Is Suspension Of Mark-To-Market Rule Irrelevant?
2:37 am October 3, 2008 by Brian J. Ritchey
Good counter-argument to what former FDIC chairman Isaac and Newt Gingrich have said regarding the role of mark-to-market accounting rule:
Even if mark-to-market rules are suspended immediately, it won’t change the makeup of a company’s balance sheet. Investors have decided that these assets are toxic and no matter how a bank accounts for them in its books, that sentiment isn’t likely to change unless investors see some proof that the instruments are actually undervalued.
On the other hand, there is the other argument:
“For almost every bank, especially the regionals, what they’ve taken the biggest hit on is mark-to-market securities,” said (Joshua Siegel, managing principal of Stone Castle Partners, a private equity group). “This is what they needed to do first – not cut a $700bn check. They first need to take the pressure off earnings.”
For now, it appears the SEC is moving towards suspending the rule. In the meantime, it was announced Tuesday that “managers could use their own judgment when valuing securities in illiquid markets, which means they can use measurements other than actual market prices.” The revised rule can be read by clicking here.
I am not sure that sort of ambiguity is what is needed to help this crisis. Perhaps a sane rule that doesn’t devalue assets based on immediate marketability would help investors better than leaving the valuation to the whim of the managers. Further, taking the point of Phil Izzo from the Wall Street Journal’s “Real Time Economics” Blog, is it too late for the change to make a difference in the current crisis? Can you really go back and increase the value of assets that you have already deemed toxic and worthless and expect anyone in the market to trust it?
Opinions on mark to market are strong and more and more people are speaking out on it:
- Jeff White, Financial Post; “Mark To Market Madness”
- The Motley Fool, “Mark-to-Market Accounting Basics”
- Andrew Willis, Globe And Mail, “Making the case for mark-to-market Rules”
- Joshua Boak, Chicago Tribune, “Critics Say Accounting Rule Off Mark”
- Floyd Norris, New York Times, “Mistakes Of Past Live Again”
- The Economist, “Fair Cop: Fair Value Accounting Becomes A Political Issue”
THe true value of a mortgage is the present value of cash flows on mortages in in delinquency. Those in delinquency can be further discounted based on a bank’s delinquency pattern of mortgages that go into default once they are delinquent by 1,2, or 3 months then foreclosure. The discounted value of the discounted cash flows of delinquency’s should not drop to zero as there is a inherient salvage value to the asset albeit it could be the market value on these identified mortgages.