Lawmakers Press SEC, FASB on Mark-to-Market Change

I agree with you SteveF that this is a big deal and can make an immediate difference. Bringing back the uptick rule and eliminating naked shorting will also help, IMO.

waverly..yes I forgot the uptick and the naked shorts too. Those f'd up shorts will exploit any loophole and run every stock right into the ground.

waverly, it sounds as if the legislature gets it. The article quoted some pretty aggressive comments. Did you get the same feeling?

I think they get it and will make it happen....hopefully soon. If this can be done (and these changes seem to make sense on many levels) and the credit markets can get loosened (the next piece to focus on) we may see some traction forward soon.

Disagree all anybody wants on NYC RE prices, no one wants to see this recession get worse or be 1 day longer than it has to be.

okay waverly.. I think this rally is 1/2 mark to market related...

So you think that by allowing banks to pretend that bad assets have not lost value will RESTORE confidence to the markets? Just the opposite - investors would run in fear from the large banks, since they no longer tell investors on a regular basis what there assets are valued at. Book value pers share would be meaningless because no one would trust it. You think investors in Japan liked not knowing how worthless their banks really were? And do you remember how many insurance companies and S&L's were perfectly "healthy" until they went bust. That is EXACTLY WHY they created M2M in the first place! Its amazing how short term your memories are.

I'm with jason10006 on this one. I simply don't see how proponents of a market-based economy can defend a valuation rule that deliberately permits misrepresentation of what assets are actually worth in the market. It should tell you something that investors are defending the mark-to-market valuation standard. How can information asymmetry between sellers and purchasers of an asset about real value be good over the long run?

Do any of these lawmakers actually have any real financial knowledge?
Its scary that these guys are making the decisions...

Imagine the same bunch of lawmakers telling doctors how to treat patients.. scary shit ahead

I will tell you in terms you guys get...it would be like congress outlawing sites like streeteasy, zillow, and trulia, and anything else that let you look at comparible real estate prices, to "help" homeowners.

I'm with woodie and jason.... it's like selling me a bond that pays 10% yield.... but psss... don't worry about your counterparty..."you're cool" until the checks stop coming :( There is a reason that nobody wants to purchase these assets... their ultimate yield is unknown... and as a prior banker that was what we got paid for... to ensure that 95% of loans paid back w/ interest, and the 5% that didn't was factored into the bank's overall interest charged... So what the hell were these Bankers doing while getting paid bonuses?

steveF, you must have yin with the yang... banks can't count paper profit for bonuses and not count paper losses...

I think Floyd Norris put it well in the NY Times this morning: "If mark-to-market accounting is to blame for the current financial crisis, then the National Weather Service is to blame for Hurricane Katrina; if it hadn’t told us the hurricane hit New Orleans, the city would never have flooded."

Frightening,

For those who support M2M forbearance, do you believe that LEH or BSC balance sheet opacity and Level 3 marks were merely the imagination of the demonic "shorts?" Or how about FRE/FNM? Or maybe we should have just trusted the marks on C's books last year when they were raising $20bn in equity from Abu Dhabi and Pandit the Bandit was telling you they were well capitalized when the stock was $28? Was that before or after THEY approached the gov't for more capital? A pile of sh@# is a pile of sh@# whether you put a blanket over it or not. At least some can avoid stepping in it if it's in view. While there are certain truths that not all assets should be marked-to-market, the fact is, they aren't. According to BBG story yest, <30% of the Top 12 banks assets were M2M..And didn't we already see what happened to inter-bank lending when trust was lost? Do we think banks will be MORE trusting when marks are suspended? Absurd. Just another step to more government intervention and backstops they won't be able to step away from...

sorry- BBG saying top 12 banks M2M <30% of their assets. And we've already seen what happens to the fncl system when banks stop trusting each other. Will suspending m2m encourage more trust? It's just another step along the road to more gov't backstops of the banking system..Rather than suspending m2m, how about MORE disclosures about what you actually own and if underlying performance is unimpaired, state it in your fncls..

Bankers Say Rules Are the Problem

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By FLOYD NORRIS
Published: March 12, 2009

If mark-to-market accounting is to blame for the current financial crisis, then the National Weather Service is to blame for Hurricane Katrina; if it hadn’t told us the hurricane hit New Orleans, the city would never have flooded.

This is the logic the bankers are using, and they are getting sympathetic ears in Congress. The bankers have gotten two members of Congress to introduce a bill to establish a new body that could suspend accounting rules for financial institutions.

Edward L. Yingling, the president of the American Bankers Association, says the proposal addresses “systemic risks that accounting standards can have on the economy.”

Steve Forbes, the publisher and erstwhile presidential candidate, goes even further. “Mark-to-market accounting is the principal reason why our financial system is in a meltdown,” he wrote in a Wall Street Journal op-ed piece.

They say the problem, in short, is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could never be repaid. It is that someone is forcing them to fess up. If only the banks could pretend the assets were valuable, then the system would be safe.

On Thursday, members of a House subcommittee joined in demanding that the rules be suspended. It was a bipartisan lynching of the accounting rule writers.

The panel’s chairman, Representative Paul E. Kanjorski, Democrat of Pennsylvania, said the accounting rule “does provide transparency for investors,” but that “strict application” of the rule had “exacerbated the ongoing economic crisis.”

Then he issued the threat. “If the regulators and standard setters do not act now to improve the standards, then the Congress will have no other option than to act itself.”

Sadly, a victory for the bankers would not help them much. Even if it were true that banks would be held in higher regard now if they had not been forced to write down the value of their bad assets — and that is, at best, debatable — changing the rules now would be counterproductive. Would you trust banks more? Would other banks be more inclined to trust banks?

It is true, as the bankers argue, that valuing illiquid instruments is tricky. And it is true that markets can overshoot. Some of these securities may well be undervalued now. But the solution is not to go to what Robert H. Herz, the chairman of the Financial Accounting Standards Board, calls “mark-to-management” accounting.

I call it “Alice in Wonderland” accounting, after Humpty Dumpty’s claim in that book that “When I use a word, it means just what I choose it to mean, neither more nor less.” After Alice protests, he replies, “The question is, which is to be master — that’s all.”

Although you would not know it from the angry complaints, the accounting board’s Statement 157 did not require mark-to-market accounting. That was already required under earlier rules. What it did do was clarify how such values should be determined. That stopped banks from defining “market value” as meaning whatever they chose it to mean.

Conrad Hewitt, who was chief accountant at the Securities and Exchange Commission when it conducted a Congressionally mandated review of the issue late last year, said at a recent Pace University accounting forum that he asked all the complainers if they had a better way to determine market value than the one prescribed by Statement 157. None did.

That statement set out procedures for dealing with illiquid markets and distress sales, and the board is now at work on setting out more guidelines on how to do that. You can bet that its efforts will not satisfy the banks.

But there are three steps that could improve the situation.

First, the regulators could make it clear they are committed to what is now called countercyclical regulating. They could ease capital rules when things are bad, and require more capital as the economy improves. As Ben S. Bernanke, the Federal Reserve chairman, said this week, regulations should allow capital “to serve its intended role as a buffer — one built up during good times and drawn down during bad times in a manner consistent with safety and soundness.”

In other words, accept that market values are low and report the facts to investors. But give the banks a break by not acting as if that will last forever.

Of course, many will doubt that the regulators will really get tough when things improve. They stood by mutely while the banks went on the binge that created this crisis. But we can hope.

The second step would be to force banks to disclose — to the public and to the other banks that trade with them — just which toxic assets they own.

The bankers assert that those assets are now trading for less than they will be worth at maturity. In fact that is unknowable, which is one reason we have markets. If the current deep recession turns into Great Depression II, then even today’s market values may prove to be too high.

But if we knew which securities each bank owned, and where it was valuing them, we could go over each security and reach our own conclusions as to values. We could also see which banks seemed to be more or less optimistic in their estimates of market value.

When I suggested that to a top official of one big bank, he dismissed the idea, saying it would damage his bank’s trading position to advertise what it had. Of course, he also complained that there was virtually no trading going on, so I’m not sure what the damage would be. But if the banks want to disclose the information with a three-month delay, so that there is no way to know if they still own the securities, that would be fine with me.

The final step would be to get the market for such securities functioning. Right now, it is largely blocked by the Obama administration’s slow efforts to design a program to stimulate such sales by offering generous financing and partial guarantees to buyers. No one wants to buy now if a much better deal might be available next week. The Treasury Department needs to get the details out, and then see who is willing to buy, and at what price.

Of course, any such government-subsidized market would need to make widely available what was on offer, to assure that the price received was the best one possible. It’s not a market price if market participants cannot bid.

It is possible that there will be few trades even then. Edward J. Kane, a finance professor at Boston College, suggests that banks, particularly those that know they need a miracle to regain solvency, will be unwilling to sell. “Cheap volatile assets with a huge upside are precisely the kinds of optionlike investments that clever zombie managers are energetically looking for,” he said. If they soar, the banks’ stock may be worth something. If not, the taxpayers will take the loss.

Next time you hear a banker denounce mark-to-market rules, ask if he runs his business that way. Will he offer you a mortgage loan based on what you think your home should be worth, which you can repay only if you make a lot more money than anyone will pay you? If so, then perhaps the bank should be able to use “Alice in Wonderland” accounting on its own books.

Or maybe that is not such a good idea. The banks already tried that, with liars’ loans. Those loans did not work out so well.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.
Next Article in Business (41 of 41) » A version of this article appeared in print on March 13, 2009, on page B1 of the New York edition.

I'm not a believer in "Mark-To-Let's-Pretend" either!

You have a couple of choices. You can stop making banks take huge loan reserves against unrealized losses in their portfolios (mark to market would stay but the reserves against these losses would be smaller). Your second option is having the banks lever up again so they can lend out money (not very popular right now) or your last option is to pump trillions of dollars into the banks to rebuild their equity bases so they can lend (even less popular). I prefer the first. Credit will flow again which is what is absolutely necessary for us to get out of this recession, companies will grow, jobs will come back and yes believe it or not NYC real estate will go up.