Thursday, February 5, 2009

Mark to Farce

Thu Feb 5, 2009 12:23pm EST

It might be possible to modify mark-to-market accounting rules for U.S. banks facing steep writedowns of troubled assets without abandoning the underlying accounting standard, a senior Senate Democrat said.

Sen. Christopher Dodd, the Democratic chairman of the Senate Banking Committee, told reporters on Wednesday evening after a panel hearing that at least one former bank regulator was discussing how to approach the difficult issue without "walking away from" mark-to-market standards.

The issue of how to value distressed assets held by U.S. banks has been one of the most difficult challenges in constructing a bank rescue plan, according to industry lobbyists and lawmakers.

It the government buys some bad assets as part of the rescue, it could force banks to drastically write down billions of similar assets. That could create further instability unless changes are made to the accounting rule which requires assets to be valued at market prices.

The Securities and Exchange Commission has already given the financial industry some wiggle room and has said hard-to-value assets do not have to be marked down to fire-sale prices.

(For all the Nancy Capitalists that have been gagging for this ... watch out if you get what you are wishing for. Law of Unintended Consequences 101 - investors will lose faith in all accounting.- AM)


Anonymous said...

Too late - I've already lost faith in Wall Street accounting.

Anonymous Monetarist said...

No argument there.Citizen King provides a good summation this morning:

What good is suspending a rule that is not being enforced? Plus how many times do we have to hear that mark-to-market accounting might be suspended? Does anyone think banks are marking all their crappy paper to the market now? And how many times will traders be fooled by the rumors? As we keep asserting, only hopeless permabulls don’t realize that certain large banks are teeming with an enormous amount of crappy paper whose value is undeterminable. Yet the hype & hope crowd believes the market will ignore reality if the solons decree the emperor is wearing splendid clothes.
More importantly, banks are circumventing mark-to-market accounting by dumping or warehousing toxic paper at the Fed. If you were running a bank with toxic assets, you would repo or dump the most damaging assets to your earnings and balance sheet to the Fed. This is why the Fed will not release the details of the toxic assets that it is has bought or is warehousing for the Street. Ergo, all the talk about rescinding mark-to-market accounting is nothing but jabberwocky, a canard to entice buying. Plus it appears the Fed has channeled taxpayer funds to the Street by buying assets at grossly over-valued prices.