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

[samba12]

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,

 

[investcdn]

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.”

SOURCE

 

[MrGecko]

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.

 

[Technically Fundamental]

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.

 

[A Dashing Blade]

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.

 

[anley]

Dashing has got it 100% right IMHO.

 

[chump]

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 ..re the climate change assumptions/changes , regulation for property etc . They couldn't have planned it much worse had they tried.

 

[Technically Fundamental]

Exactly.

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.

 

[Technically Fundamental]

VULNERABLE? how many trillions of tax money have they had to insure all their "vulnerabilities"? They should be f-ing left to rot like any other business. In any other sector a competitor with a better business model would take over but high level banking is too elitist and conspiritous. The power of national banks is now a political tool.

 

[chump]

If you can find enough other competitors who actually have a balance sheet strong enough to take up the slack for allowing all the one's who are "vunerable" to fall then you might be right ....in this case you're not because the overwhelming position for this sector is it is too weak to take your preferred option.

 

[MrGecko]

I think - at least in these circumstances - there should be a distinction between those assets that are to be marked to market and those to model.

For instance, a typical MBS has some collateral behind it. You could say it has some intrinsic value (i.e. the value of the real estate it is secured against) that the market shouldn't price it below, a floor. Of course the Price of the individual properties is totally impractical to figure out after the fact (and in effect is just marking to a different market)... but when the market isn't functioning, assets with some collateral behind them do not immediately become worthless.

On the other hand, non-collateralised securities should absolutely be marked to market, because it is the market than generated their value if the first place (not some tangible asset).

 

[Technically Fundamental]

On the other hand, non-collateralised securities should absolutely be marked to market, because it is the market than generated their value if the first place (not some tangible asset).

And they influence the market. I think GB is right when he says that banking operations should be split. They've got their fingers in too many pies to be left to their own devices.

 

[MrGecko]

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.

I agree. Changing the benchmark doesn't change one iota the risk of Mr & Mrs. Smith of South Dakota missing a payment or two...

 

[Technically Fundamental]

If they were to automatically write down a larger percentage of the loans issued as a provision then they would get tax relief on it. THen if they loan is repaid they will make a book gain. taxable. all taxes would be offset but this solution is too long term for them. They want performance bonus now.

 

[MrGecko]

Not so sure about performance bonuses, but if they want to "fast forward" some "on paper profits" to hold up Q1 earnings because they know they're gonna be awful otherwise, then I can understand. They just have to be sure that Q2 can handle it.

 

[Technically Fundamental]

Not now as in "now" I meant that this is the attitude they had during the property boom.

 

[Technically Fundamental]

Btw - I'm way way way way out of my depth here knowledge wise - I'm just a dude at the coal face. I know nothing really about accounting, and a smattering about risk (or at least, that type of risk). My opinions are worth nada to be honest

I've been an accountant for 5 years so GET OUT!!

 

[MrGecko]

You also have to pay an insurance company a premium to carry the risk in the first place - the same situation that the rating agencies got themselves into... if you were to ask Swiss RE what they will insure Whistlers Mother for for free, then I would expect a conservative answer to say the least. Much like you would probably get an appropriate rating on an MBS if it was the buyer paying the fee/premium, not the seller.

I do agree though that pricing in the end of the world is a little over the top. Marking to a model that accounts only for normal market conditions is clearly inappropriate, but that shouldn't mean you take everything to the limit.

Perhaps a new branch of the regulations will be for some 3rd party to stress test regularly... it's clear now that you can't trust the banks et al to do it with the same agenda.

(I thought it was VaR that is bad at the fire sale stuff, which is why there is CrashMetrics and stuff like that?)

 

[Technically Fundamental]

The effing banks own most of the ins companies lol.

i agree with your stress test arguement. Wonder how long before they start getting paid off lol.