I wrote about this last month when I first heard about trying to change the rules. Mark to Market is the only fair and accurate way to deal with valuation of assets – anything else is wishful thinking.
My original post is here:
http://www.effor.com/blog/index.php/2009/02/05/the-return-of-mark-to-myth-2
I expanded on it today after reading the CNN article and comments.
http://www.effor.com/blog/index.php/2009/03/14/is-mark-to-market-a-bad-idea
Economics really is different than health care. There is no virtue in economics and certainly no forgiveness. In the ER, if someone trips while holding a knife, we don’t castigate them for their clumsiness and let them bleed out…we actually HELP them, instead. Mark-to-market accounting rules frankly are flawed in that they are pro-cyclical and DO exacerbate the credit crunch…not changing them is simply dumb and unhelpful.
I am amazed at how many of people are against mark to market rules… Nobody complained about them when they overvalued banks portfolios. Antoine says mark to market may be causing financial institutions to “report losses that they MAY NEVER ACTUALLY INCUR”. Did anyone complain when these same banks were reporting gains they MAY NEVER ACTUALLY REALISE? Don’t think anyone did.
Second, it is now a proven fact that all these institutions overstated their performance… You now want to trust them to tell you how much money they think they are going to make? i know i dont. But if you guys insist, i will set up a corporation, value my work at one trillion dollars, and issue bonds against it with redemption upon my death. And everytime somebody asks for a valuation, i will increase it, with additional bond issues, and when i am actually dead, you can complain about the lack of mark to market while i was alive!
Second, many of you say that banks cant lend because MTM is reducing their balance sheets… Banks cant lend because they LENT TOO MUCH, over leveraged themselves and you, and now you want more… you should all come back down to earth and realise this insane spiral has to end. You wont solve your credit crisis by starting a new one.
Finally, there is no credible alternative to MTM… I know that most finance professionals (myself included) would be unable to truly ascertain the value of an asset if MTM were suspended… So realise this, you may be inadvertently creating an even bigger market meltdown! if investors no longer trust the value of a stock, they will sell it. And this may go down as another wonderful OOPS! moment, brought on by fear, and the intense lobbying of all the financial institutions who would like nothing better than to hide from you how badly they mismanaged the boom.
No, the accounting rule doesn’t need to change because the whole point for the accounting rule is to provide transparency to the investors. If you get rid of the accounting rule what you’re saying is that banks should not have to disclose the true value of the assets that they have sitting on their books which goes against the role of transparency in the accounting process.
Marked to market isn’t some theoretical nice-to-have, it is as fundamental to the process as requiring a company to disclose its cash flows in its quarterly reports. It allows investors to know exactly what they are getting into and not be duped by fancy estimations of the valuation of an asset.
If you didn’t want to write it down, you shouldn’t have picked it up. If you picked it up – why are you trying to hide its actual value from me when you are required to disclose the value of all of your other assets to me by regulation?
How quickly we forget the accounting hanky panky of the dot-com boom.
Mark-to-market is an important tool to truly value the net worth of a company. I don’t think it’s a good idea to get rid of it completely because we would be setting ourselves up for another tech-type bubble.
However, in the case of banks, which are making loans on long term real, secured assets, I think a better measure would be to assess the realistic expected cash flow created from the loan or security over a period of time. Even in Nevada, where foreclosure numbers are horrible, only 2% or so of the mortgages are non-performing. 98% of Nevada mortgages are performing. The 2% in foreclosures still have some residual value from the real property.
Mark-to-market is a blunt instrument. It was implemented for investments in stock and “goodwill”. I think it could be softened for long-term investments in real, secured assets.
The basic question is what’s the realistic worst case expected cash flow from the security, not what you can sell it for right now.
This seems very simple to me. We have a choice to continue to spend billions of tax payers dollars trying to shore up the capital of banks as asset values continue to be driven down by market pressures brought on in part by mark to market accounting, or we can simply temporarily suspend mark to market accounting which would allow the banks to maintain their existing capital and elliminate the need for further government “bailouts” (loans). Cost basis accounting worked pretty well for over 100 years and government overreaction to Enron and other mismanaged companies led to the current mark to market accounting system that is costing our country billions of dollars.
All this is, is another gimmick. Manipulation to get bad bets off their books. Congress wants this more than anyone else. The good old “quick fix”. You think congress doesn’t want this. Ask Barney, and Christopher! Remember, how the bankruptcy laws were changed. Everyone else pays, except them. Accounting when there’s no accountability, just what we need right now.Change the rules to hide their ignorance. MARVELOUS!!!!
I can’t understand how anyone thought that an assett marked to market should be a component of of a bank’s reserve funds.
The value of a performing loan is the net present value of the sum of the payments. The value of the underlying assett has no bearing on it as the bank will never be in a position to sell it since the borrower will own it once his obligation is fulfilled.
The value of a non-performing loan is the net present value of the payments already made. The bank may have the opportunity to recover some of the missing funds by selling collateral, but that’s the only time other than the date of origination that the assett value should even be a consideration.
Mark to market sounds like just another one of those ideas from the Harvard Business Mismanagement School that has turned out so well recently.
Maybe we need to take another look at assessing the value of this pile of horse manure …
They can value a PERFORMING asset at what they paid for it as long as they want; in this economy, who on earth would sell such an asset ?
They must value a NON-PERFORMING asset at mark-to-market (what the market will pay) or on some other metric, such as reduced interest or risk of principal loss; such an asset is clearly not worth what they paid, and these are the ‘assets’ that the banksters are trying to stuff into the Treasury or Fed. Guess what: we don’t want them either. Defaulting loans must be written down and reserved against: FDIC rules.
I still think much of this lending was really fraud in search of fees, commissions, and bonuses. There has to be a reckoning. And, lenders should be much more careful in the future.
The argument against “mark to market” seems to be that just because you can’t sell these assets for more money, doesn’t mean they are not worth more.
Someone please explain to me how you can apply a money value to ANYTHING in any way OTHER then by how much money someone is willing to give you for it.
I don’t recall anyone calling for a change from the “mark to market” when assets were selling for well OVER their actual value.
NO!!! We have allowed the financial institutions to hide their problems from investors for too long. Without the transparecy that this FASB rule provides we will be setting up for more shenanigans in the future. These sectors have already proved that they are not able to control themselves, nor are the investors who look the other way as long as they “get theirs”.
Trust in the reported numbers is paramount for investors. If the rules are changed the little trust that is left will be lost for a long time. And the mark to market is not equivalent to a fire sale value: in a fire sale those papers would be on the market resulting to lower prices than marking them but not putting them on sale.
To Wes, Dallas, Texas.
Let me get this straight.
Your loans are your investments. Let’s say they are your stock portfolio.
Your ‘Vinny’ is the stock market and the broker is your ‘bank’.
Your stocks tank due to the market crashing.
Your ‘bank’ (your broker) makes a margin call. You cannot meet the margin call.
Since you can’t pay your ‘bank’ (your broker) the required margin, the ‘bank’ (your broker) sells your investments, without your input,
The bank (your broker) gets what it needs to make up the difference owed to it so that it is not left holding the bag, having to pay off your amount owing.
Why should society be left holding the ‘bag’?
This is how capital markets function.
So what is good for the gander is not good for the goose? Are you saying this should not happen?
Is the broker (or society) supposed to WAIT until your investments recover? How do we know they will ever be worth anything again.
Some of these toxic assets are worthless — worth less than Enron was at the end. And ‘Vinny’ (the stock market) would not even pay you 20 cents on the dollar for THOSE investments.
The Enron investors are still waiting. Should we?
This is not a choice between bad and good. This is a choice between PRETEND and GET REAL.
Can’t we have the best of both worlds if we didn’t require mark to market for reserve requirements, but still made banks disclose what the losses would have been?
La Monica’s conclusion that, of the many contributory factors to the current financial crisis accounting rules aren’t one of them is the result of faulty reasoning or lack of business knowledge.
Professor Huerta de Soto, a leading economist notes that recent speculative bubbles (including Enron, high tech/Internet, and real estate), rely on a feedback loop of rising stock market values entered immediately into books, accounting entries that served as justification for further increases in the prices of assets listed on the stock market. In his article “Financial Crisis: The Failure of Accounting Reform (mises.org), Huerta de Soto argues that the current International Accounting Standards have entailed replacing traditional prudence with fair valuations, particularly for financial assets. This newest approach to accounting around the globe results in asset inflation during booms, loss of transparency to investors and regulators, increased market volatility, and loss of object professionalism among accountants. Professor Huerta de Soto concludes that accounting is vital for the economy and is very much work whining about!
Also, at a 2009 forum of 150 Professors of Accounting and Economics, most speakers agreed that the mark to model valuation option is poorly understood by accountants, financial institutions, and rating agencies. Mark Goyder (http://www.forceforgood.com) sums up the “mark-to-myth” accounting standards discussed at this forum: “So here we have a systemic failure, in which the leading accounting experts…knew there was a serious problem (during the recent financial crisis), but felt themselves quite unable to blow the whistle in any effective way.
Finally, in writing “Fact, Fiction, and Fair Value Accounting at Enron, (The CPA Journal, 11/2006) Robert Haldeman notes that mark-to-market adopted by FASB in 2006 “…has the potential for widespread deception of investors.” Whether Enron was the first deception, the FIRE sector has confirmed the deceptive use of mark-to-market during speculative booms.
Investors and regulators should be whining loudly to FASB to present evidence about whether mark-to-market aides investors to obtaining transparency.
Everyone in favor of mark to market please explain why you would want this scenario for yourself? Say you had nice busniess of 20 loans paying you an income stream of $10000 a month for 30 years that you intended to hold for 30 years and collect until payed off. Now, I tell you to value them for sale on the 31st of the month to Vinny on the corner, Vinny pays fair value for nothing, he offers you 20 cents on the dollar and thats what your value is and right now only Vinny is buying. Your banker now says you need to raise 1 million dollars next month or you are out of the loan business because that’s what Vinny pays now. Nobody is gonna loan you 1 mil right now cuz they’re all afraid of Vinny too. Enjoy, it’s so stupid only the government could come up with that system
Bob in Connecticut.
I don’t like mark to market because the market is not very good at valuing assets that investors intend to hold to maurity. However, there is still a risk that the companies that issued the debt may default, which means there is a chance that the loans are worth less than you paid for them. If the markets worked like they should, they would set a price that reflected that risk and it would be reasonable for your company to carry the assets at that price. Unfortunately this market has greatly distorted that risk and does not reflect a fair valuation either for the loans you hold or for mortgage backed securities that investors intend to hold to maturity.
I also did not say there was nothing better than M2M, just that I don’t know of a better way. It would be good for everyone if we could find somethig better.
Yes, accounting rule need to change. Like a stock, you only loose real money if you sell it for a loss. If the value comes back you are fine. If the value does not come back in some period of time, then its loss should be counted.
Bob in CT -
“Now lets think this through (I am not a tax atty) but I am pretty sure that means today banks that might be paying taxes are not due to the mark to market rules on performing loans portfolios. Some one mentioned this below about cash flows of the banks. The media should do some work on that angle. Seems to me the gov’t is costing itself today or deferring billions in tax revenues if when the loans are written up in the future.”
I am pretty sure that mark to market losses are an M-1 adjustment. There is not a tax deduction for them.
Antoine and Bob you are both correct.
Congress and taxpayers have been complaining that banks are not lending and wondering why. These mark-to-market rules are the reason. I work for a Bank and about 95-97% of our mortgages are performing. However, many of thase performing loans have to be “marked down” due to “market values”. The market value for something is the value of it when you sell it, not hold it. Since the banks now have all of these paper “losses” on their books, they have to hold back capital to cover those losses. Those are funds that could have been used to make good loans to qualified applicants, instead the bank has to hold on to those funds. I also believe that the flip side of mark-to-market helped accelerate the crash as the inflated “market values” made some bank balance sheets look better than they really were.
First off, Jim in CA –
“Bob in Connecticut says his comapny has to erite down their mortgages by twentfive to fifty percent. If mortgage backed securities are trading for 50 cents on the dollar, it should indicate that the market expects that almost all the mortages will end up in foreclosure and that the forclosed properties will only sell for about half the balance owed. ”
This clearly isn’t true. That would be the same thing as saying that if the market was valuing these securities at par then the expectation is that every one of the underlying houses are expected to be foreclosed on and bring the note value. Well that is obviously not true. If the market is valuing these instruments at 50 cents on the dollar then the market believes that the investment will only return half what is in to it, not that every house will be foreclosed on.
With regards to the accounting rule… If the problem is that the banks can’t lend because of equity requirements vis-a-vie Tier 1 and Tier 2 capital requirements from the Fed, then change the calculation. Give the banks an addback for mark to market valuation allowances. Investors get to see the true economic picture, banks get to keep lending and get the benefit of “but these assets are still cash flow positive” but eventually if those losses become real then the valuation allowance gets charged, the addback get reduced.
Here is the thing – if the regulatory agencies believe that the valuations of properties at loan inception have historically been out of whack in terms of their value at the time the loan was made, then some additional regulation needs to come into play regarding the appropriate valuation of properties.
But to make these financial institutions continue to write down asset values to current market conditions when THEY ARE NOT MARKETING THE UNDERLYING ASSETS is outright insanity. By making these institutions do this, they are causing them to report losses that they MAY NEVER ACTUALLY INCUR.
It is peposterous that these “accounting” rules are even in place. All they are “accounting” for is a massive amount of panic in the markets.
Jim in King City did not read my email clearly or maybe I was not clear enough when I said we do not hold any mortgages so let me restate the facts.
We are being penalized by mark to market accounting on PERFORMING LOANS to companies (not mortgages) that we intend to HOLD UNTIL MATURITY.
These loans are paying principal and interest on time and are not in default. Many of these loans trade below the original value not because the borrower is in any trouble but due to the lack of liquidity in the debt markets and the dumping of some loans due to other financial institutions needing to raise liquidity.
Why should we be negatively impacted by this? The Borower is in good shape but we have to write down the loan.
Now lets think this through (I am not a tax atty) but I am pretty sure that means today banks that might be paying taxes are not due to the mark to market rules on performing loans portfolios. Some one mentioned this below about cash flows of the banks. The media should do some work on that angle. Seems to me the gov’t is costing itself today or deferring billions in tax revenues if when the loans are written up in the future.
Mark to Market works fine for a non-performing or defaulted asset but it grossly misrepresents a performing or non-defaulted asset.
When it is all or nothing you lose on either side. Today peforming assets are prices as junk. A year or two ago junk was priced as high value assets.
Since the asset market, primarily the housing market is so messed up, no one can truly place a “True Market” value on any asset. It is all guess work and mirrors. Why not keep Mark to Market for the junk, defaulted and non-performing assets, and use the mortage or contract value for a performing or current asset?? If it’s generating income as contracted, then give it a value associated with the income it’s generating.
Why just complain about what ‘mark-to-market’ does to banks? We do the same thing to ALL publicly-held companies!
If a scary rumor about your company starts stockholders stampeding to the exits, the ‘value’ of your company can drop by half; regardless of your company’s physical assets, its goodwill, its intellectual property or the genius and dedication of its management and employees!
And that does not have to be just paper damage. Your company can be acquired in a hostile takeover based on a stock price set by panic-driven selling.
The value of a company should NOT be set ONLY by the mania or the depression of the bipolar personalities that game stocks!
Mark to market is a bad system for both good times and bad. It hurts valuations when things are good by overinflating prices as well as on the downside by underinflating. Assets don’t need to be valued every month. It’s expensive and unnecessary, and leads to more volatile swings in the market. We didn’t have these rules for 70 years. FDR got rid of them in 1938. What did he see that or regulators are missing right now? Let the assets be valued at book. You create much greater stability and you wouldn’t unfairly penalize banks and other financial institutions. So we keep throwing money at banks and AIG to help them out of this melee. No, but don’t penalize them either for the sake of so called “transparency”. The pendulum has swung to far the other way.
Paul I agree. Is not the definition of a market price the price at which some entity will pay to receive a good or service? Your current good/service is only worth what some entity will pay for it right now. Not what some market guru will tell you. Why does everyone want to “cover” up a true market price and create a false information source? Does doing away with mark to market in effect arguing against the efficient market hypothesis?
If mark to market is suspended then ALL of the management must go, because without it, we have to trust their estimate of value. They have proven their estimates are not trustworthy.
The problem is really in the excessive returns for financial games and excessive salaries in the finance world anyway. They all need to be brought back to earth. CEO and executive payouts need to be reduced 90 percent or more and no golden parachutes. Headcounts in these outfits need to be trimmed with wages and benefits brought in line with the rest of the world. Kind of like what is being forced on the auto workers.
Prison and other forms of accountability are appropriate for the heads; not changing the rules to make things appear better than they are.
The problem with the strict enforcement of “mark to market” is that when there is no active “market” for a particular instrument, the valuation becomes purely speculative, requiring many such instruments to be marked to a zero value even if they are bringing in cash in the form of principal and interest payments. Thus the holder of such instruments must mark the asset value to zero and record an instant loss, even though there may be a future receipt and income stream related to that instrument, understating the actual value of that asset and overstating the actual loss. Since the loss reduces capital, the financial institution suddenly has less capital on the books to meet regulatory capital requirements. This distortion of reality has, and has had, a snowballing effect throughout the economy.
In addition, I haven’t seen a single discussion of the distorting impact on financial results of future payment receipts from instruments that have been marked to market at values approaching zero. When an instrument has been marked to a zero value, any payments received for that instrument, whether interest or pricipal, now become revenue. Thus future revenue will be overstated as compared to the actual revenue stream.
Please retain Mark-To-Market rules.
I agree with Paul, Patrick Finnegan, and Doug Roberts.
Note to all of us: Wake Up!
This IS the new REAL.
Anything else is ENRON-accounting.
Markets operate best when:
(1) Left alone
(2) Given all the REAL information that is available.
What is this?
Has everyone gone back to Tooth-Fairy Land?
Mark to market is not based on some idea of a fire sale, or that a company should value assets as if the were to liquidate today. Instead they are based on the supposition that market price of an assets fairly represents the true underlying value plus a likely return on the investment. The failure here has been with the market.
Bob in Connecticut says his comapny has to erite down their mortgages by twentfive to fifty percent. If mortgage backed securities are trading for 50 cents on the dollar, it should indicate that the market expects that almost all the mortages will end up in foreclosure and that the forclosed properties will only sell for about half the balance owed.
If the “market” truly believes this they should be quaking in their boots, building gun emplacements around their homes and otherwise preparing for a total meltdown of the world economy and society.
This is just another example of how we often expect too much of the “market”. It is prone to major distortions and even manipulation. However, there does need to be a relatively simple and consistent means to value investments and I don’t see anyone coming up with a viable alternative to the M2M rules.
Isn’t it true that by using the mark to market rule insitutions have to write down the value of not only nonperforming assets but performing assets as well? If you have a performing asset and will hold that asset for the forseeable future it makes no sense to write down the value at current market prices.
The issue is whether the market and society needs a ’systematic method’ to evaluate the financial strenght, or weakness, of any individual or business entity. Obviously the current market mess and previous Great Depression shows what happens when a ’systematic method’ is NOT used.
In Arizona, we had a former Governor be conficted of ‘loan fraud’ when he submitted three loan applications to three different banks on the same day, which he signed, and all three loan applications had ‘different net worth’ values. Former Governor Symington argued then that ‘mark-to-market’ was not appropriate for valuing his so-called high-end hotel, shopping center, and commercial holdings, which would be worth much more in the future (e.g., 5, 10, 15, 30 years down the road). Does any of this sound familar about ‘mark-to-market’? Greedy and crooked individuals and financial entities like to scream murder when the accounting rules hold them accountable. Getting rid of ‘mark-to-market’ is a bad idea! Possibly adding other ’systematic ways’ to evaluate the future value of real estate holdings might be appropriate; however, they should give ‘mark-to-market’ value, likely valuing, and optimistic forecast value with all assumptions for each calculation being shown.
Keeping eveyone financially accountable is the only way to restore confidence to the markets. Anything less, such as eliniating mark-to-market valuations, will enable the greedy and crooked to prosper while society flounders.
Thanks Jayson, I appreciate the clarificaton.
Why does the present value of the collateral make any difference if the underlying assts are not being sold?The reality is that if the loans that are collateralizing these investments are paying, there is nothing wrong with the underlying assets, regardless of what some random valuation states.
This is a ridiculous rule!! Even if the mortgagee is “underwater” on the mortgage but continues to pay the loan as agreed until maturity, the Bank is still taking a paper loss on something it never realizes an actual loss on. Is this not having unintended consequences in this case?
I still have to ask – when the real estate market recovers (and it will, it may take awhile), will these Banks also be able to “write up” the values of these homes to make their balance sheets look better?
Always black and white with you commentators…either have the mark to market or not. How about value averaging, say over the last four quarters. This would cut both ways and minimize the exhuberance both up and down.
The main acoounting change we need is to know exactly where the bailout money went. Which “consultants”, how much; Which credit default swaps (“toxic assets”), who profited…
Absolutely. We are just prolonging the agony unnecesarily. If the governments of the world are capable of “printing” TRILLIONS of dollars from essentially NOTHING, why are we allowing this incredible tragedy we’re living through to continue as a result of “rules?” If you have a heart attack, speeding to get to the hospital is acceptable to save your life. Adhering to these rules, given the fact that they can change EVERYTHING in a short period of time, is just reacting to an emergency.
The ENTIRE probelem with mark-to-market is that it “dumbs down” the disclosure process. It reduces a complex strategic investment transaction to a simple number. But that number is ONLY meaningful when an actual transaction takes place. If you owned your home for the last 20 years and didn’t take out an equity loan, you didn’t make or lose money as the market went up or down. The “value” represents a potential. The problem with mark-to-market is reflected in liquidity issues – if a financial institution uses a long-term investment as collateral for short term capital, mark-to-market fluctuations (which are MADE UP) lead to collateral calls – which has caused the collapse and panics. Yes, perhaps lenders overvalued the collateral. But that was THEIR fault – as long as the loans based upon that collateral are being paid, why panic?
My feeling is that mark-to-market should be replaced by FULL disclosure of the basis of valuations of long-term assets. More information, but it’s REAL information, as opposed to the mark-to-market fiction that does great harm – and is about to kill a bunch of life insurance companies…
M2M should not be changed. Something is only WORTH what someone is willing to pay for it. The market is the best gauge to determine value on EVERY asset. If there is no maket it is worth zero. But there is a value on these assets but the banks don’t want to follow these rules because they would be shut down in a heart beat. How long are we going to play these games and change the rules so Mr. Pandit and Lewis can keep their multi-million dollar jobs? They are done! They made bad decisions and must pay the price for their actions. They should not be rewarded or be given a reprieve with rule changes.
To Jerad –
How is it more accurate to value an asset based upon what you think it’s worth given what other similar assets go for than based upon what you paid for it in the first place and what you eventually sell it for?
Antoine, you are correct. Most of the losses that are being reported are not real. The problem that mark to market is causing is this:
Assume that a bank has $100 billion in real estate portfolios. They’re not liquid, because nobody wants to buy them. Therefore, if the bank had to sell today they will stand to get next to nothing, so they have to write down the entire portfolio. Even if 20% of the mortgages in the portfolio default, it’s still worth $80 million if all of the securities are held to maturity.
The problem with these assets is not that they are worthless, it’s that they cannot be accurately valued. If mark to market wasn’t in effect, it wouldn’t be necessary to value them until they’re sold at which point it’s easy to know what the loss (or gain) on the asset sale should be.
Perhaps someone can clarify something for me. Under mark to market, are Banks required to “re-value” their entire collateralized portfolios to what the market would fetch currently, or only on those assets which are no longer paying 90+ days past due (nonaccruals)?
I am strictly talking about mortgage loans right now, but it would seem that if a Bank has a portfolio of loans where 95% are paying on time, why would the Bank have to write down those values along with the 5% which are not paying? They should only have to write down values on non-performing assets and not the portfolio as a whole.
After all, the “value” will not truly be realized until the point at which the Bank needs to take the property back through foreclosure and sell it. For the 95% in the example above, they are paying currently so why is there ANY REASON at all to “re-value” these performing assets? I can see it for those that are not performing because there is a real chance that at some point in the future, foreclosure may occur and the Bank may need to “realize” the actual loss.
It seems to me that if they are writing down the entire portfolio to value, they are reporting phantom losses. When the markets correct – does the company get to “write up” the value, which will make them look better and increase stock price?
Someone clarify if I am looking at this correctly or not.
Yes “mark to market” mayhem accounting rules should be changed. They treat every asset as a “trading asset” even though one may intend to hold the asset to maturity.
Banks made bad decisions to be sure, but “mark to market” tossed gasoline on the fire, accelerating the blaze. Even the idiots finally know this now.
When evaluating a policy like this I have one question, does it work for everyone?
If we get rid of M2M, does that mean I can go to my bank and say “really my house is worth $500K because that’s what I value it at and now let me have a HELOC for $200K for that hot tub?” Isn’t that really what got us into this in the first place? M2M is vulnerable to market swings, and the market is irrational right now, so solid companies are being caught up in it, but in the long run, it IS a more accurate way of valuing assets.
Tough question, kind of like assessing the value of a pile of horse manure: if you’re a mushroom, it’s great food, if you’re a person, it’s waste.
They can value an asset at what they paid, what the market will pay, or on some other metric. What they paid is how it always starts out, but valuations change. Mark-to-market is the tried-and-true method, and I think we should stick with it.
The only alternative I can think of is mark-to-value-based-on-income, i.e. if the security is paying you money because the underlying borrower is paying, it can be valued highly. If the borrower is in default, you have to start taking write-downs based on probability of recovering the principal or not, rather than receiving interest payments or not.
A lot of this lending was really fraud in search of fees, commissions, and bonuses. There has to be a reckoning. And, lenders should be much more careful in the future.
If there is no market for a security, then mark-to-market is inherently false. Right now there is no market for my home because I am not looking to sell but use that asset for housing. That doesn’t mean it’s value is zero, just there is no market. Banks that are holding onto performing assets should be able to use some sort of discounted cashflow analysis to value those assets. If the assets are non-performing, then market value might be more appropriate.
If I try to sell an item and nobody wants to buy it, its market value is $0. The value I place on the item is irrelevant. Denial and greed created the problem and will not provide the solution. Let the market “reward” those with toxic assets, not the taxpayers. Mark-to-market is a fancy term for telling the truth – what a concept!
This is ABSOLUTELY fueling the problem! Company’s report “write-downs” at billions per quarter losses, but if you read the fine print, they actually made profits, meaning cash money, in that quarter of billions. The news cycle drives the markets day to day and all people see are the headlines, a regular person doesn’t understand what the accounting rules are. An asset should be valued at what it was paid for until you sell it, then it should be valued at that number. It doesn’t make any sense to revalue these things over and over again, no sense at all!
When the economy was doing great no banks were complaining about “mark to market” because it worked in their favor to show current assets at market value. Having assets “over valued” at the market rate allowed them to borrow more. It was a dumb rule to begin with, if we eliminate it – it will only come back when the economy improves and we’ll be right back where we started.
Well for the first time I can say you have no idea what you are talking about – really no idea. I’m glad you made 2 phone calls and called it research
I work for a commercial finance company with no exposure to mortgage assets and mark to market is killing us and our liquidity.
The problem is not with crappy mortgage assets it is with the performing loans on our books. These loans are current on principal and interest payments and not in default. Yet we have to write them down to 0.75 or 0.50 cents on the dollar as that is what they are trading for in the market because they are being dumped by other institutions to cover capital calls etc. It has caused us to post more collateral than we need to and reduced our liquidity to lend to new borrowers.
How can you say to stop complaining about this? – it does not work, period.
I guess the banks are thinking, “If you can’t make a profit, then hide your losses!”. This is not the time for a shell game. I hope the FASB doesn’t give in to the bank lobby and other bs politcal pressure.
-
Rich nations want others to cut greenhouse gases. Who pollutes the most? More -
Many businesses were laid to rest in '09. 8 familiar names now gone. More -
The Becerras spoiled themselves with a puppy. Here's what 6 other readers are indulging on. More -
Consumers looking to buy electronics for holiday gifts won't have to break the bank this season. More
Effor,
You are just plain wrong. Mortgage backed securities are priced using computer models that factor in interest rates, mortgage duration, default rates, pre-payment rates, etc. However, there are times like today when no one wants to hold these securities and prices drop to almost zero. Mark to market accounting magnifies losses in deteriorating markets and will magnify profits in strengthening markets, greatly increasing earnings volatility for all financial institutions. Before MTM, there were, and still are, acceptable ways to price portfolios of assets held for investment. To be sure, banks made some stupid decisions “mark to market” accounting rules have poured gasoline on the fire. Warren Buffett, perhaps the world’s most astute investor (?) has said “mark to market” should be suspended for regulatory capital purposes. Many others agree.