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.

[kirby]

1. Absolutely NOT!!!

Without Mark to Market, companies can value their assets anyway they want. The can hide problems on their books, bypassing transparency. The whole point is that these loans are made with collateral. If the collateral (house price) declines, more capital is required to back up the potential loss. The problem is not Mark to Market. The problem is a system that was premised on a housing bubble where loans were made that had no relation to the realistic value of the underlying asset. Without Mark to Market, things would have gotten much worse. We need transparency right now to understand the depths of the downturn, not a two year delay of the inevitable.

You claim Bernanke opposed Mark to Market, but here is what he said last April.

" RICHMOND, Va., April 10 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday mark-to-market accounting has helped to destabilize markets for illiquid assets, but regulators need to be careful about any changes to the system.

"It's also true in the current context, that mark-to-market accounting has been sometimes destabilizing in that sales of assets into very illiquid markets had led to reductions in prices, which have caused writedowns which have sometimes caused firesales, and you get into an adverse dynamic which has caused problems in some of our markets," Bernanke said in a question-and-answer session before a business group,

On balance, he said mark-to-market accounting has been a positive influence for investors, but valuations should be determined during normally functioning, stable markets, not times when assets are illiquid."

[joeglow3]

4. I, respectfully, disagree

I have seen multiple cases of where a client wanted to do something with an asset (donate, etc.), but did not because the "FMV" was so low. They KNEW for a fact that they would ultimately collect on the entire amount (and they did), but the value was driven artifically low due to issues such as lack of marketability.

Accounting is just as much an art as it is a science and there are very few, if any, pronouncements that are applicable 100% of the time. The current situation is an example of a case where MTM accounting is not the best choice.

[joeglow3]

2. Of course they now what it is.

I am a tax CPA and have done enough corporate accounting to be somewhat knowledgeable about it and the impact it is having right now. Unfortunately, the average person has no clue what this is or even that it exists. Lets hope our politicians do what is right (I don't have a problem with your proposal to suspend the pronouncement). Unfortunately, there is nothing sexy about this, as you will get no or little press for passing, so some may not like the absence of grandstanding potential.

[Staples]

3. Nice to see a CPA somewhat agrees

[Hamlette]

5. My gawd, this thead is my life!

My husband was the banking commissioner for my state for many years. Now he is an attorney representing banks.

All I've heard for the last 6 + months is mark-to-market this, mark-to-market that. When things spiraled out of control in September I told myself I was going to listen to him, pay attention, ask questions and really understand what was happening.

You should all bottle it as a sleep aid. I think the problem is it sounds like such an easy fix "we could be living on easy street if we just fixed mark to market" that I can't believe its true and its kinda boring. He agrees that it is a big part of the probem and needs to be fixed. The second poster seems to think banks can assign any value to assets and that mark to market is a true reflection of value. While I agree with and worry about the first part of that statement, the second part is not true. Today's value of my house loan is not a true vaule of what my house/the loan will be worth when it "comes due".

I've heard ppl say the banks just want to do accounting tricks to get out of this and wonder why, if this will fix the whole economy (financial is a huge part of this problem) why we don't just do it already!

I'm actually glad to hear someone talking about his (David Gregory mentioned it a couple of weeks ago) and hope that smarter heads than mine will figure this out.

[kirby]

7. True value...

I do agree that Mark to Market may not be a 'true' reflection of value, but it is the best we have. Someone has to value assets. There is no magical valuation fairy, so you need to go by what you can get for the asset. Mark to Market is biased towards working best within a liquid market. When the 'markets are frozen' like we are told they are now, it becomes crunch time. Basically the mark is, if the borrower defaulted today and I had a liquidate this, how much is it worth.

Some people have claimed that as long as someone is paying on the loan, MTM should be suspended. But then we are back to the scenario where a bank will be allowed to not have enough capital to back up the unexpected. While you mention that the value of your house loan is not a value of what the house/loan will be worth when it comes due, who can predict that? Each time the asset is marked to market, it will adjust eventually approaching the correct value. What happens if you default on your loan and MTM was suspended? Now the bank has to take over an asset that is worth a lot less than the loan value, and if they do not have the required capital reserves, they are out of money.

I really believe the complaint against Mark to Market is a symptom and not the cause of any of this.

[joeglow3]

9. I DO agree with your assessment

Sadly, there are problems (as pointed out in another post) with suspending the rules. There is no silver bullet, but there is little doubt that many institutions are getting hammered (and even going under) due, in large part, to a simple accounting method.

[wmbrew0206]

6. File under "No Shit!"

A liquidity ratio vs mark to market would go a long way to help end the current crisis.

[uponit7771]

8. Ummm, let those who've fucked things up valuate.................themselves? You trust these fuck ups

...I don't.

The rating issue still is a big blow of confidence to me in the mortgage market and the stupid ass's rating agencies who AAA rated MBS's are still skipping along..

Do something about them I might try and take a look at M2M rules