Archive for March 23rd, 2009
Mark-To-Market Accounting Rules Driving Banks To Bailouts–Change The Rules–Fed Chair Bernanke Explains!–Videos
Peter Schiff Vlog Report 02 Apr 2009
FASB Relaxes Mark-to-Market Rules
CNBC’s Mark Haines On Job Loss & Mark-To-Market (HQ)
Dissenting View on FASB Mark to Market
Today in Washington – Mark-to-Market Hearing – Bloomberg
Future of Banking: Credit Crunch, Marking to Market impact. Sub-Prime Crisis – What next after global market chaos and share price collapse? Suspension of Mark to Market Rule.
Kudlow-McTeer on Mark-to-Market
Mark-to-Market Acounting – Steve Forbes
Newt Ginrich: How to dramatically improve the Market Crisis.
Bailout Fraud EXPOSED!! Legalizing Book Cooking!!
FASB Eases Mark-to-Market Rules
“…U.S. accounting rule makers made it easier for banks to limit losses, but in an unexpected move they bowed to critics and backtracked on one proposal that would have let companies ignore market prices in some cases.
The vote by the Financial Accounting Standards Board followed a debate in which members of Congress pushed for steps to help banks weighed down by troubled assets, while some investor groups warned that the plans would allow executives to cover up losses. The rules change spurred Thursday’s stock-market rally.
For the most part, the board ratified proposals it had put out for comment two weeks earlier, including changes that would lessen the need for banks to take an earnings hit when assets run into trouble. Financial stocks led the market up in the morning on the expectation that the rules would be approved, but faded and ended roughly on a par with the broader market. …”
http://online.wsj.com/article/SB123867739560682309.html
Everybody favors a mark-to-market accounting rule when there is an active market for a security or investment.
The problem with the mark-to-market accounting standard is there are times when there is not an active market or even no market for a security or investment for a period of time.
How do you value a security or investment when this is the case?
How does a bank or financial institution mark-to-market when an active market does not exist and there are only a few or no buyers for a security?
I favor changing the accounting rules or standards regarding the mark-to market rule to-reflect that there is actually no market for some assets when you are in a financial crisis.
When there is no market for a security or asset in your investment portfolio, a bank may be forced to raise capital to reflect the fact that one or more assets on their balance sheet has fallen significantly in value when it tries to apply the mark-to-market rule.
When a bank plans to hold an investment to maturity, then it makes no sense to force a bank to mark-to-market an asset that the bank does not intend to sell at liquidation prices or fire-sale prices.
Rumors are flying that the Treasury and the Federal Reserve in conjunction with the Financial Accounting Standards Board will stop forcing companies to mark-to-market those investments they intend to hold to maturity and are/or are receiving a money or income stream from.
Nine minutes into the video below Fed Chairman Ben Bernake speaks to the issue and gives some hints
as to what is going on:
Bernanke Speaks on Economy (Part 2) – Bloomberg
Fair Value Accounting: Hero or Villain?
Bernanke 2: Capitalism broadly construed has been enormous success, Mark-To-Market
Alfred M. King, Vice Chairman, Marshall & Stevens, Inc
Responding to pressure applied by lawmakers on Capitol Hill, the Financial Accounting Standards Board on Thursday voted unanimously to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value.
Fmarket flexibility ASB approves more mark-to-Panel passes measure unanimously; measure could boost bank profit
Mark to market
“Robert Herz, chairman of the Financial Accounting Standards Board (FASB), noted that he has been a long-time advocate of mark-to-market, or fair value, accounting, but that the approach works a lot better with markets that give off strong and clear price signals. …”
Mark-to-Market Debate: The Banking System
Mark-to-Market Debate: Bank write-down
Brian Westbury on “Mark to Market”
Special Report Mark To Market
http://www.youtube.com/watch?v=GL5s1Q7OxlY
Mark-to-Market Accounting
Warren Buffet on Mark-to-Market
Why did the political elites wait so long to address this issue?
This should have been done in September 2008 if not much earlier.
A recessions was needed to guarantee the election of candidate Obama.
Economists should not be intimated by accountants.
Presidents should not be intimated by either economists or accountants.
Get on with it people and show some leadership.
Delay is hurting tens of millions of people around the world that are currently unemployed.
Stop all the nonsense about bonuses for AIG people.
Congress and the President are looking more and more like dilitents and incompetents.
A worldwide recessions largely caused by an accounting rule.
Unbelievable!
Background Articles and Videos
FASB Eases Mark-to-Market Rules
Bernanke Speaks on Economy (Part 1) – Bloomberg
US FASB says to discuss mark-to-market Monday
FASB/ (UPDATE 1):UPDATE 1-US FASB says to discuss mark-to-market Monday
“…The Financial Accounting Standards Board, which sets U.S. accounting rules, will discuss mark-to-market accounting guidance at its board meeting Monday, according to its website.
The board says it will discuss “additional application guidance” that would clarify how mark to market is used in illiquid markets, according to the website.
U.S. lawmakers told FASB Chairman Robert Herz on Thursday to deliver new guidance on mark-to-market accounting within three weeks, or face legislation changing the rule that has forced banks to write down billions of dollars in assets. …”
Ed Yingling on CNBC
FASB to discuss mark-to-market accounting rule changes on Monday
March 14, 2009 by Bank REO
“…U.S. lawmakers told FASB Chairman Robert Herz on Thursday to deliver new guidance on mark-to-market accounting within three weeks, or face legislation changing the rule that has forced banks to write down billions of dollars in assets.
The rules, also known as fair value accounting, were aimed at giving investors an accurate view of financial companies’ books, but some banks and investors have blamed the rules for accelerating the financial crisis.
The board also said it will discuss “how best to present” other-than-temporary impairments, which affect how companies write down assets that have suddenly declined in value.
The American Bankers Association has urged FASB and U.S. regulators to look at clarifying impairment rules.
The U.S. Securities and Exchange Commission and FASB oppose suspension or elimination of the rule, saying that such a move would hurt the quality and transparency of financial reporting and further diminish investor confidence in the capital markets.
Last year, the SEC and FASB released guidance saying the financial industry did not need to mark down values of hard-to-value assets to fire-sale prices, saying the “fair value” of these assets should reflect orderly transactions.
However, in the past few months, FASB has been criticized for the “pro-cyclical” effects of mark-to-market accounting, which some claim led to a downward spiral where bank assets valued at market prices had to be written down, causing markets to freeze up and leading to more write-downs.
FASB had said last month that it had started two projects to further improve fair value accounting in illiquid markets and that it hoped to complete the work by the end of the second quarter. FASB also said it has plans to work with the London-based International Accounting Standards Board on a broad review of impairment rules. …”
“…CPA’s continued to struggle with asset valuation. What is fair? What is conservative? Enter Enron. Inside accountants at Enron recognized correctly that valuing assets at cost was often invalid, so they started playing fast and loose with asset values, using something called mark-to-model. A sharp CPA could design a believable computer model that could make the value come out wherever his boss wanted it to be. He could also convince outside auditors and regulators of the soundness of his model. Embarrassed that they had been caught looking the other way, FASB (Financial Accounting Standards Board) passed rule 157 that requires assets to be marked to market. Asset valuation based on the optimism of its owner was replaced with the skepticism of a risk-averse buyer. Sounds nice and conservative.
The Trillion-Dollar Question: Are the Bookkeepers At It Again?
By Jim H. Ainsworth
“…Why should America attempt an expensive, controversial, and possibly ineffective bailout strategy for the current financial crisis when a virtually costless and simpler change could solve much of the problem?
http://www.americanthinker.com/2008/09/the_trilliondollar_question_ar.html
Mark-to-market accounting
History and development
The practice of mark to market as an accounting device first developed among traders on futures exchanges in the 20th century. It was not until the 1980s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals.
To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a “margin”. This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if the market price of his contract has declined, the exchange charges his account that holds the deposited margin. If the balance of this accounts falls below the deposit required to maintain the position, the trader must immediately pay additional margin into the account to maintain his position. As an example, the Chicago Mercantile Exchange, taking the process one step further, marks positions to market twice a day, at 10:00 am and 2:00 pm.[1]
Over-the-counter (OTC) derivatives on the other hand are formula-based financial contracts between buyers and sellers, and are not traded on exchanges, so their market prices are not established by any active, regulated market trading. Market values are, therefore, not objectively determined or readily available (purchasers of derivative contracts are customarily furnished computer programs which compute market values based upon data input from the active markets and the provided formulae). During their early development, OTC derivatives such as interest rate swaps were not marked to market frequently. Deals were monitored on a quarterly or annual basis, when gains or losses would be acknowledged or payments exchanged.
As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available or the asset value was derived from other traded commodities, such as crude oil futures), so assets were being ‘marked to model’ in a hypothetical or synthetic manner using estimated valuations derived from financial modeling, and sometimes marked in a manipulative way to achieve spurious valuations. See Enron and the Enron scandal.
Internal Revenue Code Section 475 contains the mark to market accounting method rule for taxation. Section 475 provides that qualified securities dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also provides that dealers in commodities can elect mark to market treatment for any commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions). …”
http://en.wikipedia.org/wiki/Mark-to-market
FASB Chairman Robert H. Herz Testifies on Mark-to-Market Accounting
“…Addressing misconceptions that mark to market is a broadly applied rule, Herz explained that so called “mark to market” accounting generally only applies to trading accounts and derivatives that don’t qualify as hedges. Additionally, Herz clarified that the use of fair value for measurement depends on both the nature of a financial asset and its intended use by an institution. Herz added that current financial reporting in the U.S. and elsewhere across the world included the use of both fair value and historical cost.
In response to the current challenging market conditions and feedback from a wide array of investors and constituents—including the SEC—the FASB recently announced projects intended to improve the application guidance used to determine fair values as well as improving disclosures in financial reports. (http://www.fasb.org/news/nr021809.shtml). Earlier in the crisis, the FASB and SEC jointly issued new guidance on the application of fair value in illiquid markets. (http://www.fasb.org/news/2008-FairValue.pdf).
“The fact that fair value measures have been difficult to determine for some illiquid instruments is not a cause of current problems but rather a symptom of the many problems that have contributed to the global crisis—including lax and fraudulent lending, excess leverage, the creation of complex and risky investments through securitization and derivatives, the global distribution of such investments across rapidly growing unregulated and opaque markets lacking a proper infrastructure for clearing mechanisms and price discovery, faulty ratings, and the absence of appropriate risk management and valuation processes at many financial institutions,” Herz said.
http://www.fasb.org/news/nr031209.shtml
Mark-to-Market: The Bogeyman of the 1930s Is Back
By Mark Sunshine
“I wonder how many people realize that FDR got rid of mark-to-market accounting in 1938 after it virtually destroyed the banking sector. According to Brian Wesbury and Robert Stein, mark-to-market accounting was the law of the land for most of the Great Depression until it was outlawed by FDR in 1938. Wesbury and Stein report that the rationale for mark-to-market accounting in the 1930s seems similar to today’s argument for the rule: the need for greater price transparency based upon the efficient markets hypothesis in the banking sector.
FDR rejected the arguments of the efficient markets crowd because he thought that mark-to-market accounting contributed to the Great Depression. For approximately 70 years after FDR’s decision, banks operated without mark-to-market accounting and the economy didn’t have the threat of another depression. Years later Milton Friedman wrote that mark-to-market accounting was responsible for the avoidable failure of many banks in the 1930s. Maybe it is just coincidence, but immediately after mark-to-market accounting was restored in 2007 the banking sector started into a death spiral. Unfortunately, even though history seems to be repeating itself, few people are trying to learn from the past. Even so, today’s Congressional hearings on mark-to-market accounting are hopefully the first step towards stopping this terrible man-made economic disaster. …”
http://seekingalpha.com/article/125914-mark-to-market-the-bogeyman-of-the-1930s-is-back
Gibbs on Geithner: “Uhhhh….uhhhh…uhhh”
By Michelle Malkin
Mark-to-Market Rules – Worsening the Credit Crisis?
“Despite the fact that the majority of MBS owned by banks are not in default, the fair market value for them is very low. Why? The market is illiquid, no one is buying them. The spread between the bid and the ask is too large—and mark-to-market values assets based on the bid.
Normally, it would be fair for banks to value securities at the price they are fetching on the open market. But these aren’t normal times, and most Banks argue that the value of the securities they are holding is actually much higher than their current market value. Meanwhile, the value of bank balance sheets are plummeting—forcing them to write-down losses and seek outside funds to maintain required capital ratios. European regulators suspended mark-to-market accounting in early October, 2008.
Proponents of mark-to-market accounting argue that the rule helps prevent banks from understating the gravity of their situations. Investors and creditors have the right to know the true value of publicly-traded companies. Says Dane Mott, Analyst with JPMorgan Chase: “Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick.”
This is a great analogy, but to what extent should you believe the doctor? In the current situation it could be said that using mark-to-market accounting on mortgage backed securities is like the doctor telling you that you have brain cancer when in fact you are just suffering from stress-related headaches. I am keen to hear your views! …”
http://michellemalkin.com/2009/03/20/gibbs-on-geithner-uhhhhuhhhhuhhh/
The David Copperfield School of Economic Recovery
“…The Federal Reserve performed another empty magic trick yesterday to the tune of $1 trillion.
While the Kabuki Theater of AIG outrage played out in Washington, the Fed was pulling its David Copperfield School of Economic Recovery routine. They’ll be printing up a trillion buck and “pumping it into the U.S. economy”…by buying up bonds and mortgage securities…sold and backed by the government. Voila:
The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.
Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.
The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.
The illusion melts: …”
http://michellemalkin.com/2009/03/19/the-david-copperfield-school-of-economic-recovery/
The David Copperfield School of Economic Recovery, Pt. II
By Michelle Malkin
Now what?
Last week, the Obama administration brought us a $1 trillion Federal Reserve magic trick hatched by the David Copperfield School of Economic Recovery — printing up a trillion bucks and “pumping it into the U.S. economy”…by buying up bonds and mortgage securities…sold and backed by the government.
Today, hapless, truth-challenged tax cheat Treasury Secretary Tim Geithner officially unveils another $1 trillion magic trick. Instead of letting failed banks fail, we’ll have another desperately massive and massively desperate attempt to prop them up through a “public private partnership investment program.” Eager to get the still-unfolding Bonus-gate behind them (see “Geithner Aides Worked With AIG for Months on Bonuses” and “AIG paid over $218 million in bonus payments”), Team Obama leaked details of the plan over the weekend. World stock markets were up this morning, full of audaciously blind hope.
Geithner ’s WSJ op-ed this morning lays out some of the details he failed to deliver when he first unveiled his non-plan plan a month ago: …”
http://michellemalkin.com/2009/03/23/the-david-copperfield-school-of-economic-recovery-pt-ii/
Mark-to-Market Debate: Mark to Market Accounting Definitions
Mark-to-Market Debate: Difference between Mark to Market accounting and Fair Value Accounting
Mark-to-Market Debate: Fair Value Defined
Mark-to-Market Debate: Volatile Markets
Mark-to-Market Debate: Models in Accounting
Mark-to-Market Debate: What is OTTI?
Mark-to-Market Debate: Better than Mark-to-Market?
ENRON Created Mark To Market Book Cooking!
Mark to market
Pronk Palisades 