooper’s remarks at a recent accounting conference.

The IASB rule was put in place after political pressure during the financial crisis prompted hasty action at the international accounting rules-setting body. A move to tweak the rule has been expected since differences in opinion on the topic derailed “convergence” of standards with the United States-based Financial Accounting Standards Board (FASB). The convergence of standards between American and international accounting principles was initially set for June of 2011.

“If we are going to consider the FASB position and think what we should do and ask constituents’ views, then implicitly we have to contemplate the possibility of reopening IFRS 9 and making changes. Otherwise, what is the point of consulting?” Cooper said.

Noting that the FASB has been influential in dictating fair value standards, Cooper continued: “If FASB ends up in a different position…and if we want to achieve convergence then somebody has got to change. No decisions have been taken on this.”

The United States Securities and Exchange Commission will eventually make a ruling on whether or not to adopt IASB rules outright, hinging on the board’s fair value decision. The U.S. is the only major economy not using IASB.

Ritholtz: Despite Deregulation, Banks Not Healthy

September 6, 2011 by · Leave a Comment
Filed under: Financial Crisis 

Author, financial commentator, and FusionIQ CEO Barry Ritholtz says that big banks are “under-capitalized, overexposed, and opaque.” In an article published to EconoMonitor, Ritholtz criticizes the U.S. Treasury and Federal Reserve for their actions in response to the financial crisis. “The banking system was not saved; The massive injection of liquidity temporarily salved the day-to-day operations of banks, but they did not repair what ailed our financial institutions,” he says.

Bank holdings remain full of declining assets, capitalization rules remain too thin, and compensation and bonus structures are misaligned, says Ritholtz. Balance sheets are “unnecessarily opaque” due to the removal of fair value accounting in 2008-2009. He continues, “Eliminating fair value accounting via FASB 157 did not fix balance sheet problems, but instead allowed banks to hide them.”

Instead, Ritholtz proposes a full reorganization of the nation’s largest banks, most importantly shedding under-performing holdings that are now hidden by marking assets at original value.

Economic Recovery at Two Years Running

June 14, 2011 by · Leave a Comment
Filed under: Financial Crisis, General, Market News 

It has been over two years since the United States financial market bottomed out on March 9th, 2009. Financial publication The Street reported on the financial regulation and gains that have led to this recovery.

The very first catalyst noted by The Street is the repeal of mark-to-market accounting rules. As banks lend based on the value of their reserves, lending was difficult as debt prices plummeted. Though often criticized for allowing banks, not the market, to determine the financial worth of their debt reserves, mark-to-market’s repeal has been noted as a key factor to the recovery, as banks could now lend freely.

Though mark-to-market’s repeal was only part of the recovery, as bank balance sheets were still struggling a year after the bottom-out. Federal Reserve Chairman Ben Bernanke’s Quantitative Easing programs, where the Fed would purchase Treasury bonds to pump more money into the economy, is the key follow-up to the recovery noted by The Street.

4th Quarter Earnings Almost Complete, Appear Strong

May 6, 2011 by · Leave a Comment
Filed under: Financial Crisis, Market News, Uncategorized 

With 4th quarter financial reporting over 95% complete, reports appear to be strong from this earnings season. Zacks Investment Research has received reports from 479 firms and is awaiting the results from the straggling 5%. The investment research company noted that typically, the early-reporting firms perform much better than those filing reports last, but that the firms reported represent almost all of the potential earnings for 4th quarter. Thus, the remaining firms are not expected to have much of a negative effect on the overall earnings in 4th quarter.

Total net income has risen a very strong 29.6% versus the same quarter one year ago. Zacks points out that significant growth came from the financial sector, which posted huge net margins. The researchers did caution that the quality of the reports versus prior years can be subject to interpretation due to the absence of mark-to-market accounting. Much of the growth might be attributed to firms setting aside fewer reserves for bad debts compared to a year ago, said Zacks.

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