FASB loosens "mark-to-market" rules at behest of Cong. leaders

[TayTay]

This news is just breaking today:

FASB approves more mark-to-market flexibility
Panel passes measure unanimously; measure could boost bank profit

By Ronald D. Orol, MarketWatch
April 2, 2009

WASHINGTON (MarketWatch) -- Responding to pressure applied by lawmakers on Capitol Hill, the Financial Accounting Standards Board on Thursday voted unanimously to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value.

The new guidance, which is expected to boost bank operating profits when they report first quarter results later this month, alters so called mark-to-market rules, which require banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments based on the current market price for either the security or a similar asset.

Banks complain they can't sell certain assets because of a lack of a market, but that the assets are not distressed and have strong cash flow.

Seeking to resolve this situation, FASB's guidance allows banks and their auditors to use "significant judgment" when valuing the illiquid assets. For example, if companies have strong cash flows that can be estimated, then those cash flows would be used to estimate market value in the illiquid market. This approach could be used when bank auditors determine there is a "significant decline of a market for new issuances," in other words if there was a primary market and now there is no market.

You can read the rest of the article at the http://www.marketwatch.com/news/story/FASB-approves-more-mark-market/story.aspx?guid={33F70684-4207-4EDD-B7C3-1B82B7A7F6B6}">MarketWatch site.

Rep. Barney Frank (D-Ma) had made a speech at a banking convention on Tuesday (March 31) advocating for this rules change. The http://online.wsj.com/article/BT-CO-20090331-710809.html">Wall Street Journal carried a story quoting from the Congressman.

Rep Frank: Mark-To-Market Needs To Be 'More Realistic'

WASHINGTON (Dow Jones)--U.S. banking regulators need the leeway to work with financial institutions on how they apply mark-to-market accounting rules, a top Democrat in the House of Representatives said Tuesday.

House Financial Services Committee Chairman Barney Frank, D-Mass., told a banking convention that he wants the accounting rules to be "more realistic." This includes allowing a different application of mark-to-market accounting if a bank is holding a paying asset to maturity; banks shouldn't have to write down the value of such assets, Frank said at an American Bankers Association conference in Washington.

"Regulators ought to have some flexibility on applying these things," Frank said.

Whether the changes will be retroactive has yet to be determined, Frank said. He said he would ask the Securities and Exchange Commission to consider a mechanism whereby banks could apply to roll back certain write-downs for some types of assets. Additionally, he said he expects the SEC to soon reinstate the uptick rule.

[marketcrazy1]

1. they make this retroactive and banks

will magically become "profitable" accounting is a beautiful thing!! :sarcasm:

[TayTay]

2. What is "mark-to-market"

Wikipedia has an extended and technical explanation for what this means that you can http://en.wikipedia.org/wiki/Mark-to-market">read here:

Mark-to-market or fair value accounting refers to the accounting standards of assigning a value to a position held in a financial instrument based on the current fair market price for the instrument or similar instruments. Fair value accounting has been a part of US Generally Accepted Accounting Principles (GAAP) since the early 1990s. The use of fair value measurements has increased steadily over the past decade, primarily in response to investor demand for relevant and timely financial statements that will aid in making better informed decisions.

http://www.investorwords.com/2996/mark_to_market.html">InvestorWords defines it this way:

mark-to-market
Definition: Recording the price or value of a security, portfolio, or account on a daily basis, to calculate profits and losses or to confirm that margin requirements are being met.

[TayTay]

3. Sec. Geithner's remarks on reform of"mark to market"

From an http://www.huffingtonpost.com/2009/03/24/geithner-calls-for-balanc_n_178508.html">article by Ryan Grimm at the Huffington Post

Geithner Calls For Balance On Mark-To-Market Accounting Rule Reform

March 24th, 2009

Treasure Secretary Timothy Geithner said Tuesday that federal regulators who are examining reforms to mark-to-market accounting rules are working on a "constructive set of changes."

At a recent congressional hearing, lawmakers called on regulators to revise the rules, which require banks to value assets at current prices. Banks have resisted such revisions, because reducing the value of assets on their books leads to significant write-downs. Banks who suffer too many write-downs become insolvent.

Geithner told the Financial Services Committee that any reform of the accounting rule must strike a balance "between preserving confidence in the quality of public disclosure, which is very important to getting through this, some of the complications of applying those standards in a market like we're experiencing today."

Archive webcast (so you can see it for yourself) at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr03240923.shtml

[TayTay]

4. The new rule also is generating confusion as to what it does to the Treasury plan

Another http://online.wsj.com/article/SB123854595878676211.html">article from the Wall St. Journal that discusses the changes in the mark-to-market rules

Move to Ease 'Mark' Rule May Subvert Treasury Plan

By HEIDI N. MOORE
April 1, 2009

A new accounting rule set to be approved this week will relax mark-to-market rules for banks sitting on billions of dollars in toxic assets, making it more attractive to keep the assets on their books. Yet those changes may undermine a larger U.S. Treasury plan to rid the banks of those same assets, bankers and accounting experts say.

The Financial Accounting Standards Board is proposing significant changes to its mark-to-market rules, allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans. The new proposal, called FAS 157-e, is scheduled for a vote this Thursday.

The change was meant to assist U.S. banks after bankers complained current mark-to-market accounting rules forced them to undervalue their assets, by setting prices at deeply discounted, fire-sale values.

Once the new accounting rule takes effect, banks will have new incentive to keep the assets directly on their books, say bankers. That is because the rule states that banks can use their own judgment on asset values as long as there are no willing bidders to set a market price.

No, that's enough initial info to provide food for thought. Anybody got any opinions on this?

[marketcrazy1]

5. solution is to legalize the fraud...........

and that is what they have done.... say goodbye to bank balance sheet transparency....................

[TayTay]

6. IT does not sound like the assets are going to be priced right

and the problem of trying to figure out what these assets ae worth will continue.

I can't see who would be happy with this, outside of the banks who are still holding the economy hostage over this.

[Statistical]

7. Mark to market doesn't work when there is no market.

Simply analogy for mark to market.

Say you own a house $200,000. You put 20% down ($40K) so you have a note for $160K.

Now a condition of the note is that you maintain 80% LTV (20% equity).

Say you have a good job (no risk of being fired/laid off).
You live within you means, no excessive debt.
Plenty of cash in the bank.

One day you get a letter from the bank.
Bank says the current market price for your home is only $150K.

You have defaulted on your equity requirement.

Pay down you loan by 40% in 1 day or you are forced in bankruptcy and lose your house.


That is mark to market.
It was a system in which banks (and other companies) are required to constantly revalue their assets based on what the market would be willing to buy it for.
It is a good system when the market is funcitoning.
Banks are required to maintain certain capital requirements to avoid being siezed by FDIC.

Right now some banks (especially smaller regional banks) who didn't play in exotic assets are being forced to mark down plain jane bonds despite their low risk.
Why?

There is no market.

Even if the bank intends to keep the bond to maturity (like homeowner above planning on keeping home) they are forced to mark the bond down.
This reduces the capital the bank has and they are forced to raise capital. IF they can't then they are in default and get seized.

Even worse is one way banks are "raising capital" is by cutting BACK ON LENDING. The exact OPPOSITE of what we want.
By not lending and hoarding the payments from existing loans they can raise their capital levels.

Even worse (kinda hard to get worse) even HEALTHY banks are doing this. Why because while their may be a market for their assets right now.....
what happens if it changes in the future? What if they can't raise capital fast enough.
So even banks w/ good assets paying on time + market still exists for those assets are hoarding cash in case they need to write them down.

Mark to Cashflow would be an acceptable metric for "performing" = paying on time assets.

[TayTay]

8. So, is the House right in pushing for this

or is Treasury right in resisting it?