The world has officially gone insane. After making a mortal enemy out of Mark to Market and halting it pretty much everywhere as an indicator of true asset value, Italian banks are now aggressively urging to implement Mark to Market to take advantage of surging prices in, get this, gold! From the FT: "Italian banks, which by a quirk of law are shareholders in the country’s central bank, are lobbying to have their stakes in the Bank of Italy marked-to-market on the back of surging gold prices in an attempt to ease regulatory pressure on them to raise capital in advance of this summer’s stress tests." You can't make this up: basically the world financial mafia says Mark to Myth when prices are low, and Mark to Market (on selected assets) when prices surge to a record.
The FT has more on this tragicomedy:
The Bank of Italy currently has a nominal value of just €156,000 ($215,000) divided into 300,000 shares which are distributed among Italy’s retail and savings banks according to their size.
Senior bankers say taking into account the surge in gold prices the Bank of Italy could have a mark-to-market value of about €30bn. Analysts estimate the Italian banking sector has combined recapitalisation needs of much the same amount to comply with new Basel III capital rules.
Any debate over the value of the Bank of Italy has met with opposition from the central bank concerned that it could harm governance. For the same reason, executives at Italy’s banks are not involved in the central bank’s decision-making process.
But several sources familiar with the talks say Italy’s banking lobby is gaining political traction amid opposition from its core shareholders, the local banking foundations, to capital increases as they fear a dilution of their stakes.
Italy’s government has also indicated there is a political will to reduce the need for Italian banks to access the capital markets
It is oddly ironic that we discussed just this issue 10 short days ago, when we penned "Does A Surging Gold Price Mean The Fed Will Be Forced To Sell Treasurys?" when we observed a variation of the the inverse: i.e., should the Fed allow Mark to Market accounting on its alleged 8,133.5 tonnes of gold, which are currently held on the books at $42.22, then the asset side of the Fed's balance sheet will surge by $350 billion! Which would mean that either excess reserves will have to rise by the same amount, making hyperinflation that much more likely, or the Fed would have to sell a like amount of securities. Neither will happen.
Which is why we believe that the Italian MTM proposal has no negligible chance of actually happening: one call from Bernanke to former Goldmanite, and current Bank of Italy governor, Mario Draghi will make sure to lay out all the "angles" of the situation quickly and succinctly...