FASB Votes To Relax Mark-to-Market Rules

[Terral]

Greetings to All:

TheStreet.com/Story

The Financial Accounting Standards Board informally voted Thursday in favor of a proposal that will give institutions more flexibility in how they use fair value, or mark-to-market, accounting rules, which have been blamed for exacerbating the financial crisis because it forced banks to record hefty writedowns on damaged assets.

Under the new guidelines, the FASB agreed that the objective of mark-to-market accounting still involves what would be received in an orderly transaction in a currently inactive market. However, the board said that an "orderly" transaction does not include a forced liquidation or distressed sale, which allow assets to be valued differently.

The board also agreed to make the changes effective for the second quarter of 2009, although first-quarter applications will be permitted. A formal vote is expected soon (story continues).

This ruling is nothing more than a SHAM allowing banks to create 'two' sets of books and assign any value to their assets that makes good sense 'to them.' The fact that these guys are even considering abandonment of the mark-to-market valuation practices means there is definitely something WRONG with the market itself, which should represent a big red flag for anyone on the receiving end of these transactions. We are still looking at 10,000 foreclosures every day (story and 20,000 lose their jobs) and the 600,000 unemployment numbers are transitioning to 700,000 every month (story); which means no bottom to the housing market is in sight (story).

These rulings amount to a license for bankers to cook the books in attempts to make their balance sheets have a better appearance, while at the same time they look for unsuspecting victims to assume liability for their past mistakes . . .

Robert J. Shiller Knows His Stuff

GL,

Terral

 

[editec]

Terral,

You seem smart enough to me to be able to intuit that the whole banking system has been predicated on a scam for so long that they cannot even imagine running things without cooked books.

THIS period in our economy is the IDEAL time to radically change things more in align with what people like me want, and with what libertarians want too.

They won't do that, though because if they do then they must give up all the benefits this crooked monetary system has given them.

 

[Terral]

[FONT=&quot]Hi Editec:

You seem smart enough to me to be able to intuit that the whole banking system has been predicated on a scam for so long that they cannot even imagine running things without cooked books.

If you are referring to the unconstitutional Federal Reserve System central bank, that needs to be eliminated, then we agree:

[ame="http://www.youtube.com/watch?v=Xeb2VnI7S4U"]Ron Paul Knows[/ame]

Ron Paul >> "The whole problem we are facing today is that the Treasury and Congress and the Federal Reserve are trying to price things that they are incapable of pricing; that is the toxic assets; the illiquid assets, so if we only allow the market to operate, we might clean up the MESS that we have brought upon ourselves."

Abandonment of mark-to-market valuation is one step 'away' from allowing the 'market to operate,' because the fundamentals of the market ARE BROKEN. The Treasury and Congress and the FED are as incapable of 'pricing' these toxic/illiquid assets as the banks, because the FED-created housing bubble has burst and nobody knows how to locate the housing BOTTOM. Those of you who did listen to Robert J. Shiller (the video link again) already realize that housing prices are only half way down to the bottom having lost 25 percent.

To give you an idea of what this means: My mother put 50,000 dollars down on her house just three years ago and must refinance her loan, but the bank informed her that her house is now worth 40,000 dollars LESS than the loan amount! That means she must caught up 40,000 new dollars to refinance her mortgage 'and' the house price will definitely continue going DOWN. Changing the valuation rules will change nothing about the fair market price that buyers in her area 'are willing to pay,' so all of this hype is nothing more than a SCAM where bankers are trying to dump their depreciating assets on somebody else for more than the fair market value.

The credit freeze has everything to do with the percentage of households underwater on their mortgage, because people must sell their home before buying a new one. Allowing the banks to engage in price fixing is not going to create one JOB and is not going to stop the 10,000 foreclosures that will happen today, tomorrow and the next day, so on and so forth; which means the number of distressed properties on the open market is only going to INCREASE 'and' bring the values of all the houses in the neighborhood DOWN.

THIS period in our economy is the IDEAL time to radically change things more in align with what people like me want, and with what libertarians want too.

TheStreet.com came out with "Today's Outrage" that addresses this "Mark to Market's Fictional Failure:"

Today's Outrage[/FONT]

[FONT=&quot]
[/FONT][FONT=&quot]Today's Outrage: Mark to Market's Fictional Failure[/FONT]
[FONT=&quot]
The mark-to-market debate appears to be over. The independent Financial Accounting Standards Board, or FASB, is relaxing the rules, yielding to pressure from bankers, Congress and regulators.

However boring this may sound, the mark-to-market requirement, which forced banks to value assets based on what they could be sold for in current market conditions, is a pretty big deal. [/FONT]

[FONT=&quot]Trillions of dollars of bad assets have been written down under the old rules, causing some banks to teeter and fall. Of course since none of those assets could actually be sold, most of that lost value was purely theoretical. The consequences, however, were very real for many banks and financial companies . . . [/FONT]

[FONT=&quot]. . . What we've learned is that the mark-to-market rule only works in normal markets that show a modicum of stability. How do you decide what an asset might be worth when market values are flitting around like a bat with no radar? [/FONT]

[FONT=&quot]This brain teaser gets even more complex when trying to value mortgage-related securities that no one seems to want at the moment but may some day be worth owning again. And it gets even harder when you try to separate good assets from bad ones. [/FONT]

[FONT=&quot]Some of these "assets" are several steps removed from anything solid like the home that was originally put up as collateral for a loan. The mortgage may become worthless if the homeowner can't pay it, so a security based on the interest payments becomes worthless too.[/FONT]

[FONT=&quot]The key question is "How do you decide what an asset might be worth when market values are flitting around like a bat with no radar?" The answer is that "You do not." Period. Taking over a distressed property amid escalating unemployment and rising foreclosures will see more and more investors stuck with properties in a deflationary market where values are going down into the ground. Since nobody is trying to slow down the Outsourcing of JOBS and the importation of Foreign Nationals (legal and illegal), then the U.S. Consumer will continue to see purchasing power dwindle, which means fewer and fewer potential buyers willing to pay a 'fair market price' for your home.

They won't do that, though because if they do then they must give up all the benefits this crooked monetary system has given them.

The Financial Accounting Standards Board is voting to remove transparency from the valuation process that will only turn investors away in a deflationary market where they can pick up the same property next quarter for a lower price. The banks are actually shooting themselves in the foot, but the day traders have yet to realize that all of this is bad news for the U.S. Economy heading for eventual collapse.[/FONT]

[FONT=&quot]My two cents,[/FONT]

[FONT=&quot]Terral [/FONT]

 

[garyd]

Mark to market is perfectly fine for commodities that are traded hourly and for which the price is not geographically dependant. For real estate for which the value is almost wholly dependent on geographical location it is a disaster, simply because it compels the institution to capitalize losses well before they need to and often even before said loss actually happens.

As an example let us say we have a gentlemen who is paying his $1000 dollar a month mortgage payment on his 300k home on time everytime. The housing market takes a down turn in his neighborhood for whatever reason and his 300k home is suddenly worth only 250k. As long as the home is not sold this 50k loss is essentially valueless and the property in question is generating the exact same amount of revenue it has always generated for me. 5 years down the road the housing market turns around and the property is now worth 350k on the open market. Under mark to market I have to show on my books each of these changes when in fact none of those changes ever had any affect on my earnings or profitability.

 

[Toro]

I used to support mark to market but have come to the conclusion that it was a bad idea. It is too easy to wreck the financial system with it. IMO, it has turned into a disaster.

In 2008, when the subprime mortgages in these pools began defaulting at a higher rate, the market for MBSs dried up. Yet, rigid mark-to-market accounting rules, enforced by regulators, forced the drastic write-down in the value of MBSs, even when investors were both willing and able to hold them until the market improved or to maturity, when the loans would be paid off, if necessary.

However, even though the MBSs have hardly been trading, most of the underlying mortgages are still generating income, making them worth more than their marked down prices. Thus, a cheap way of addressing the financial crisis and saving banks is to suspend these mark-to-market rules. ...

According to Milton Friedman, mark-to-market accounting was responsible for many banks failing during the Great Depression. In fact, President Roosevelt suspended it in 1938. The practice reappeared in the mid-1970s and was formally reintroduced in the early 1990s. ...

The tragedy in marking to market comes not from the write-downs per se, but from the resulting decline - dollar for dollar - in regulatory capital.

As a general accounting rule, investments drop in value when their market price drops below their original purchase price, a situation called impairment. Impairments can be classified as "temporary" or "other than temporary," in which case they must be written off as worthless.

For example, if a bank buys an MBS with 1,000 underlying mortgages and a few of these mortgages become "other than temporarily impaired," the bank must write down the whole bond - not just the impaired mortgages. The write-downs would be much more modest if the same 1,000 mortgages were separated. For example, the Federal Home Loan Bank of Seattle has a portfolio of MBSs that are predicted to only lose $12 million in the long run. However, the MBSs were marked to market because they were classified as "other than temporarily impaired," causing the bank to report a $304 million loss.

Although the original mark down may not be justified, it can lead to a real loss of capital. This loss of capital may lead to higher capital requirements at a time when capital is becoming scarcer. A bank's worsened condition may also require it to pay higher Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums in order to preserve the deposit insurance fund. As this process is multiplied across the banking system, these premiums may be raised across the board.

Consequently, the banks have their capital requirements increased when they can least afford it. The FDIC, after keeping its premiums low during good times, has to raise them during bad times. This is procyclical because it makes an economic downturn worse, and can artificially reinforce an economic boom.

Mark-to-Market Accounting: Shooting Ourselves in the Foot - Brief Analysis #648

 

[garyd]

Exactly sir.

 

[editec]

They're carrying assets which have an unknown value and lending based on multiples of that unknown value.

Oh, yeah, there's good solid banking principles in action.

Now anyone who has been FORCED to sell has had NO CHOICE but to accept that the price of real estate has declined, but heaven forbid we force the bankers to suffer the sling and allows of the real estate market, eh?

They're too special. They can't be hurt because they're too important to the economy to let go down.

Hang 'em! Shut the forking banks down, strip them of their assets and then just hang the bastards.

 

[Terral]

Hi Gary:

Mark to market is perfectly fine for commodities that are traded hourly and for which the price is not geographically dependant. For real estate for which the value is almost wholly dependent on geographical location it is a disaster, simply because it compels the institution to capitalize losses well before they need to and often even before said loss actually happens.

We disagree. We are talking about real estate properties that in many cases have been abandoned and oftentimes vandalized with some houses striped of electrical wiring and anything people can sell for scrap. The US Census Bureau reports that the USA currently has 19 million empty homes (story) that the banks are currently trying to decide how to unload on ‘new money’ investors. The ‘loss’ happened when the bank handed over the 300,000 dollars to the original ‘seller,’ because the buyer has headed for the cotton-picking hills! The bank is already out the 300,000 dollars and is trying to ‘talk up’ the value of their distressed property that is losing value with every passing day, because another 10,000 foreclosed properties are trying to hit the market EVERY DAMN DAY. Gary is trying to give banks a license to create a ‘second’ set of books for the results of their fantasy valuation trickery, because the housing market fundamentals are BROKEN. Period.

As an example let us say we have a gentlemen who is paying his $1000 dollar a month mortgage payment on his 300k home on time everytime. The housing market takes a down turn in his neighborhood for whatever reason and his 300k home is suddenly worth only 250k. As long as the home is not sold this 50k loss is essentially valueless and the property in question is generating the exact same amount of revenue it has always generated for me.

Your example has nothing to do with the elimination of mark-to-market valuation methods one way or the other, because this is no distressed property falling under the ‘troubled/toxic/illiquid asset’ umbrella at all. The gentleman in your example is making his payments on time and there is no distressed property to unload on the open market for any valuation procedures to become a necessity. However, when your gentleman’s loan balloons and the ‘new value’ is less than the mortgage value, then the bank will require him to cough up the difference before issuing the new loan and you can take that the bank. The reason that people are racing to refinance right now is because the value of their homes is ‘depreciating’ and they are trying to refinance before going under water . . .

5 years down the road the housing market turns around and the property is now worth 350k on the open market.

No. Five years from now the bottom has fallen out of the housing market and your 300,000-dollar home is now worth 98,000 bucks on the open market and your gentleman has to decide when enough is enough. Basing ‘current market value’ upon ‘your’ happy expectations for the market has nothing to do with the ‘actual price’ that buyers in your area ‘are’ willing to pay ‘today.’ The reason mark-to-market valuation is the ONLY real estate method you should trust is because somebody is trying to saddle you with ‘their’ troubled asset and ‘you’ will be the one left holding the ‘bad paper’ bag. Deviating away from mark-to-market valuation spells trouble for all the banks, because the smart money will require a valuation method that ‘is’ connected to the real market and the banks will end up in the precarious position of retaining troubled assets in a ‘deflationary market’ where values are going into the toilet. The banks are sitting in quicksand and refusing to liquidate these troubled assets is only going to make the ‘hard landing’ that much harder down the road. Watch and see . . .

Under mark to market I have to show on my books each of these changes when in fact none of those changes ever had any affect on my earnings or profitability.

You will not be singing this tune when your current buyers go too far underwater, and abandon the properties, and you are forced to find a real buyer in the real market unwilling to buy into your fantasy valuations on what might be . . .

Marking house prices to-market is the only game in town, because everything you own is worth whatever a real buyer ‘is’ willing to pay on any given day. Of course that number is meaningless if you intend on holding that asset forever and ever, but then you needed no valuation method in the first place . . .

GL,

Terral

 

[garyd]

Terral 99% of homes aren't toxic. the problem with Mark to market is it tends to magnify such problems by compelling people to treat all homes the same regardless of actual value.

Marking house prices to-market is the only game in town, because everything you own is worth whatever a real buyer ‘is’ willing to pay on any given day. Of course that number is meaningless if you intend on holding that asset forever and ever, but then you needed no valuation method in the first place . . .

The problem with real estate is that you have no idea what that price is until you actually try to sell it.

The same house in Oklahoma sells for far less than a similar home in located in So. Cal.

 

[wimpy77]

i have a question that i have been wondering. doesn't the change in mark to market basically kill geithner's bad assets plan? i mean aren't the banks gonna want to hold on to those assets instead of selling them?

 

[Toro]

i have a question that i have been wondering. doesn't the change in mark to market basically kill geithner's bad assets plan? i mean aren't the banks gonna want to hold on to those assets instead of selling them?

Yes, it might.

However, I'd rather there be inertia if the banks think they can realize value above market than having to sell assets in a desperate bid to shore up capital while in a vice grip of a financial death vortex.

 

[Terral]

Hi wimpy:

i have a question that i have been wondering. doesn't the change in mark to market basically kill geithner's bad assets plan? i mean aren't the banks gonna want to hold on to those assets instead of selling them?

The banks are screwed because the deflationary spiral DOWNWARD is lowering the value of their mortgage-backed security portfolios 'and' more people will continue walking away rather than drown in their underwater mortgage situation. Think about it: If you must cough up 50,000 dollars to refinance, that buys a whole lot of rent-to-own someplace else in a distressed property coming onto the market.

Everything Tim Geithner does will only make the situation far worse (my thread), because he is creating a secondary/fake market that will undercut 'the market' and that will kick the housing bottom out for good. What happens when you buy up an over-appraised house (new valuation method) and rent the thing to one of the 700,000 people losing their JOB next month, or the next month, or the next month? Then here we go down foreclosure lane again. The banks are looking for 'new money suckers' to take over their position in this deflationary market, while doing everything to artificially inflate the price to whatever they wish. No thank you. Just wait until the market crashes and pick up five for the price of one house today, if the JOBS/Illegal Aliens/Outsourcing situation ever gets fixed . . .

GL,

Terral

 

[garyd]

But if they aren't forced to capitalise that loss prematurely then there is no problem with the majoirty of loans.