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FASB to Fold on Mark to Market

Bruce Krasting's picture




 

A board member at the FASB, Lawrence Smith, gave an interview with Reuters on
the status of US accounting standards moving toward greater
transparency. According to Smith this important change is not going to
happen.

Why? Because the folks who have the most to lose by forced transparency
have complained! What a stupid reason to fold by the FASB.

"Thus
far, I think the count is up to about 1,500 or so comment letters," said
Lawrence Smith, a board member of FASB, which sets U.S. accounting
rules. "I think I've read one that supports what we propose."

So what if the letters are 1,500 to 1? That the banks and finance
companies are writing all these letters is probably the best evidence
that MTM is desperately needed.

Smith added that board members will probably be influenced by the opposition.

"If I were a betting person, I would bet on some type of hybrid model being adopted".

Well I am a betting person and I will bet that there will be no MTM from
FASB. They will crater to their own constituency and do the wrong thing
for the investing public, again.

This makes a joke of:

-The FASB
-The companies who wrote the letters
-The SEC
-The accounting profession
-FinReg, as it is proving to be a toothless set of regulations
-The US Treasury. (they did not write a letter)
-The Federal Reserve (who also did not write a letter) the Fed has been
pushing on this issue and will not step up to the plate when necessary.

The banks are all afraid of MTM. They want to be able to hide an asset
on their books that is worth 50 cents on the dollar and maintain it at
100 cents. When FASB blesses this insanity the banks will just abuse the
rule to hide more junk.

So when you are out there buying bank stocks know that the assets you
think are there have nothing to do with the fair value of those assets.
That the financial statements you read are just a charade. You can draw
no conclusions on the health of the company you are investing in. And
that the FASB has blessed it and wants it that way. Caveat Emptor.

 

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Thu, 09/30/2010 - 23:48 | 617462 DTCC 1999
DTCC 1999's picture

Please consider the following :

        Steve Forbes on M2M:

"The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

 

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets, they have to get new capital. And the need for new capital is a signal to that rating agencies these outfits might deserve a credit-rating reduction.

 

Mark-to-market accounting is the principal reason why our financial system is in a meltdown. The destructiveness of mark-to-market--which was in force before the great depression--is why FDR suspended it in 1938. It was unnecessarily destroying banks. 

 

If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule and enforce the prohibition against naked short selling. If he doesn't, historians will look back in utter amazement at Mr. Obama's preservation of Mr. Bush's worst economic policies." 

http://www.forbes.com/2009/03/20/steve-forbes-mark-to-market-intelligent-investing-market.html 

"In their seminal work, A Monetary History of the United States, Milton Friedman and Anna Schwartz reported that mark-to-market accounting rules caused banks to fail in the Great Depression, not from bad loans, but from writing down bond values at the behest of regulators. And as William Isaac, former head of the FDIC, tells us in his submission, FDR eventually called together a panel in 1938 that suspended those rules. By then the Depression had lasted eight years. We hope our current government leadership understands this history. -- R. Emmett Tyrrell, Jr." http://spectator.org/archives/2008/12/11/market-value-accounting-crippl

Thu, 09/30/2010 - 17:27 | 616730 DTCC 1999
DTCC 1999's picture

In my humble opinion, multinational shadow banks are king in avoiding the limitations of reserve requirements, with FinReg's "teeth" formed to hold this tightly.  

I'd be more than willing to endorse the pains of deleveraging if it was a step in ending compliance to multinational corporate demand derived from their creation of these credit derivative products. 

 

Wed, 09/29/2010 - 21:18 | 614270 gwar5
gwar5's picture

We are so screwed. Everything is a hologram.

Wed, 09/29/2010 - 20:36 | 614197 bingocat
bingocat's picture

With regard to mark-to-market accounting for all assets all the time at banks... Investors/consumers should be careful what they ask for.

If banks were to be forced to mark to market the loan they make to Joe Prime HomeOwner (even when Joe puts 30% down on a brand new 5 bedroom apartment in a great neighborhood in Manhattan costing $1 million (i.e. something which is underpriced so the bank has a lot of buffer)), it would be a serious problem for Joe HomeOwner.

  1. The  cost of the loan would go up because the volatility of the bank's assets would go up. If the cost to get a home loan goes up, the market value of the assets being funded goes down.
  2. The bank would force themselves to mark the asset behind the loan to market - i.e. Joe's house, and if Joe lives in a recourse state, then the bank would probably start putting in covenants such as "collateral cure' clauses, meaning that if the bank determined that the value of the house fell, the bank would demand that Joe add collateral to the pot (usually cash) so the bank would continue lending. In times of economic stress when housing prices fall, Joe and his fellow tens of millions of homeowners would have to give more cash to the bank. Otherwise, the bank could seize the house.
  3. If Joe's wife loses her job, the bank could demand more cash from Joe and his wife as collateral, reflecting the lower ability of Mr. & Mrs HomeOwner's ability to pay.
  4. If Joe quits his job because he does not like it, and he is sure he can find another job quickly, the bank could demand more collateral just in case.
  5. Joe's life will be marked to market because the bank has to be that much more diligent in managing its collateral over the very short term so as not to take a large loss because Joe decides to have another baby, quit his job, start skydiving as a hobby, or whatnot.
  6. If Joe is marked to market on his liabilities, he will have to mark to market his assets. That means Joe, who lent money to his brother Jim to buy a car, would have to call back Jim's car when housing prices and car prices fell in order to be able to sell the car to raise cash so he could add collateral. This would happen all over America. It would INCREASE the level of correlation between asset prices. Everybody would sell everything when prices go down.
  7. The overall total level of credit would go down, substantially.

Mark to market works among mark-to-market counterparties. Banks don't mark housing loans to market because homeowners don't mark their debt to the bank to market either, and because banks are levered, banks need to have both sides of their balance sheet treated the same way. Banks mark some assets to market. Those assets have all their parts marked to market and so things like leveraged loans have covenants which allow them to terminate the loan early when the asset against that loan does not perform according to promises.

I promise you that most Americans, while disappointed that a crash follows a bubble, would not want to subject themselves to a mark-to-market of their life.

 

Fri, 10/01/2010 - 23:18 | 620235 GoinFawr
GoinFawr's picture

bingocat, outstanding! I am right impressed.

That is one of the most succinct descriptions of the gun that the banks think they are holding to everyone's heads. Thanks.

Regards

Wed, 10/27/2010 - 08:07 | 680000 bingocat
bingocat's picture

I am not sure that banks 'think' it but it does exist. The world is not ready for mark-to-market, because the world is a 'price-taker' of services rather than 'provider of services'. Banks will take the spread (i.e. receive excess collateral) while depositors and borrowers will pay it (provide collateral when the borrow, receive less collateral when they lend (deposit). There is no way that it will be otherwise - banks, or other institutions which have operating costs above zero (even charities), need to have a spread somewhere to finance their cost. Regular joes finance their costs (and the spreads they pay away) by working somewhere else and receiving take-home pay.

 

Wed, 09/29/2010 - 18:39 | 613896 GoinFawr
GoinFawr's picture

Anyone wanna hazard a guess what implications  'marking to sky-pie' has for the deflationist case?

Regards

Wed, 09/29/2010 - 19:57 | 614091 GoinFawr
GoinFawr's picture

No? Well don't feel too bad, it was a rhetorical question anyway...

Regards

Wed, 09/29/2010 - 17:45 | 613631 DTCC 1999
DTCC 1999's picture

 

Ok I'll be the dummy who disagrees with the likes of Mr. Kastings, Mr. Whalen, Mr. Smith, Mikla, CD and others here. 

I'm against implementing M2M given the leadership and interests of the Federal Reserve.  M2M rules were in effect in 1938 and FDR ended it saying it caused banks to fail that wouldn't otherwise.  I think the cause of the crisis was increasing deregulation and leverage given to the financial's - systematically altering over Dem. and GOP administrations - which the Fed lobbied for.  

I don't think it's a coincidence that GS was behind the most irresponsible and late in the game MBS packages.  Or Paulson threatening our legislative branch Martial law if we didn't bailout the home owners but the next day making it a blank check for shadow banks. 

Our Judicial Branch was twice refused by the Fed when ruled they must disclose the recipients of tax dollars.  Then the case was taken out of the system before it could reach the Supreme Court by state representatives who voted 96-0 that the Fed must comply - but are obviously incapable of enforcing that. (opps :)

I didn't follow the Financial Crisis Inquiry Commission - but there was bi-partisan support by our Legislative Branch to go back to the findings of the Pecora Commission - until a trading day in May that is talked about here often. 

GS favors mark to market accounting too.  What about dropping everyone down to current interest rates like Blanchard said?

 

Wed, 09/29/2010 - 22:01 | 614356 mikla
mikla's picture

Suspending mark-to-market is the same thing as suspending reserve requirements.  It merely means banks print infinite money, with no accountability.

It no longer matters if any bank makes bad loans:  They can merely print more money to make up for the "losses".  This merely ensures they collect infinite "profit", since there are no "losses".  Further, it means they don't even need to bother with the pesky "customer":  They can merely print infinite money and give it to themselves as bonuses for *not* making loans, and print more money to speculate in the market (which they actually do now).  All it does is permit infinite increasing leverage:  Every day is "double-or-nothing" day.

In short, no reserve requirements, no mark-to-market, no accountability.  It's quite strange that people grant this monopoly to banks to manufacture dollars out-of-nothing.  With no real printing/speculating limit, the people figure that out and stop participating *at all*.

Conclusion:  Without M2M, the system will blow super-nova style like you could never possibly imagine.

We can disagree on outcomes.  However, I shall take no joy in the fact that my conclusion will be proven correct, as it is a mathematical certainty.

Wed, 09/29/2010 - 18:50 | 613924 Captain Queeg
Captain Queeg's picture

 "...it caused banks to fail that wouldn't otherwise." 

Since when, really, are banks public agencies? The notion that the insolvency of banks is a national security threat is the craziest idea yet; actually, the lack of MTM, and the attendant lack of the truth, is what will make the country weaker, not the perception that there is massive insolvency. The breakup/conservatorship/bankruptcy of weak banks would prove to future generations and the rest of the world that leverage is not always a good thing - poor (overleveraged) business models need to be punished with liquidation. Banks will be replaced by Other Banks, and that creative destruction is what has made this country great, not the legislative protection of the various turfs. The level of politicization of economic issues is at a revolting all-time high, and nobody should wonder why gold looks invincible.

Why do people do business with the moneycenter banks under these circumstances??? 

Wed, 09/29/2010 - 15:51 | 613351 anonnn
anonnn's picture

Finance Accounting was established to make transparent and understand  a complex collection of datums.

Such is also used to enable fraud by covertly occluding transparency. Accounting that pretends transparency is a fraud.  It is counterfeit accounting.

Accounting fraud is requisite to all control fraud, yet the easily identified persons doing it are free of prosecution. That's a tell on the protection racket shielding the accounting profession.

When fraudulent action is discovered, just ask a CEO to point to exactly where in the latest financial statement it was hidden. And exactly how it was hidden.

Likewise, ask the accounting firm.

If they claim to not understand the company's financial statements, that's another tell...that both the CEO and the accounting firm that authored the statements are frauds that destroyed transparency.

Wed, 09/29/2010 - 15:17 | 613239 Rider
Rider's picture

FASB punks should be in jail for accounting fraud, and of course all twisted politicians who promoted this farse.

 

JAIL TO FASB OFFICIALS!!!

 

P.D. FUCK THE FASB

Wed, 09/29/2010 - 15:01 | 613199 PicassoInActions
PicassoInActions's picture

New QE2 is not about printing mroe money. It's about providing every american with free vazelin or baby oil right before  the next rape occurs.

 

Wed, 09/29/2010 - 14:46 | 613153 SheepDog-One
SheepDog-One's picture

Did we expect anything different than more 'bend over here it comes again'?

Wed, 09/29/2010 - 14:40 | 613131 MarketFox
MarketFox's picture

Want the WHY ?

Simple....FASCISM

 

And the middle class is being extinquished because of it....

REVOLUTION is the resolve....

Think about it ....

Lost how many $Trillions ?

With no accountability ?

Enough said....

Wed, 09/29/2010 - 14:21 | 613077 PicassoInActions
PicassoInActions's picture

I don't think the market was any different before 2007, and every1 was playing by their corrupted rules.

Now we do have more information on market manipulation and we are complaining.

We cant keep patching the old system and there is not enough force in universe to bring the new system.

 

 

Wed, 09/29/2010 - 14:09 | 613050 99er
99er's picture

Fuckin A Sons of Bitches.

Wed, 09/29/2010 - 13:57 | 613027 janchup
janchup's picture

Sometimes I hate reality too but only my own life is being screwed by love of ignorance.

Wed, 09/29/2010 - 13:54 | 613020 Spirit Of Truth
Spirit Of Truth's picture

BOTTOM LINE: Don't mess with the "make believe" of TPTB and the sheeple they loot, or there'll be hell to pay.

Wed, 09/29/2010 - 13:49 | 613004 Hondo
Hondo's picture

Another reason the Greenspan (FOMC) doctrine that market dicipline will force shadow banks to self-regulate has been a complete failure (stupid thinking from stupid people from the beginning).  It is also a reason you have to be a fool to invest in any financial institution (equity or debt).  I like gold better than demand deposits with $250,000 insurance (which is worthless).

Wed, 09/29/2010 - 13:48 | 613002 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

A bureaucracy functions much like a HS cafeteria; as a popularity contest.  In this respect walls are built that are cumbersum, inaccurate, and often times malicious.  Fortunately for HS students, maturity and experience can bring insight.  Unfortunately for adults, ego has most likely locked the spine into disposition.  This is why my friends and I would throw food at the preps.  We wanted to help them understand they were just as dirty as everyone else. 

Once done there I began college.  After a term I told a friend I was disappointed that the mentality of my peers was the same as it was previously before this "freedom".  He deadpanned and said, "Life is like high school."  The words shocked me, but he is right.  Overall, herd mentality dictates flow.  This is why it is important to run with the right pack.  Slip out the back Jack, make a new plan Stan, no need to be coy Roy, just listen to me.  Hop on the bus Gus, no need to discuss much!  Just drop off the key Lee, and get yourself free.

Wed, 09/29/2010 - 13:48 | 613000 PhattyBuoy
PhattyBuoy's picture

I definitely know the MTM for Au & Ag ...

Wed, 09/29/2010 - 13:34 | 612948 Ned Zeppelin
Ned Zeppelin's picture

There is absolutely no chance of MTM coming back in the foreseeable future.  It does not serve the criminals, and they are firmly in charge. Stick a fork in it, the accuracy of financial reporting is done.

 

Wed, 09/29/2010 - 16:32 | 613508 RockyRacoon
RockyRacoon's picture

It sure served them well on the way up, eh? 

When it is no longer useful (becomes harmful), change the rules. 

Nothing new about that tactic.

Wed, 09/29/2010 - 13:27 | 612933 Captain Queeg
Captain Queeg's picture

From a standpoint of investing in the equity securities of banks, at the end of the day, a non-performing asset may be obscured on (or off) the balance sheet, but the impact on the income statement is tangible over time unless an investor is willing to believe in such hokum as "accrued rent" or "goodwill." Caveat Emptor ad infinitum. Obviously most people here know not to buy something that is known to be a misrepresentation of value.

Wed, 09/29/2010 - 13:13 | 612910 AR15AU
AR15AU's picture

I use only the most popular accounting standards. I want to be liked.

Wed, 09/29/2010 - 14:52 | 613179 hedgeless_horseman
hedgeless_horseman's picture

Felons on death row probably write a lot of letters in support of habeas corpus, too.

Wed, 09/29/2010 - 13:06 | 612903 M.B. Drapier
M.B. Drapier's picture

To be fair to FASB, they seem to have made a more serious and concerted attempt than anyone else to hold the line. They know that the letter-writers will run to Congress if FASB tries to ignore them. I wonder though, is the list of anti-MTM petitioners on the public record, or could it be revealed by an FOI request?

Wed, 09/29/2010 - 13:15 | 612908 Widowmaker
Widowmaker's picture

 "Almost truth" is pure marginalization of truth.

Wed, 09/29/2010 - 13:04 | 612895 Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

We should not continue to be surprised when those in power keep that power at all costs.  For all those they rule over the expense is liberty and means are the lies, more lies, and damn lies.  But we asked for this king, our populace wants freedom without sacrifice and a happy retirement without saving for it.

Wed, 09/29/2010 - 13:01 | 612888 Mitchman
Mitchman's picture

Mark my words, they will cave on the lease accounting changes as well.  The same interests are lined up against the change.

Wed, 09/29/2010 - 12:50 | 612857 Fish Gone Bad
Fish Gone Bad's picture

It is amazing how something so (apparently) important can live without a spine.

Wed, 09/29/2010 - 12:48 | 612851 Rusty_Shackleford
Rusty_Shackleford's picture

Bruce,

I'd imagine you saw this but, if not, it sums up the issue here in a way that is crystal clear:

 

http://dealbreaker.com/2010/08/other-than-that-i-have-no-concerns/

 

James C. Blain couldn't care less what is right or honorable.

Wed, 09/29/2010 - 13:52 | 613013 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Wow.  Hey everybody look, it is James C. Blaine, the biggest duche in the universe!

Wed, 09/29/2010 - 12:47 | 612849 sweet ebony diamond
sweet ebony diamond's picture

I don't think these mega-companies know what they own.

The Lehman accountant Matthew Lee said as much.

Wed, 09/29/2010 - 12:44 | 612834 Nathan Muir
Nathan Muir's picture

I wrote the entire board when they adopted Mark-To-Makebelieve, and reminded them FASB now stands for Fraud Accounting Saves Banks!

Wed, 09/29/2010 - 12:43 | 612830 Lonewar
Lonewar's picture

Bruce,

The answer to this is for the investing public, when they are looking at financial statements to just take all assets and give them a 50% haircut.

If the financial statement is from a bank, or other real estate venture, give them a 70% haircut.

If we cant trust whats out there, then discount it until you feel you can trust it. If regulators what companies to be able to lie, then the people who write and report on these matters need to take that into consideration when they are writting those reports.

Wed, 09/29/2010 - 12:37 | 612814 Ripped Chunk
Ripped Chunk's picture

Mark-to-Unicorn. While 110 other countries mark-to-market.

Euro banks are still covering up equity deficiencies though.

Wed, 09/29/2010 - 12:20 | 612761 S474NtheD3v1L
S474NtheD3v1L's picture

mark 2 market, smark 2 market; who cares!
the music's still playin, watch me do my 2-step suckers.

Wed, 09/29/2010 - 13:31 | 612944 bigkahuna
bigkahuna's picture

Its gonna feel good to guys like you until the fed decides to yank out your culo. Keep on dancing.

Wed, 09/29/2010 - 12:11 | 612735 Boilermaker
Boilermaker's picture

The GOOD NEWS is that my 2006 Chrysler 300C Limited is worth $38,000 again!

Fuckin' "A" Right!

Wed, 09/29/2010 - 12:36 | 612812 Developers
Developers's picture

+38000

That's hilarious.

 

Wed, 09/29/2010 - 12:08 | 612726 old_turk
old_turk's picture

Negative cash flows will kill the banks ... eventually. 

Mark to Myth just buys time.

Bad loans = no cash inflows = FDIC sponsored yard sale. (excepting C,BAC,JPM,WFT, of course, where the bad loans are foisted upon the FRB)

Any questions?

Wed, 09/29/2010 - 12:03 | 612705 Widowmaker
Widowmaker's picture

I pity any "regulator" that shows up at my door.

Consider that a threat -- I don't want that level of corruption near my home.

Wed, 09/29/2010 - 12:00 | 612694 TradingJoe
TradingJoe's picture

This Ponzi will end very bad for ALL of US! They will keep doing it until We the People Stand Up, but his won't happen any time soon, there is still much to steal, cheat and lie about, a lot more to destroy and go crazy about, americans are slow but once on their feet there won' be no stoping, and that's what I am afraid of, a stand off where no one knows how it happens and most importantly how it ends! for now, thinking goes towards "more loot" rathe then "let's shoot"! fact is though, there will be no stoping of these gangsters without The People! Bad things to come!

Wed, 09/29/2010 - 11:58 | 612684 Rainman
Rainman's picture

The real kick in the ass is how this charade gums up any fair valuation of SPY earnings and multiples. The level of loss underprovisioning by the banks is known only to each of them. And since IASB operates in lock step with FASB, the Eurozone banks exist with similar distortions. 

Playing this charade out further, what is the true organic GDP without government's massive deficit spending ?? What is the true p/e for the S&P ex mythical asset marking ??

You'll win your bet, Bruce. No MTM form FASB. Some other catastrophy will be needed to dial back financial transparency in our lifetime.

Wed, 09/29/2010 - 11:54 | 612673 MarketTruth
MarketTruth's picture

So if we all complain loud enough, then the needed adjustment (higher) of speed limits on roadways will be whatever we choose to mark them to? Makes almost as much sense as mark to make believe.

Wed, 09/29/2010 - 11:42 | 612645 b_thunder
b_thunder's picture

If the banks are forced to MTM ,  all the "hard work" done by the Treasury and Fed since 2007 will have been for nothing.  All those trillions of stimulus, bailouts, and QE will have been wasted.  Well, not totally wasted - some $$ went to enrich Bill Gross, Tepper and J. Paulson.

Anyway, MTM would mean going the "swedish" rout: nationalization, break up, sell-off of the pieces.  Bondholders taking a major cut.  Ain't gonna happen here.

 

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