"We Have a Real Problem Coming..."

frightening.

Silly analysis. Mark-to-market is a silly concept for loans held on book. Imagine if you had o pay capital gains tax every year on a market appraisal of your house. Just plain dumb.

very true, whole loans do not have to be and shouldnt be marked to market. HOWEVER, if you look at FASB 115-2, or what the FASB has done to help banks through this crisis, they allowed management to re-classify assets that 'held to maturity' and 'available for sale' category so that they do not have to be marked to market. Aha, so what is being done now. Perhaps assets that SHOULD be written down were re-classified, so that they didnt have to.

everyone knows marks on whole loan books are distorted to todays bid for those assets. yet for accoutning reasons, it simply doesnt matter. there are trillions held in whole loans

http://www.schiffhardin.com/publications/corp_apr13_09/corp_apr13_09index.html

On April 2, 2009, following a short fifteen day comment period that itself followed threats of congressional action, the Financial Accounting Standards Board (FASB) approved the issuance of three pronouncements effecting changes in certain aspects of fair value accounting.

FSP FAS 115-2 and FAS 124-2 (the OTTI Pronouncements). FASB issued Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1993. That Statement required a reporting to classify its investments into one of three buckets: (1) trading assets — securities that are bought and held principally for the purpose of selling them in the near term; (2) held-to-maturity assets — securities that would be held to maturity (therefore, only debt instruments qualified); and (3) available-for-sale assets — all other securities.

Placement of a security in the latter two categories permitted a reporting entity to avoid recognizing in earnings any unrealized (by disposition) impairment of the security (where the security's value declined below amortized cost) if the impairment was other-than-temporary. An entity did have to record an impairment of an available-for-sale asset in other comprehensive income, but this is a balance sheet item so any earnings impact was avoided.

was what she said about commercial mortgages not scary?

yes, but non-performing loans can't be hidden so easily. and today's underwater but hidden asset can easily become tomorrow's non-performing loan.

http://www.ritholtz.com/blog/2009/08/5-level-for-toxic-loans-doom-banks/

The problem, UD, was a dysfunctional market. If a risk-averse market is only willing to pay 15 cents on the dollar for a book performing at 95%, you have a disconnect. It happens the other way, as well - in bubble times people buy assets because they are going up in value, further increasing their value, till the collapse.

The change in the FAS's was only for assets for which there was no or a very small secondary market, which tend to be less perfect than larger markets.

Mark-to-market would work if markets were perfect. They demonstrably are not. Mark-to-market is very pro-cyclical, and arguably banks need to operate counter-cyclically, providing liquidity when there is no. Else the Fed has to do it.

I believe fasb was meeting as recently as yesterday discussing broadening the application of MTM... this might imply a significant new capital need for the banks

Or, you can say the problem was a parabolic system of credit, the use of excess leverage, flawed rating agencies, and a quantity-fee based securitization model that all led to pleny of loans being handed out that never should have been. then the market became dysfunctional as that excess and platform was not sustainable at the pace it went parabolic.

everyone knows the whole loans, regardless that they should not have to mark to market, are being carried at values way above their bid. period. if they are market at 0.90, then the bid is 0.70. but the pace of non performance continues and you cant expect the book to recoup performance levels that warrant a bid where current marks are. this has to be an overhang of sorts for banks. this has to affect ability to raise future capital and operations and how ones books are seen by regulatory requirements

markets may not be perfect, but in the end they will bring out flaws or disconnects. and yes, the whole loans are just the overhang, the pressure that wont go away for years, as banks handle the next set of assets whose marks are yet to come down to current bids.

you hear headlines about commercial being so bad, but you know what, bids for cmbs have improved with credit and fed programs and optimism of the past 4-5 months. I dont expect this to last, and I think a big adjustment is coming (who knows when), but then banks will start to worry about how future writedowns may negate some of the time that was bought with raising so much capital.

http://www.markit.com/en/products/data/indices/structured-finance-indices/cmbx/cmbx-prices.page?

cmbs, jumbos & prime loans, financed PE LBOs...these guys are the places to watch over the next 2 years.

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTTT9jivRIWE

so...estimating that mortgages under water will double from 25% to roughly 50%. even at "only" 25%, the implications for the banks is grim.

http://blog.hsh.com/?p=5316

http://www.bloomberg.com/apps/news?pid=20601109&sid=a1Qa_Q_PbGWc

i found the following a bit funny, although i'm sure it wasn't intended as such:

The biggest reason that stocks have rallied since March, Wesbury said, is that the House Financial Services Committee forced FASB to loosen its mark-to-market rules. Other reasons for the rally are the easiest monetary policy in the Federal Reserve Board’s 96-year history and the end of panic selling, he said.

And here I thought it was green shoots.

The green shoots must have been green buds.