Federal Reserve to Issue New Capital Rules

June 15, 2012 by · Leave a Comment
Filed under: General, Market News 

The United States Federal Reserve is proposing new capital rules for banks. These rules, which are capital requirements put in place by the Federal Reserve to mitigate volatility, would set a standard for how much cash and capital a bank must keep on hand to offset its debts and loans.

Almost immediately, large U.S. banks and lenders like Citigroup and Wells Fargo have decried the proposal, saying that “the net effect of the change will force them to hold more capital over and above the stated requirements,” according to an article by Shahien Nasiripour in the Financial Times. Additionally, “because of different accounting treatments, their foreign peers will have their capital levels protected from changes in the market value of some securities holdings,” Nasiripour continues.

The accounting treatment that concerns U.S. banks involves those portfolios designated as “available for sale.” These holdings, according to U.S. accounting rules, are to be booked using mark-to-market accounting.

European banks, as Citigroup and others have noted, are not required to mark these portfolios at market value.

Berlau: JPMorgan Chase Hedging Losses Magnified by Mark-to-Market

May 16, 2012 by · Leave a Comment
Filed under: General, Market News 

In a Competitive Enterprise Institute OpenMarket.org editorial, contributing editor John Berlau says that recent JPMorgan Chase losses may be magnified by mark-to-market accounting.

JPMorgan Chase recently reported a $2 billion loss from a “failed hedging strategy,” a hedge created by a synthetic credit portfolio operated by the firm’s Chief Investment Office. But, notes Berlau, the losses were reported by the Wall Street Journal and others as “significant mark-to-market losses,” wherein the value of the firm’s assets has dropped due to its current market value in addition to any poor hedging decisions made by fund operators at JPMorgan Chase.

“It seems that the primary reason for J.P. Morgan’s loss is that hedge funds bet against its position in certain securities,” says Berlau. “Mark-to-market losses like this are frequently paper losses that translate into much smaller actual losses, or sometimes even no losses at all,” he continued.

Additionally, such mark-to-market activities “can do significant damage when [they are] enmeshed in mandates such as regulatory capital rules,” Berlau says.

NY Times: Deleveraging Process Calls for Lenders to Deal with Losses

April 27, 2012 by · Leave a Comment
Filed under: General, Market News 

New York Times financial writer Floyd Norris, in a recent article, explores the United States debt crisis and subsequent rebound happening now. Both borrowers, faced with foreclosures and bankruptcy, and lenders, facing massive losses due to credit defaults, have been slow to recover.

But the situation has turned, says Norris, noting that in the first quarter of 2011, required debt service payments now account for only 10.9 percent of disposable income – the lowest since 1994.

However for the debt rebound to continue, the deleveraging process must be a key component, Norris says. The McKinsey Global Institute, in an analysis published in early 2012, called this phase “the good part.”

“Growth rebounds and government debt is reduced gradually over several years,” says the analysis. But for deleveraging to begin, says Norris, “it is important for lenders to face reality, admit losses and deal with them.” Though banks were tempted to obscure losses, mark-to-market accounting rules limited the extent to which this could be done.

Mark-to-market, weakened by bank lobbying, still had some positive effect on accepting losses as opposed to attempting to obscure them in hopes of a quick recovery, says Norris.

Maru: Toxic Assets at Banks Avoid GAAP and Mark-to-Market

March 7, 2012 by · Leave a Comment
Filed under: Market News, Toxic Assets 

In a contribution to Resource Investor, Vin Maru writes that the western financial system’s reliance on pure fiat currency “is the virus that will be the death of the financial world as we know it.” Regarding the economic downturn of 2008 and subsequent Troubled Asset Relief Program (TARP), Maru criticizes the actions of the government, saying that the financial system “will not be allowed to naturally correct and adjust” because of the TARP bailout.

“Banks which own toxic assets are no longer keeping financial records under generally accepted accounting principles (GAAP) or applying mark to market valuation for the assets they hold on their books,” says Maru.

The banks are not to blame, though, he says. The bailout and lack of GAAP and mark-to-market regulation, says Maru, simply act as “bandages to conceal the wounds from the public’s eye.” Capital injections and “printing money,” says Maru, “seems to be the cure to all sovereign debt problems” both domestically and globally.

Goldman, Morgan Stanley Discuss Reducing Mark-to-Market Accounting

December 9, 2011 by · Leave a Comment
Filed under: Market News 

Investment bank giants Goldman Sachs and Morgan Stanley have entered discussion on whether or not to scale back each company’s use of mark-to-market accounting.

Shifting certain reporting measures away from mark-to-market would mean that Goldman Sachs and Morgan Stanley would use historical cost accounting, valuing assets at their original purchase price rather than current market value.

The Wall Street Journal report on the potential shift said that only a small portion of the companies’ $1.7 trillion in combined assets would be affected.

Such a move is not guaranteed. As The Wall Street Journal reported, “there are wide differences of opinion among executives” of both companies. Should Goldman Sachs and Morgan Stanley decide to make the switch, no regulatory approval would be required, allowing for a swift transition if the companies’ leaderships so chose.

A 2008 change to classification as bank holding companies allows for less strict regulation in situations like these. It also allowed both companies to tap into the Federal Reserve’s emergency fund discount window during the financial crisis.

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