consequences of end to Mark to market accounting in relation to bank stress test

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Old Apr 6, 2009, 3:00am   #1
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consequences of end to Mark to market accounting in relation to bank stress test

End of Mark to market accounting

and beginning of mark to 'estimated' accounting

FASB Bring Sense, and Cents, To Banks & Mark-to-Market (C, WFC, BAC, JPM) - 24/7 Wall Street

so now all these toxic CDO's, MBS and CDS will all still be a hole on the balance sheets, but they will be an somewhat undeclared hole, which the banks hope will get better in time

if their accounting department think a certain asset is worth 0.6 on the dollar rather than the 0.4 that it is currently trading at, and they can declare a value of 0.6 on their quarterly reports then i think the banks will be feel they arebetter off keeping them medium term, to stay private and then wait to see what happens

when the end of april comes and tim geithners stress test has finished reviewing their books, will the fed team agree with their value assesments or not?

if they do and a bank like citi or BoA survive's the stress test and keeps some of these assets for 5-10 years and they are indeed plagued by nonperforming loans, then we can expect banks to lose money on these derivatives for years to come (like the japanese banks did in the 90s?), confidence wont really be restored and real recoverey may be undermined, leading to a decade of stagflation/depression?

however if they believe that these superbanks need to be nationalised and then possibly trillions are poured into them to 'cure' them quickly with a lot of money, then the markets will crash but eventually find a bottom? inflation should be a big short term problem? and possibly other consequences which i havent foreseen, such as the effects of more QE on the currencies of the US and maybe others,

i'm not sure which one is worse,
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Old Apr 6, 2009, 9:32pm   #2
Joined Mar 2009
The FASB is going ahead on its “reform” of mark-to-market. I preditct “Investors savvy enough to know that share value ultimately is driven by discretionary free cash flow – which can’t be ‘played with’ – and not by subjectively determined accounting numbers ought not to be hurt by these proposed changes. Less sophisticated investors in my view likely are going to suffer a bad result.”

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Old Apr 7, 2009, 8:08am   #3
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I'm not convinced by the whole thing TBH.

Marking to Model does improve the look the balance sheets, sure - but I don't believe that the freed up capital will then make it's way into circulation, I think any additional capital that a Bank can get hold of will go straight under the matress. Banks don't lend out of their own capital, they lend out of their reserves; and I don't necessarily think that marking to model improves the outlook - regardless of how much you think it's worth, the risk has been written and is sat there... should we see more defaults (e.g. Alt-A), aren't we going to be in an even stickier situation?

The key to freeing up interbank markets is to take these things out of the loop for good (palm them off onto the US taxpayer I mean)... until then, I think the risk of Alt-A blowups and "bottom drawer" positions are preventing the circulation of credit.

*NB: I don't work in a bank, so take it all with a good pinch of salt.
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Old Apr 7, 2009, 9:52am   #4
Joined May 2008
I agree GammaJammer. It's all very symbolic and political but it's also a very short term. What's to stop this all happening again if they keep allowing the banks to mark to model?
IMO, at the very least we need an impartial organisation to value banks' assets. Only problem is you'd need to employ people who weren't rubbing elbows with the bankers/politicians/FSA. Looking at the chinese economy I bet there are a lot of uber capable graduates that would jump at the chance of on opportunity like that. Communism ftw.

Last edited by Technically Fundamental; Apr 7, 2009 at 10:20am.
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Old Apr 7, 2009, 11:17am   #5
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Huh . . . ?

What's wrong with mark-to-market?

I buy something, my balance sheet should reflect the price (NOT the value) that I can realise that asset for in the market at the time. This is part and parcel of trading illiquid assets.

+ note that for every winner there's a loser. For every bank crying foul over mark-to-market, there's the other side of the trade quietly pleased with itself.

To allow anything different, and to only allow it in finance markets is lunacy.
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Old Apr 7, 2009, 11:44am   #6
Joined Dec 2003
Dashing has got it 100% right IMHO.
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Old Apr 7, 2009, 11:48am   #7
Joined Dec 2003
There's nothing wrong with Marking To Market, BUT if you have not done this and you intend to change to that model then you have to be the wrong side of stupid to do it at a time when the institutions effected by it are already vunerable on their balance sheets.
Reversing that action is a tribute for commonsense and if they are still in love with the idea they can come back to it at a more appropriate time.It's not an argument about the model ,it's an argument about the timing for it's introduction.
You could make the same argument for a host of changes posited in recent times the climate change assumptions/changes , regulation for property etc . They couldn't have planned it much worse had they tried.
Distance = Perspective
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Old Apr 7, 2009, 11:49am   #8
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International accounting standards state that a the the balance sheet should reflect the value of assests at the lower of cost or net realisable value. Why is it different for the banking sector. They might as well be buying alcohol, watering it down and putting the top back on with the same volume on the label. It's an absolute joke.
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