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Developing Implications on Loan Accounting Law: Mark to Market, Mark to Model, or Mark to Market Crash?
Relevant commentary from BoomBustBlog and sources throughout the Web
on the accounting change that added 80% to the S&P since March
2009!!!
Warning Shots from the IASB: FT
- The IASB came under fire in the fall/winter of 2009 in regards to
mark to market rules - Banks wanted continued relaxation of valuing models in order to
“smooth out volatility swings in asset prices” - IASB and FASB plan to converge on mark to market ruling by 2011,
both have stated a desire for more transparent financial statements, but
have been politically compromised by bankers and commercial lenders
FASB Plan Would Force Banks to Report Loan Fair Value: BusinessWeek
- FASB is seeking to approve a proposal that would force banks to mark
loans at market value by 2013, potentially having billions of dollars
at risk for writedowns - In April 2009, FASB gave significant leeway to banks in regards to
pricing and modeling loan values, banking consultants are very opposed
to a reversal of the measures - Pension obligations and leases will be exempt from new measures
Another Perspective from Dealbook: Dealbook
- Commercial and Retail banks have more at risk than investment banks
- Banks with less than $1 billion in assets would be permitted to wait
until 2017 for changes in rules - Banks have benefited from mark to model accounting measures in order
to avoid swings in loan values - Direct Quote: “To mitigate the effect of large swings in market
value for loans, the accounting board will allow banks to split the loss
on some assets into two categories: one that would affect the bank’s
earnings and another that would affect the bank’s book value.”
Why the Hassle from Bankers? Naked
Capitalism
- Development of changes to FASB 157 created three types of asset
price valuations:- Level 1: Mark to Market
- Level 2: Assets are fairly illiquid and “hard” to value according to
market price, so usage of similar products and “observable inputs”
generate a market price - Level 3: Priced using “unobservable inputs” (i.e. unicorns, Buffalo
Bills Super Bowl rings, eye of newt, etc) - The SEC reported in SHAS 157 that if market prices are not
favorable, ignore them (but if prices are rising like
mad in bubblicious mania, by all means mark everything to market) - FASB 157 has changed names to Topic 820, where the idea is being
considered to force those using level 3 valuations to state how much is
valued at that level as a percentage of total assets, and disclosure of
uncertainty in generating related observations - Don’t get excited about what level 2 means, anything
using a market variable can be classified as a level 2 price valuation,
including historic prices
The Current Status Quo – Mark to Mayhem: FT
Alphaville
- After suspension of mark to market in 2009, FASB standards may
change as indicated by this table from Jason Goldberg at Barclays

- Author makes a point of “no one cares about mark to market until
assets fall in price” - Discrepancy in fair value to carrying value is as high as 15% to the
downside
IASB 39 – A Little Simpler: FT
Alphaville
- IASB will attempt to modify valuation methods to two possible
options, mark to market and price at amortized cost - No consensus on effects of assets that will face mark to market
- Determining fair value vs. amortized cost is as simple as the
attached picture

Related Video:
11:24
Bailout 4: Mark-to-model vs. mark-to-market
Related articles: Is
the Threat to the Banks Over? Implied Volatility Says So
On that note, it would be a good time to
revisit the FASB argument: About
the Politically Malleable FASB, Paid for Politicians, and Mark to Myth
Accounting Rules
. Remember, the change of these rules to the status
of straight silliness what kicked off one of the greatest bear market
rallies in the history of US publicly traded stocks. Now, nearly
everything financial (as it relates to M2M) is overvalued.
Relevant subscription research:
MS 1Q10 Review
4Q09 Alt-A and Subprime commentary
Sovereign Debt Exposure of European
Insurers and Reinsurers
Euro Bank Soveregn Debt Exposure Final –
Pro & Institutional
- advertisements -



Felix Zulauf in a recent Eric King interview states that one day, some major banks will all fail in one day.
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/28_Felix...
Great link. I have posted it a couple of times on various sites.
Great job Reggie... about the debate over mark to fantasy/or market...Do we want to go through the Japan experience or do we want to liquidate, take the medicine, and rebuild on sound banking/accounting standards.
I say give capitalisim a chance to work and reduce the power of the Fed to it's original mission. Mr Market is going to win anyway...always does.
End the Fed. The Fed is the problem.
I'm admittedly a dumbass but what if FASB allowed banks to use a variant of the P/E10...property value based on a three year period of comps instead of last sales price right now. This way it won't create a self fulfiling deflationary cycle but will definitely get the banks moving to resolve their issues but allow them some time and smooth our RE / CRE peaks and panics? Glad to hear why this is stoopid but even glader to hear a workable solution.
Updated DOW charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
A timely topic, Reggie. One word should connect all of society’s financial avenues…the disciplines of credit and debt, deposit and drafts, markets and interest, and all the rest.
That word is trust. Money itself is a promise, a representation of worth. And the banking business is nowhere if it can’t be trusted.
As “lack of trust” pummeled bank-to-bank lending in the Eurozone, as reported May 17, 2010, courtesy of Mish, the rate banks say they charge each other for three-month loans in dollars rose to a nine-month high…
Bank lending “conveys a lack of trust in the system,” said Robert Baur, chief global economist at Des Moines, Iowa- based Principal Global Investors, which manages $222 billion. “Banks are a little reluctant to lend overnight as they don’t know the full extent of what is on the bank balance sheets.”
http://www.philstockworld.com/2010/05/17/investment-grade-corporate-bond-sales-collapse-in-eurozone-lack-of-trust-pummels-bank-lending/
No one demonstrates the value of trust better than Adam Smith.
In Adam Smith’s analysis of the energy that sparks individual effort from self-interest and freedom of choice afforded by laissez-faire liberation of markets, Jerry Evensky points out that in the story Adams tells, the energy that unleashes markets that “can seem magical in the ability to coordinate the labors of the legions of autonomous individuals who have a hand in bringing about such things as a simple ‘woolen coat…which covers the day labourer’” is available “only where trust prevails.”
Says Evensky in Adam Smith’s Essentials: Trust, Faith and Free Markets, “In human interaction we trust individuals and institutions to the degree that they have over time proved trustworthy. Faith is a leap beyond the rational calculus of probabilistic trust to belief without doubt.”
Writes Evensky: “If all individuals were angels we could take it on faith, no evidence … no probabilistic calculus necessary, that in all market interactions (indeed, in all interactions) we are dealing with individuals whose behavior is constrained by the rules of justice… In Smith’s real analysis we leave the realm of faith and the issue becomes trust…
“To the degree that our trust diminishes, the transaction costs associated with protecting ourselves from the risk of immoral or unethical behaviors rise.
“Every market interaction involves a probabilistic calculus of the perceived risk so that the transaction costs can be assessed. This is a challenge in an intimate society. It is a daunting challenge in the global market system. In that larger economic system, one is unlikely to have direct information on the trustworthiness of the other parties involved, so in a laissez-faire environment one must resort to proxies: Risk assessments by others who in turn must themselves be assessed for risk…
“This opaqueness of risk in a world in which the only rule is caveat emptor makes for dangerous going, but Smith believed it need not be so.
“In Smith’s analysis the establishment of a system of positive laws and the institutions to implement and enforce those laws provides an imperfect but potentially constructive solution to assessing risk in a world of less than angels. Establishing rules of justice and insuring that the alignment of institutional incentives encourages individuals to follow those rules, no matter the individuals’ ethics or lack thereof, reduces risk…"
Says Evensky: Smith developed a theme that is the constant in his modeling of a constructive human society: “’Order and good government’ that ensure that rules of justice are defined and enforced are essential for mutual trust among citizens. This trust is the sine qua non for social cohesion. Absent this trust a society will degenerate into a war of all against all:
Society … cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. …
Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it. … Justice … is the main pillar that upholds the whole edifice [of society]. If it is removed, the great, the immense fabric of human society … must in a moment crumble into atoms. …
“The central theme of Smith’s four stages analysis is clear: Without trust there can be no progress.
"For Smith commerce is the most advanced stage of humankind’s progress because a healthy commercial market system provides the greatest wealth for the nation and thus the greatest capacity to enhance the well being of society…
"If in a free society individuals’ choices are unconstrained by civic ethics, the expansion of government policing necessary to enforce appropriate constraints would turn that free society into a police state.
"Only where most individuals follow the dictates of civic ethics can the role of government police be lightly measured to constrain the unethical few.
"But government itself must do this measuring. If those who control these powerful institutions are not themselves constrained by civic ethics, the power of government can be captured for the very purpose it is ideally established to police – unconstrained greed. … Our point here is that in Smith’s analysis the success of a commercial free market system depends on the citizens’ trust that their fellow citizens are generally good citizens and that government will provide the police to discourage destructive behavior of those few who are not so good. Absent that trust, there would be no incentive to build the foundation of commerce: Capital accumulation." … (emphasis mine)
http://hes-conference2009.com/papers/SAT1B-Evensky.pdf
Let's play the new ZH game: "Guess How Many Different Usernames Reggie Has".
My guess is 164, and all of them love BustBlogBoom.com because the site content is harvested from the most popular sites on the interwebs. Plus the membership fees are cheaps, very cheaps.
Reggie:
http://i49.tinypic.com/6t3f5i.jpg
Me:
http://i50.tinypic.com/qpm89l.jpg
Dad:
http://i49.tinypic.com/2uf9h0y.jpg
I think I figured out where you got your asshat. Reggie must have handed you your ass at one point.
That'll do donkey. That'll do.
I'm going with Mark to Market Crash. We must quit playing these accounting games, and take our medicine while there is still a small chance of our way of life surviving.
Reggie I thoroughly enjoy your content and have nothing but respect for your track record.
and I have nothing at all against you linking all your own stuff all the time, it's necessary citation, however my only comment is that it would often read easier if you you didn't use the full titles all the time.
and I can also tell you absolutely and categorically that varying the links & anchor text is the way forwards, the Google rankings on your own site would benefit greatly from mixing up the anchor text a little.
Google (still attempt to) maintain that "whats good for users is good for rankings" but in this instance I know that to be true.
so if I were you I would not be so rigid with your linking back, and vary the anchor text slightly each time, your own site (and likely your readers here) will thank you for it, I promise.
Im only saying this because Ive noticed some negativity creeping in lately to your comments that is wholly underserved because of the strength of your work, and that as I know you're thinking about SEO on your own site, this is actually win win for you.
Thanks Reggie...
The FED was playing a game trying to prop up the banks and flood the financial institutions with money thinking job creation and consumer buying would be a byproduct.
Hiding the waste via FASB157 until the economy rebounded and they could get at least even valuation before putting it back on the books. Well it hasn't worked and they are still holding out instead of acting responsibly and taking it as a loss each quarter and reducing bonuses. They had their chance now they should be liquidated.
BTW Reggie you deserve a lot of credit. All the research and well laid out analysis is excellent.
Ya know, a lot of people have used the term "Dead Cat Bounce" and I know what it means. Kinda hard to get any sort of bounce though, from a height of 30,000 miles, going into Jupiter's gravitational field!
No worries, if the atmospheric friction doesn't get ya, the crushing weight will!
So we are going to have to muddle through this crap until 2017. That sucks. They need to get that toxic shit off there books NOW!
Once a house is foreclosed on the bank has to show the loss on its books, and the foreclosures will keep coming at an accelerating pace up to 2017. That is unless they keep letting all those people that stopped paying in their mortgage to continue to live in their homes for free forever.
Somehow all the Enron Schemes are now being used. Why was FAS 197 stopped? This can only mean they are not solvent. But they have "liquidity" pouring down their throats from the mamaFed.
The base doctrine of MTM - no compulsion to buy/sell, relative information symmetry - comes under tremendous pressure in current markets. Was Merrill's .22/1.00 sale truly on market, was it under compulsion, was there information asymmetry? If it was truly on market, then that is a market input.
If so, then how big an across the board capital hit does .22/1.00 cause (which raises big policy question of does MTM cause across the board runs compared to amortized cost basis, and if so, should that be allowed)?
If you think the hit should be taken, then you don't like 157-4. If you think the muddle through is for the best, then you like 157-4. It should not be surprising that banks don't like the proposal to MTM loans. The whole point of 115 and the AFS/OCI bypass was to get out from under the vicissitudes of the prompt corrective action regime that would be inherent in marking loans to market. Not sure that bankrupting banks is for the best. OTOH, the current slow moving muddle through is not doing much either. Maybe we need a bit faster of a muddle.
Dudley speaks the truth. The various articles Reggie quotes are not written by practitioners.
If MTM is brought back, you will see the level of bank closures by the FDIC rise exponentially. Instead of 200 banks a year it will be more like 200 banks a month. The only reason banks have not fallen into the closure listing is because they have not fallen below the regulatory capital threshold. Bring back MTM and the likes of CITI and BofA will all become subject to captial ratio standards. Of course the benefit of no MTM is that banks can push-off foreclosures until they absolutely must act. FNMA and FHLMC don't want MTM because then they would have show the true gap in their balance sheet.
I see the lid of Pandora's box opening.
Rather than forcing a parade of randomly timed write-downs, why not coordinate when the charges by pro rating...a soft landing pool.
choice:
“smooth out volatility swings in asset prices"
plop!
"assets are fairly illiquid and 'hard'”
grunty!
“To mitigate the effect of large swings in market value for loans, the accounting board will allow banks to split the loss on some assets into two categories: one that would affect the bank’s earnings and another that would affect the bank’s book value.”
Get out yet cherry-pickers, boys...it's time to off-load the junk!
Forget the cherry pickers, they will need something like this:
http://www.youtube.com/watch?v=UqlNYCGDQDk&feature=related
or this:
http://www.youtube.com/watch?v=tLSMXeH1lzE
They put the date way out... it won't matter...
The markets will crash in the next 4 months...
4 mos. you're an optimist.
brag all you want reggie. your stuff is right on. i'm an asshole. that doesn't stop me from serving up great stew. thanks reggie.
They have to QE this month or die. Problem is it'll fall apart while they are doing it.
"i'm an asshole. that doesn't stop me from serving up great stew."
LMFAO!!!
this made me LMFAO.
http://www.huffingtonpost.com/2010/06/04/the-most-amazing-drummer_n_601268.html
As an accountant, the rule changes burn me. In the U. S. financial statements are to be fairly stated and the auditors are paid good ( relative term ) money to see that the corporations do that. What we have now is pretend. That is what children do with Barbie and Tonka. Adults effectually deal with the brutal realities of life. I am dismayed and insulted. Dismayed that my profession was so gutless as to allow this and insulted that that anyone outside the profession would suggest that we should. To put a point on it what the hell good is an auditor or having an audit if the underlying purpose of audits ( fairly stated financials ) is negated. Bob Janjuah, RBS, in yesterdays post said that the bank’s assets could not be valued with any certainty.
This is going to cause nothing but pain and grief for the investing community. The politicians will not own up to the grief. They will do the finger pointing and do nothing to fix the problems they caused. What a pathetic excuse for existence. Ok I’m done venting.
What else are politicians good for besides "finger pointing"? Maybe BP should try a junk shot with thier useless asses!
if you keep writing like this you are going to rescue your profession from the immense contempt i have for it....
i am glad to hear that an acountant is disgusted with the fraud of his profession.....this is another reason why anyone involved in the markets is a greater fool....even the foolers will be fooled by their fool accounting....
anyone yet thinking that the usa is not a 3d world den of thieves should examine the voodoo accounting desccribed herein...
thanks for your comments...keep venting.
So what we have here is akin to a liar's loan.
My question still remains, why were these invested in ?
Anyone ? Anyone ? Bueller ?
Beautiful! The banks are taking out liar loans from the government.
If J6P filed a financial report for a loan using the same MTM scheme for his assets, the poor sap would be charged with bank fraud.
Nothing illustrates the desperation to reflate better than the chart provided here. Great job, Reggie.
Does this mean I can still value my AZ rental properties at 2005 valuations on my financial statement? My model clearly shows that they are still worth what they were in 2005 (like Leo's employment figures). Thank God for these changes, because for a few years now I thought they may have lost $400K in value. For awhile there reality was a real bitch.
Derivatives money had to go somewhere.
(Is the hyperinflation complete yet?)
jdrose
Ya mean dez Guyz ?
Da Guyz wid free moolah from tha Fed ?
http://www.forbes.com/2010/06/03/goldman-sachs-citigroup-markets-lenzner...
rgr that
Reggie, your degree of self-promotion is getting a bit much. Have some modesty and scale it back a bit .
Bullcrap. Reggie is one of the few willing to put his nuts up on the counter and dare to challenge the conventional wisdom. If you don't promote, you're not heard. How the hell do you think Tyler built this place by hiding like a pansy?
Keep up the great work Reggie!
http://www.youtube.com/watch?v=xPDy_2yX9Pk
Self promotion is a necessity when your product is suppressed information. Especially when that information documents and proves ongoing criminal activity of the political and economic elite.
Thank you Reggie for sharing information that I can not afford.
+1000 and thank you Reggie Middleton
Suppressed information....
Is that like when a dog shits and the cat buries it in the kitty litter and Reggie scoops it out and calls it BoomBlogBust Gold? (likely scenario #1)
Yes, I think.
Never!
Did people ever tell the Oracle at Delphi to hush up? No, no they most certainly did not.
Do not question the Reggie!
Reggie
Why was this change of rules accepted by investors and used as a rationale to buy ?
Suspension of disbelief is a powerful phenomenon,especially when it is backed up with trillions hot off the presses sloshing around the sytem looking for a rental for a few months. I personally am wondering about more sleight of hand when it comes to the 30+ insolvent states, not to mention many municipalities in the US and how this will play out and what rules will be suspended and whether there are front or back door bailouts to some or all of them. And if bailing out the states would be tantamount to QE 2.0 or something much different indeed? Reggie, any thoughts? Thanks for more great stuff, BTW.
I think you really nailed it there butchee.
There is no bankruptcy court for states. Fed.gov will step in and take over, then it's the United State of America.
The lie is that there is always more money on the way. If so, where do they keep it all and why is there a shortage of it to begin with?
Because it made them money.