Suspension of Mark to Market

[2centsworth]

http://www.cnbc.com/id/29028628

At this point, when banks make loans, the loan note is discounted hurting a banks capital requirements. For example, Bank A loans you $100k, and then Bank A claims that $100k note as an asset on their balance sheet. because of the fear in this market, the bank is forced to assign a market value to that note. The market values for those notes are coming in at below $100k, hurting bank balance sheets.

There's a rumor that rule will be suspended, so banks can issue notes with out hurting their balance sheets. In fact, good solid lending practices should improve a banks balance sheet in a normal market environment.

We should see a flurry of banking activity if this rule is suspended.

[clambake]

so i guess you don't know what banks are doing RIGHT NOW to show a loan as an asset?

you're a real business man.

[2centsworth]

so i guess you don't know what banks are doing RIGHT NOW to show a loan as an asset?

you're a real business man.


I'm not a banker and I'm not a tycoon, but I never claimed to be either. Instead of being you're trollish self, shock us with a little more than incoherent drivel.

[clambake]

why do you start threads about things you know nothing about?

can you answer that "troll" question?

[Winehole23]

My understanding is that this rule change affects capitalization. Marking the price to a non-existent market apparently had its problems. Maybe looser rules will help to limit the unnecessary damage to our economy.

Former FDIC chairman William Isaac recommended suspension of Fair Value Accounting and Basel II capital rules on September 19:

http://online.wsj.com/article/SB122178603685354943.html

.

[Winehole23]

In a nutshell, Isaac's argument is that mark to market and capital requirements work fine in normally functioning markets, but wreak havoc in disrupted ones.

[Winehole23]

I guess we were too busy doing something else to bother fiddling with the rules. Too bad.

[Winehole23]

Maybe looser rules will help to limit unecessary damage to our economy. And the USG will soon assume the balled up risk of the banks' illiquid assets. Lucky banks.

They get the moneymaker. We get the Bolus (http://www.merriam-webster.com/dictionary/bolus).

[KenMcCoy]

They should have done this a long time ago...Mark to Market is not a good accounting method; it undervalues assets when the economy is bad and overvalues assets when the economy is good. Europe had warned us about MtoM accounting a long time ago, IIRC.

[Winehole23]

Holman Jenkins claims "The Big Short has it wrong: the epochal Panic of 2008-9 was caused by accounting rules imposed by the government.

Ritholz, Laux and Leuz rebut:


The government, Jenkins argues, should have changed the accounting rules and let banks keep assets on their books at valuations that were a multiple of their mark-to-market value. In this way, the illusion that the banks were in sound financial shape could have been preserved a little longer, in the hope that somehow or other the real problem of the huge housing bubble and its associated derivatives would miraculously resolve itself with no cost to the economy.


Quite apart from the folly of suggesting that banks should cook their books to present a false picture of their actual financial soundness, the fundamental premise of Jenkins’ argument is factually incorrect. Mark-to-market accounting rules do not require banks to mindlessly value assets based on “fire sale prices.” In fact the accounting rules have numerous provisions allowing flexibility in valuations, of which many banks made extensive use in the period prior the financial crisis of 2008.


As a result, careful studies have shown that accounting rules played no significant role in the 2008 financial crisis. Thus Finance Professors Christian Laux and Christian Leuz in their article “Did Fair-Value Accounting Contribute to the Financial Crisis? (http://www.nber.org/papers/w15515)” (2009) conclude that although there were downward spirals or asset-fire sales in certain markets in 2008, there was “little evidence that these effects are the result of fair-value accounting…. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.”


Why would a financial newspaper like the Wall Street Journal be publishing an article re-stating arguments that have been shown to be false? Economists like Paul Krugman (http://www.nytimes.com/2015/12/18/opinion/the-big-short-housing-bubbles-and-retold-lies.html) and Barry Ritholtz (https://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html) suggest that the object is to distract attention from the fact that the asocial, and eventually criminal, behavior of the kind that led to the financial crisis in 2008 is continuing.

http://www.forbes.com/sites/stevedenning/2015/12/19/the-big-short-was-it-greed-or-accounting-rules/