Mark-to-Market Accounting Must Come to a Halt

[Staples]

Mark-to-market accounting is an accounting method of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments.

It has actually been around for many years, but didn’t become a common practice for banks and corporations until 1980 as a solution to the failing savings and loans crisis. Some of the predominate S&Ls kept regulators away by carrying large assets on their books for substantially more than their actual market value due to inflated appraisals. This triggered the beginning of mark-to-market accounting involving large American enterprises.

The most famous case involving mark-to-market accounting and its failures is the Enron controversy. The company notoriously booked future contracts as current earnings even though they had no idea what those contracts would be worth. The method was approved by auditors, banks, and regulators and called mark-to-market accounting. It ended with many people losing all they had and Enron’s top financial officers in federal prison.

Today, we find ourselves with a much different problem than the one from 1980. Banks having to mark down assets in this uncertain market are being forced to mark them to where the market is today. This process becomes a self fulfilling prophecy as it affects other assets in the class as the market spirals lower. Few buyers know where to enter a downward spiraling market.

President Obama and the Financial Accounting Standards Board need to come to an agreement to suspend mark-to-market. Wall Street would get a break and banks would not be writing assets down to artificially low levels. A two year break could be reinstated when the market returns to a more normalized pattern. Immediate action must be taken or the entire economy could collapse.

During the Great Depression, mark-to-market accounting contributed to a historically high 40 percent mortgage default rate. Eventually, FDR suspended mark-to-market. Barack Obama must follow suit.

If assets can be marked down, bank capital is at risk. This creates a domino affect leading to banks not loaning money. Ben Bernanke, Tim Geithner, Larry Summers, etc. know mark-to-market accounting is a problem.

It is a bad idea to have the government buy up bad assets and hold them in a bank. What they should do is allow the banks to seize the assets and have the government provide insurance. The banks already hold the assets anyway. You can’t turn bad loans into good loans, but this would put a halt to markdowns on the system.

This is the best solution at ending the problems mark-to-market accounting brings on without using taxpayer dollars.

[iquiring mind]

1. I couldn't have said it better !!!! n/t

[DCKit]

2. You mean like how I can only get a mortgage based on the current value of the property?

I don't see a problem with that. These investments were inflated beyond belief and, if the banks want U.S. to take them off their hands, then they need to accept fair (and current) value - not simply the amount they want and *definitely* not whatever was originally paid.

[Nickster]

4. Exactly. The OP would like you to be able to claim your home is worth 1 million if that's what you

say it's worth, as an example.

[DCKit]

9. Just don't ask me to pay taxes on that.

But I would very much like to sell my home for what I deem necessary to keep me in style and not what I can get in the current market.

Of course, I would then insist on applying mark-to-market pricing on my next housing purchase - Just as any banker or trader would.

I'd be happier with the new taxpayer financed economy if I were getting big, fat checks from the gubmint with no expectation of oversight or restraint.

[Nickster]

3. Getting rid of mark to market takes away transparancy, and erodes investor confidence.

Putting up a cloud of smoke will help temporarily if investors suddenly get amnesia about the underlying stability of those assets and start believing the made up valuations that removing mark to market would bring about.

The SEC studied it, and they decided it was a bad idea as well.

http://sec.gov/news/press/2008/2008-307.htm

[ww2player]

7. The SEC is a Joke

The SEC has "investigated" Naked Short Selling (selling shares short while not bothering to borrow them, creating more outstanding shares than the companies put out) for a decade saying it was no big deal and letting companies be shorted to death. Until people started shorting the crap outta the banking stocks. Then they had to impose an immediate halt to short selling a few dozen financial stocks. Screw the rest of the market like the startup Energy companies.

The SEC is only protecting their future employeers whom they look to get a nice cushy job after a few years of protecting them. Too bad for someone that Bernie got caught. Someone was sure to get a great job from him after letting him rob folks blind. The SEC needs to be investigated and new rules made. It's not the 1930's anymore. MORE Transparency is needed. Better investigators who actually know how business operates should be hired. Enough of letting the investigators go to work for the folks who they investigate. And the DTCC needs to have all their activities brough into the open for all to see. How are they clearing more shares traded than companies have outstanding? It makes no sence how they can attempt to justify it.

[Cicada]

5. Mark-to-Market Accounting Must Come to a Halt

Switching to Alice-in-Wonderland accounting can't really help. We could use make-believe accounting in which each nickel in a bank is recorded as five billion dollars and then the problems would similarly be solved. I think I prefer reality-based accounting, painful as that may be.

[DCKit]

6. Geez, all the new-to-DU posters trashing "mark-to-market".

How odd....

[aquart]

8. Indeed. Glad you pointed it out.

Refugees from the non-reality based empire?

[marketcrazy1]

10. marki it ALL to market!!

RIGHT NOW!! force receivership! bring out you dead ( MBS,CDO paper ) . mark to market or mark to myth. what makes more sense!

[whosinpower]

11. Well

If the market does not determine the value.......then who does? And what would that value be backed by??? Funny - Wall Street and the banksters do not complain one iota when market values increase, thus allowing them to borrow more against capital that is valued within the mark to market system....but when it falls back the other way.....Oh dear, this is awful.

Ah - you let the true cat out of the bag. Let's go on a mortgage binge giving out mortgages to EVERYONE and their dog.....which did one thing to the housing market - it heated up - which is GREAT, because we(bankers) can then loan out even MORE money, and then we can take these financial instruments, repackage them, remarket them, and sell them as triple A rated securities, making even MORE money and selling that risk abroad, cause those mortgages are going to fail once they are refinanced at the real rates, and these yahoo's holding these mortgages can NEVER pay em off. Then we will go to Uncle Sam and say - so sorry, we can't borrow any more money because this mark to market accounting rule means we do not have the capital to leverage for the loan - and he bails us out - 350 BILLION - no questions asked - ah FREEBIE!.......BUT THE BEST PART, IS WHEN THOSE STUPID IDIOTS LOSE THEIR HOMES BECAUSE THEY COULD NEVER AFFORD TO PAY FOR HOMES WORTH THREE TIMES WHAT THEY SHOULD BE - WELL WE GET THE PROPERTY AT THE END OF THE DAY! Woo-hoo! Who said you can't make money out of nothing? Uncle sam blindly insures this whole mess, because credit is locked up tighter than Alcatraz - and the banksters hold all the property.

No thanks. Mark to market may not be perfect, but until there is a more TRANSPARENT, equitable and fair valuation - it is the best we've got.

[marketcrazy1]

13. whosinpower - nice post

I like the way you think!!!

[Double T]

12. Sure, let's fabricate more phony numbers and valuations so we can continue........

to fool ourselves into believing all is well and a recovery is just around the GD corner. Phony bubble real estate prices need to come down to real world values; not values fabricated by the corrupt real estate brokers, agents, appraisers and their accomplices in the mortgage/financial business. Mark-to-market needs to stay intact if we are ever to get away from corrupt and criminal accounting practices that lead to recessions and depressions.

[sendero]

14. Mark to fiction..

.. is no answer.

[notesdev]

15. When the truth hurts

Lie.

That is in essence the anti mark-to-market argument. The truth that these things are worth pennies on the dollar, combined with the typical pre-bust leverage ratio, results in learning the unpleasant truth that the banking system is insolvent.

That truth is apparently so unpleasant to bear that we are prepared to throw tens of trillions of dollars at insolvent banks while hiding any information that might reveal this truth.

The unspoken assumption is that the fate of the banks is the fate of the nation. The Russian experience in the 1990s puts the lie to this assumption. 95% of their banks failed, and that nation subsequently experienced an economic boom.

Challenge the base assumption. The fate of the banks is NOT our fate, and we should not be throwing trillions of dollars at it, and we should not be allowing them to lie to their bondholders, shareholders, employees, and the general public in order to pretend that it is.

Let insolvent banks die. Healthy ones who did not commit the frauds that made the others insolvent are waiting to take their place, to put solid banking practices in the place of the fraudulent ones. Keeping insolvent banks around as government-sponsored zombie corps helps no one but a group of people who by all rights should be in jail, or worse.