Banks Seeking To Value Assets Higher Than Market Value

Banks are pushing for a change to banking rules that would allow them to ignore mark to market accounting for assets in markets that they deem “inactive.” In other words, if a bank is loaded with worthless assets but decides that the market for those assets is frozen, they can value those assets higher than the market would. Or to simplify it even more, they can create value out of toxic assets. And it looks like now the Financial Accounting Standards Board, which so far has been against this rule change, is caving in.

The Huffington post points out that this is an abrupt about-face for the FASB:

The move marks a shift for Robert Herz, head of the FASB, who recently told a panel of lawmakers that the harshest critics of mark-to-market accounting practices have been the very same banks that have gone under when regulators would not let them adjust their accounting. Herz and other regulators have been under intense congressional pressure to reform the rules.

“I will tell you that I get calls and visits from some of those institutions that are now in government hands, about two weeks before they get taken over, trying to get the accounting changed,” he said. “Clearly some of the most vocal opponents of fair value and mark-to-market have been some of those institutions that ultimately failed and have had to have billions of taxpayer dollars put into them.”

If you’re interested in having a say on this issue, read the full article at Huffington Post and check out the info below.

The public is entitled to comment on the rule change until April first. Comments can be e-mailed to director@fasb.org — File Reference: Proposed FSP FAS 157-e. Or send snail-mailed Technical Director, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, File Reference: Proposed FSP FAS 157-e.

“New Rule Would Allow Banks To Choose Values Of Their Assets” [Huffington Post] (Thanks to Marge!)
(Photo: The Sierra Club)

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  1. gilamon says:

    Sweet. I’m assuming this will apply to me too. Right?

    It will be great telling everyone how I’m now worth a billion dollars with my busted screwdriver collection. The market for those is inactive but I’m pretty sure they’re worth $100 million each.

    Gil

    • wickedpixel says:

      @gilamon: I plan on doing the same with my parents’ old WebTv unit. The market is obviously frozen, so I’m going to declare it worth $40,000 and add it to my property insurance.

    • Blueskylaw says:

      @gilamon:

      Thanks for the tool idea gilamon.

      Will the FASB suspend MTM and let me inflate the value of my rusted Sears sockets.

      It seems that the originator of the sockets, Sears, isn’t even interested in them.

  2. HIV 2 Elway says:

    Heard a great mark to market discussion last week. Everyone was fired about about what it would do to their balance sheets when prices were going up but everyone knew it would be just as painful if prices fell.

  3. laserjobs says:

    There is never a demand problem, only a pricing problem. Someone will ultimatly buy an asset if priced right. The problem here is the banks don’t like the prices being offered.

  4. Applekid ┬──┬ ノ( ゜-゜ノ) says:

    Did they see the last South Park about the 97 trillion dollar valued Margaritaville and come up with an equivalent idea of their own?

  5. T. Daniel Garfield says:

    This isn’t strictly a bad thing. Mark to Market is partially responsible for so much financial trouble. The fact is that when the bank owns a house it is worth something, even if its not a lot its still worth something. So the bank owns all these houses that have been foreclosed on and the banking rules require them to mark those assets as having zero value!

    All of the sudden a solvent company becomes insolvent on paper because they are forced to account for assets as having zero value.

    On the flip side there is a problem of account for those assets as being worth too much, there is a balance that has to be maintained.

    • Brontide says:

      @T. Daniel Garfield: Not so fast.

      The banks don’t own the house, that house still has a value. The banks and other large investors have a tranche of a MBS whose revenue stream has dried up and will never be able to pay off as anticipated due to falling home prices.

      Essentially they have a bankrupt security. This is no different than holding bear stock when the company went bankrupt, you took a gamble with an investment and it didn’t pay off ( and never will ).

      • Anonymous says:

        @snowmoon: Not so fast either. Would you consider it fair to have to mark down assets you planned on holding for a few years due to the economy, which presumably would rise in value when you would want to sell the asset? Of course not, so why should you have to mark it down to the current selling price if you don’t plan on selling it currently. This mark to market, enacted on November 15, 2007, is exactly what has exacerbated the crisis, if not initiating it itself!

      • BuildnCastles says:

        @snowmoon: Couple problems with your explanation:

        1) A tangible asset,like a house, is not the same as holding stock in a company.

        2) The house will eventually regain value and the revenue stream will return.

        Granted this may take some time but you cannot simply compare defaulted home loans to common shares of a bankrupt company, they are not the same thing.

        • Inglix_the_Mad says:

          @BuildnCastles: Big problem for you and the banks: No one thinks it’s worth that much right now. So if the bank had to raise money by selling the “asset” in a regular sale or auction, they couldn’t get that much (or in some markets HALF that much) so by definition the banks don’t have the assets to cover.

          Long story short: They’re really bankrupt in practical terms and the only thing holding most TARP banks up is the big, nasty, ebil gubbermint. The only way you should give up on this rule is if you terminate all FDIC insurance.

          That’s the FAIR trade here. I’ll let the banks give up Mark to Market if they give up FDIC insurance and ALL government monies received.

    • Drew5764 says:

      @T. Daniel Garfield: Sure, they can value it at whatever they want. They should have to pay the property taxes on whatever they value it then. I think they’ll think twice about over valuing it then.

    • RedwoodFlyer says:

      @T. Daniel Garfield: Please consider knowing WTF you’re talking about before you comment…..

      Those forclosed homes don’t have “ZERO” value…they have current market value. It may feel like nothing to have the home you bought for $800,000 to be worth only $150,000….but that’s reality. The formula is the same one banks have used for years when appraising homes before they give you a home loan. It’s not to different from what the property tax appraisers use either…. It works because it prevents behind the scenes manipulation of balance sheets.

  6. PunditGuy says:

    This is a glass half-empty or half-full situation. If you believe that the hype about these assets has damaged their current value but they are still fundamentally sound, then mark-to-market is unfair and short-sighted. If you think these assets will never have any value — and you’re a taxpayer being asked to buy them — you want that low, low “market” value.

    Wall Street isn’t making it any easier for us to sympathize, what with the 3-figure lunches and gazillion-dollar bonuses for failure. The best solution right now — IMHO — is to pull their butts out of the fire with this Public/Private Partnership and then regulate the financial industry to within an inch of its life so that when the capitalists screw up next time (and there will certainly be a next time) the cleanup won’t be as painful.

    • rugman11 says:

      @PunditGuy: There’s a great YouTube video out there showing how the Public/Private Partnership will allow banks to borrow government money to “invest” in their own securities (at full price of course) for pennies on the dollar. Basically, the FED and the American taxpayers are going to end up on the hook for all of the toxic assets.

    • Brontide says:

      @PunditGuy: If these assets have so much value why doesn’t someone with cash ( like buffet or hedge funds ) buy up all of these valuable items? Are the taxpayers really so gullible as to believe that all these other investors are passing, but the assets are really, truly valuable?

      That’s because they know better.

      • Coelacanth says:

        Also, even if a large percentage of homeowners end up getting in trouble and going into foreclosure, and let’s assume the house value is worthless…

        Odds are a large percentage of those mortgages are still going to be paid in full. What that percentage is, I wouldn’t be able to hazard a guess since I haven’t seen the data, but even if 25% of mortgages essentially become worthless (which I’d take is beyond even the most bearish assessments), then that means 75% will pay as agreed.

        Thus, the fair price should be 0.75x face value. Not worthless.

        Add the intrinsic value of the home, and suddenly the securities market doesn’t look so scary.

        Too bad psychology amplifies risk and reward, causing an “abnormal market.”

      • quail says:

        @snowmoon: The mortgages were bundled into those secured credit transaction thing-a-ma-bobs and sold. Those were bundled again down the pipeline and sold again. In many cases true ownership of the mortgage, or so I hear, is a complicated mess to pin down.

        But some of this will become a moot point in some locales. Cities and counties have found that no one is paying taxes on foreclosed / abandoned properties. Local municipalities are getting sick of it and have started actions to take over homes and sell them to take care of the taxes. That’s why you can buy a home in Detroit for a couple of grand. It’s to pay off the taxes.

  7. johnsakalauskas says:

    It doesn’t surprise me as the banks have already found a way to game the system by purchasing assets for 30 cents and then selling it to the PPIP for an inflated price. Pocket a quick huge profit with no one being any the wiser.

    [www.businessinsider.com]

  8. JGKojak says:

    Yeah, I have $1000.00 in my bank account, but I’d like to pay off that dang credit card, so I’ll just pretend my $1000 is worth $10,000, OK?

    What could POSSIBLY go wrong?

    • TheBursar says:

      @JGKojak: Its more like:
      My house is worth 200k and still nobody wants to buy it. However now that i estimate it at 10mil, I’d like to take out a home equity loan on that amount.

    • MooseOfReason says:

      @JGKojak: Actually, if you put $1,000 in your bank account, the bank is allowed to loan out $10,000. It’s called “fractional-reserve banking”.

      But “what could possiblygo wrong”? Oh… lots of things.

      ;)

  9. full.tang.halo says:

    And we seem to have come full circle, mark-to-market was one of the accounting rules abused by Enron in it’s over inflated #’s, now it’s the “reason” assets are worthless, irony anyone?

  10. Wit says:

    This seems like a very bad idea. First they get into trouble by fictionally eliminating the risks on assets (thereby increasing the value) and now they’re trying to fictionally increase the value? I’m not an economist and I warn you that I’m dyslexic with a bit of discalculea, but could someone explain to me how this sort of further accounting shenanigans would be a good idea?

    If banks are allowed to determine the value of their assets without regard to current prices, investors have less trust and confidence in the integrity of their books and their assets, which could further freeze markets and further drive down prices.

    The proposed FASB rule, according to a release from the agency, “provides a framework for measuring fair value and a definition of fair value that contemplates an orderly transaction between market participants, not a forced or distressed sale.”

    But isn’t a forced or distressed sale more likely than not what’s going to happen? Are backs then irate that their artificially inflated security assets are showing a value far less than it had in its inflated state and opposed to a more or less actual valuation of the security because it would cause people to have less confidence in them? How is this not just an attempt to create another bubble?

  11. tankertodd says:

    This makes a lot of sense. Mark-to-market itself implies that there is a market. When there are very few buyers, is that a market? Was it supposed to be “Mark-to-OBO?” It’s like saying that my TV cost $500 a year ago and I need to sell it, but since I can only find one homeless guy willing to buy it for $10, is my TV really worth $10?

    It gets even better. What if the TV generates cash flow? Shouldn’t I get credit for the fact that the asset generates a return? My understanding is that current mark-to-market doesn’t reflect that.

    This revision is good for consumers – if mark-to-market stays in place today, banks will be forced to sell assets to maintain a capital level they really don’t need. Some banks would artificially fail, with FDIC and the taxpayer paying for the pleasure. Mark-to-market is a key driver to the downward spiral we’ve seen.

    • Jesse says:

      @tankertodd:

      Mark to market (MTM) is a good valuation method when the market is working properly. The problem with the mortgage backed security market right now is that it isn’t. FASB doesn’t like the idea of deviating away from MTM since it creates a transparency issue, which I understand. However, I don’t think this the end of the world.

      This isn’t the first time FASB has bowed to Congressional pressure. If you want a good case study, look at the history of stock option expensing.

      • David Brodbeck says:

        @Jesse: I just don’t see how it’s supposed to help. I thought the reason banks weren’t lending to each other was because they didn’t know who had real assets and who was on the brink of failure. Doesn’t eliminating MTM just further cloud the issue by letting them sweep their bad assets under the rug?

        • zonk7ate9 says:

          @David Brodbeck: No, the banks aren’t lending because they’ve had to mark the value of so many of their assets to very low values thus making them look insolvent. If they lend out their cash they look even more insolvent which could evnetually lead to a collapse.

          • chrisjames says:

            @zonk7ate9: But lending against assets in a frozen market? That’s highly irresponsible. Once the markets are moving again, the higher valuation becomes meaningless. Mark-to-market isn’t just an accounting rule, it’s a cog in the machine; it will adjust the asset value if the market picks up again. If the market picks up again, these banks will seem insolvent all of a sudden, and with no contingency to deleverage in time. It’s short-sighted to assume that the market will do anything but turn around eventually (maybe decades from now, but eventually), but the price may take even longer to rise, if it ever does.

            In short, this is a fool’s bet that the status quo will be maintained long enough for the banks to do whatever it is they’re planning. From experience, we can guess they’re drafting up “cut and run” plans right now.

            Actually, artificially raising the paper value of an asset sounds suspiciously like what started the snowball rolling down the hill in the first place.

            • Brawndo_The_Thirst_Mutliator says:

              @chrisjames: If Im wrong on this please correct me, but, isn’t the value of anything determined by what someone’s willing to give you for it? So yes your tv is only worth 10 dollars.

            • zonk7ate9 says:

              @chrisjames: I never said I condone it, I was just answering a question. In fact, I agree with you about it being highly irresponsible. The Government should really be delivering capital to the banks the way they accidentally did with the stimulus checks (trickle-up effect, the true economic principle). Send me another $600 check and I’ll use it to pay off my credit cards justl ike last time, now consumers and lenders are both liquid.

    • Trai_Dep says:

      @tankertodd: If “the market” only counts when bubbles are percolating, then something’s broken. They had no qualms marking up assets during their ascent; gravity is a cruel mistress.

    • Farleyboy007 says:

      @tankertodd:

      My understanding of the concept of mark to market is: If a business unit was forced to close their doors today, what could they get for that asset. if there is no market, then i would percieve that to be a worthless asset. It seems like, there is a market, and that asset is priced at $0. if these banks are allowed to give their toxic assets a value, and then are forced to liquidate their assets one day, their balance sheet is essentially useless.

    • j-o-h-n says:

      @tankertodd: Yes, in that case, $10 is exactly the value of your TV.

    • KyleOrton says:

      @tankertodd: Will banks then take crappy personal items of mine as collateral because of sentimental value?

      Better yet, are they willing to buy more securities at this value?

    • wildhalcyon says:

      @tankertodd: Your television is worth $10. Suppose that you have a $1/month revenue stream on your television. How much is it worth?

      Well, the bum with $10 is still the only person willing to buy your television. It doesn’t matter if you bought it last month for $500, or even if you don’t want to sell it right now. If the highest price someone is willing to pay for your television is $10, then your television is worth, at most, $10.

      Its the same thing with the housing market. In my area, average prices went up 2.5x between 2001 and 2006. Now prices have fallen about 20%. Yes, that’s a tremendous drop historically, but prices are still nearly double what they were in 2001, far higher than inflation can account for it. What does that mean for me? As a first-time homebuyer it means I’m not buying a house until I can afford one. $600K is a little too much for a decent detached home in a good neighborhood.

      I’m like the bum with $10. I’ll buy a house when someone offers me one for $350K.

      • DaoKaioshin says:

        @wildhalcyon: i think the comparison is that the tv has an intrinsic value beyond what people are willing to pay, i.e. scrap

        and some of these toxic assets will still generate revenue and mtm will hide that

        these assets may be ‘toxic’, but they’re still worth more than anyone currently in the market (likely who has toxic asset undervaluation issues of their own) is willing to pay.

      • chauncy that billups says:

        @wildhalcyon: The television price is not a good analogy for troubled bank assets. In this market, when an asset is marked to 0, nobody is WILLING to buy it because they cannot resell it at higher value. A better analogy would be – supposed a federal depreciation table forces tankertodd to price his tv at $10 because it is a year old, and as a result, no one will buy it because they themselves cannot resell it at higher value. Also, if it only costs $10 there MUST be something wrong with it, right? In this analogy, much like the current problem, federal regulation is interfering with proper market functioning.

        Mark-to-market, as Warren Buffett said, is fine for disclosure purposes. But Banks should not be FORCED to price assets that they know are worth more at the troubled market value, because that value has no meaning.

  12. Anonymous says:

    If handled properly, this isn’t a bad thing. Many of these banks have positive and sustainable cashflows, but the accounting rules force them to account for the dollar value of assets IF THEY SOLD THEM THAT DAY and treat it the same way. But that ‘s the problem: if the banks aren’t selling the house, its because they think they can do better down the line. The rules now are only causing troubled banks’ balance sheets to swing even more wildly, exaggerating the effects of the broader market and scaring investors. Obviously, ignoring the value of assets as an indicator of financial health is just as stupid, so some kind of balance needs to be struck. We’ll see if the government manages to do just that (I’m not holding my breathe).

  13. Trai_Dep says:

    If this same rationale were adapted to dating, then every man would possess a 16″ purple sheathed one-eyed monster.

  14. cametall says:

    So they’re going to change a big part of GAAP then?

    I believe assets are to be valued at fair market value, unless FMV isn’t available, then it’s book.

    I’ve had this pounded into my head for the past 3 years and now it’s about to change. Ergh…

  15. benson304 says:

    Mark to market is great when a market truly exists for the security being valued. However, the current economic situation does not provide a valid market for these securities to base their value on. There are different levels of inputs of course, Level 1, Level 2 and Level 3.

    Level 1 means that there is an active market for the security and that it can be clearly valued within that market, obviously not the case. Level 2 bases value upon other observable market prices for assets as no direct market exists. Level 3 is when there is no comparable market and the management then has to use professional judgment to determine the value of the assets and any sort of impairment that might exist. This is where the problems start. When you introduce this judgement call, who determines the value of these assets? You bring in the management’s opinions on the possible future markets for assets.

    This proposal at first blush sounds like it could be a problem and eliminate a level of transparency, but at the same time it is correct in that a lot of these assets do hold some value at least. They haven’t been entirely impaired. A house is still worth something if a bank owns it, it just determining how much that’s the problem and is why the rules are currently written in such a way to eliminate the asset’s value entirely.

  16. Shane Elliott says:

    I can’t help but think; couldn’t the banks have just exercised some control and not flooded the market with the foreclosed homes that they took possession of? Prices plummeted because they themselves engineered a high supply, low demand environment. They might have had to pay some caretaker fees and the like, but couldn’t they have just sat on the majority of their new assets and just trickled them onto the market slowly enough not to depress market values?

    • craptastico says:

      @Shane Elliott: the problem is all banks would have to agree to it. if one bank decides to hold onto their inventory for purposes of strenghtening the market they run the risk of being the last guy holding the bag if everything drops in value. even if all banks did decide to do it, it’d probablyu be considered collusion, just like if the oil companies artificially lowered supply to juice up prices.

  17. craptastico says:

    The problem with mark to market in this instance is that there is not market. these assets are still providing revenue and and should have an intrinsic value, but when nobody’s buying, everything is technically worthless.

  18. Matt says:

    I love how so many people seem to forget econ 101. The price for an item is determined by supply and demand. No demand? Abundant supply? Your price is going down or nonexistant. Don’t like the price being offered? Hold on to your items and wait for that to change. This is how a free market functions. Sellers are not pleased with the low price of their goods and refuse to sell. This decreases supply which in turn will eventually increase the price.
    I know your balance sheet holds a large quantity of assets that are no longer valued as much, but is lying about what they are really worth the right thing to do? Just because there is no market for your item doesn’t mean you have to liquidate the item to rectify your balance sheet. Perhaps, instead of basing such large swaths of your balance sheet on wildly fluctuating assets in order to leverage yourself 30 times over, you should have relied on something you understood. Things like capital goods, equity, etc. Using an inflated market (dot com stock, houses, etc) for your ‘assets’ so that you can go out and get into the CDS market that no one understands is a very stupid thing to do. Perhaps, as capitalism dictates, those who act stupidly should be punished. Not allowed to lie about their assets any more.

    • Brawndo_The_Thirst_Mutliator says:

      @Matt: Now how does that actually work with nuclear waste? Its continuously being created. I don’t think anyone “wants” it. So the price of nuclear waste must continuously be falling. In fact I bet they couldn’t even give it away. They’d prolly have to start paying people to take it…oh wait. nm.

  19. chrisjames says:

    Makes sense, in a pointless way. If the market is frozen, they could value the assets at anything they wanted. They could value them in imaginary currency at nonsense values, like three-umpteen flogoolian stained-glass Unicron heads.

    Okay, realistically, they can value them at what they think is fair, so long as the markets aren’t moving. Once they start moving, the valuation becomes meaningless, and everything will revert quickly to mark-to-market rules. More importantly, those assets are frozen so long as their coupled markets are frozen, so any valuation will appear as an obvious blind.

    For instance, I own a few faded T-shirts from various company picnics. I could value them at thousands of dollars despite there being very little market for them, but if I try to insure them at that value, the insurance company would probably get a little giggle out of it.

    • Shane Elliott says:

      @chrisjames: it would actually matter if they overvalued the assets during the frozen market. The reason? Government bailouts. If they can freely fiddle with market values however they want, then it will be us that pays the imaginary prices to buy up those assets.

  20. JollyJumjuck says:

    Here’s an idea: Have the executives of these banks back up the higher prices with their own money. If an asset has a market value of say $100,000 and they want to value it at $200,000, if the asset ends up being worth closer to $100K, have the executive pay the difference to the bank out of his own pocket. By making people RESPONSIBLE (hey, what a new concept!) for their mistakes, we’ll likely see a lot more care involved in valuing these assets.

  21. humphrmi says:

    Here’s the problem with the current mark-to-market rules.

    Let’s say that you want to sell your house. OK, not the best time, but comps in your area are still a few points above what you paid, and you have lots of equity, so you’re good.

    You put your house on the market. You expect it to take about 6 months to sell, which is fine with you.

    Month number one, nobody makes any offers on your house.

    Well, according to the current mark-to-market rules, congratulations! Your house is now worth zero. Take it off the market, because it’s worthless. You have no bids, thus your mark-to-market value is zero.

    Artificially inflating values may not seem like such a great idea, but lets not forget that these “toxic” assets have underlying intrinsic value that will recover someday.

    • Trai_Dep says:

      @humphrmi: Inherent in a market price is the assumption that the seller sets it at a market-clearing level. In your example, it’s not zero, it’s some figure between the asking price and zero.

      • humphrmi says:

        @Trai_Dep: Not the way current mark-to-market rules work. That’s why they’re changing them, to allow banks to use some figure between the asking price and zero.

        • Trai_Dep says:

          @humphrmi: Wouldn’t a better solution be to use a bid that cleared the market?
          I’m leery of a business being able to declare value arbitrarily between 0 and their too-high-bid that resulted in no takers. Seems rife with potential for abuse, no?

        • Trai_Dep says:

          @humphrmi: And, it seems that the seller needs to lower his price and resubmit (repeat) until there’s a sale. His not following this step then throwing up his hands demanding m-t-m rules be abolished seems self-serving.
          It’s hard to be sympathetic to people in this quandary since they were remarkably quiet while the asset prices on their books appreciated. If fact, I’m sure their bonus were juiced quite a bit as a result.
          They can’t really turn around now and complain. Maybe next time a bubble’s forming, they won’t complain so vociferously when sensible measures to prick the bubble are rolled out.

          • humphrmi says:

            @Trai_Dep: By all means, I agree that the solution is not perfect. But neither was the original rule. And I’m not defending the actions of the people who profited during the run-up and then later expect the taxpayers to help them after their balance sheets went bust. There’s little sympathy amongst even people in the industry. But meanwhile, I think that minor adjustments that might help us weather the mess are a step in the right direction.

            • Trai_Dep says:

              @humphrmi: I see what you’re saying, and it has some validity. But I’m concerned that “minor adjustments” will quickly lead to widescale, fantasy-based balance sheets that are only tweaked in the direction that inflates poorly-run institutions’ books.
              I think there are hazards when trying to normalize rules to fit abnormal times, which we’re living through (but hopefully won’t last too much longer). If that makes sense. :)

              • humphrmi says:

                @Trai_Dep: Agreed. I’d love a set of rules that applied in good times and bad.

                If I can, I’ll suggest why the rules need to be changed for our abnormal times: It’s not the hugely down market that is predicating this change. It’s the lack of any market. The existing mark-to-market rules worked in good times and bad – if you put assets on your balance sheet and things went pear-shaped, you took it in the arse. If the market for your balance sheet item went up, you profited. If the market went down, you ate your crow. It was as things should be, as free markets go.

                The problem arose when the market disappeared completely. It’s a complete disfunction of markets… we’re not talking losses, we’re talking complete loss of market function in some cases. In our chat, we’ve been talking about bid and ask, but picture a market completely void of bids. It’s not that the asking price is too high – it’s that there are simply zero, zilch, nada, no bids whatsoever… and not just one week or month, but quarters… fiscal years… beyond anyone’s comprehension of how long some markets would disfunction.

                So its not simply a matter of the seller lowering his ask. The sellers could lower their asks to a penny and the market is still absent bidders. The absence of any bidders whatsoever causes the mark-to-market rules to fail. And the adjustments recognize that probably, with any luck, someday, those markets will eventually resume normal function and bidders will return.

                I know it ain’t perfect, but it’s all we’ve got right now.

  22. Spectre1125 says:

    Yay! People are getting to the point they can spend money again, AND the government is kicking in to first time home buyers, AND they just publically smacked us in the mouth so we can get away wtih things again… What should we do? I KNOW! We can take all this crap property no one wants to buy, swap the stickers, wait for the initial wave of buyers, and BOOYAH! Six months later, no one knows any better and we have a bunch of people ignorant to our ASSinine, convuluted processes and policies scrambling to get into any “deal” they can while STILL trusting us to actually help them despite centuries of trying to control the world.

    Certainly does make flipping a house easier when you don’t have to do anything to it and it skyrockets in value anyway. This is one of those things where it has come so full circle you almost think Capital One/BoA/whoever did it on purpose. Are they EVER going to stop trying to ram it into us? We have literally GIVEN THEM MONEY at this point and yet they are STILL doing what they can to make sure they score the extra buck off our backs.

    I am so sick and tired of the way modern society perpetuates this sort of stupidity on a massive scale. This is no different than their overdraft fees, “free” checking accounts, or any of the other crap they try to pull while we pay for the priviledge of letting them trade our money to make EVEN MORE cash. And we put up with it!

    It’s seriously driving me to nationalization, which I thought is something I would never approve of. Maybe banks need to become a utility, at least until they figure out how to be accountable to their “customers”. I understand that banks are just another business, but this is stupid. These are the people that run THE most powerful force in the world: cash! These banks might as well be opposing governments with how they act and try to influence the lives of other people. All they need is an army or police force and they’re set.

  23. SillyinPhilly says:

    Currently under FAS 115 an asset would not be revalued only if the owner demonstrates positive intent to hold the investment to maturity.

    From the press release:
    Market-related losses would be recorded in other comprehensive income if it is not likely that the investor will have to sell the security prior to recovery.

    This means that that equity would be lowered by a change in unrealized losses. How to do this without lowering the asset value is a mystery to me. The credit half of the entry has to be posted somewhere.

    FASB has other rules that are meant to shield the statements from extreme volatility. The most important regards the treatment of reporting for foreign subsidiaries whose local currency is hyper inflationary. FASB allows you to carry their balances in USD.

  24. Enkael says:

    Watching so many arm chair economics flail about is amusing.

    Any really Consumerist, using the Huffington Post? Can you make your bias anymore hysterically obvious?

  25. kwsventures says:

    Problem is nobody really knows the value of these bank assets.

  26. chauncy that billups says:

    GOOD. Mark-to-market valuations are part of the reason why these banks are collapsing. The downward spiral of forcing these assets to market value as a result of regulatory rather than disclosure reasons results in valuable assets being worth 0, unsellable, and therefore forces a well-capitalized bank to write down massive losses on paper, which results in investors losing confidence and pulling their money, which results in REAL losses, which results in institutional failure.

    I will add the words of none other than WARREN BUFFET (paraphrased):
    “Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.

    We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It’s not so fine for regulatory purposes. It doesn’t just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.”

    • Anonymous says:

      @bilups:
      OK, let’s see if a little education helps.

      I’ll use an analogy to show why ‘mark to market” is bad in the current environment.

      You are a landlord with a house you are renting out. You bought the house at $200,000. You have a $175,000 loan. You have to pay $1,000 mortgage every month. You have a renter paying you $1,200 every month. You have income, are making a $200 profit, and have no problem paying the mortgage.

      Now, in the current environment, the value of your house has fallen. An equivalent house down the street just sold for $120,000 – who knows why, maybe the owner was desperate for cash, but it doesn’t matter why. The only thing that matters is no houses are selling, and the last sale was for $120,000.

      Now, mark to market would say that because the last equivalent house sold for $120,000, your house is now worth only $120,000. But you owe $175,000. So, technically, on the balance sheet, you are insolvent. You should be forced into bankruptcy.

      But you have a renter. You are paying your monthly mortgage. So why are you insolvent? As long as you have a renter and can pay your mortgage, does it matter that the last house sold for $120,000? – especially if you don’t need to sell your house today.

      Now apply this to bank A. they hold your loan. It’s worth $175,000. They receive your mortgage. No problem. Now, bank B just sold a similar loan to an investor for $120,000 (maybe it needed cash – doesn’t matter). Mark to market says that because of the last sale of similar loan, bank A’s loan is only worth $120,000 – even though bank A is still getting your monthly mortgage and has no problem or reason to believe that it will not get all of it’s money back. So what is the real value of the loan?

      Should you, the landlord, be forced to bankruptcy. Should the bank be forced to re-value it’s $175,000 loan to $120,000 even though it’s getting it’s payments?

      Of course, this is simplifying things, but the idea of how mark-to-market does not work when there is no market should be clear.

      Banks want to be able to value the loan based on the future cash stream, the monthly mortgage that is coming in, not on the last distressed sale price. Just like the landlord would value the property by the $200 profit you are making every month, and not by the fact a house down the street sold for $120,000 yesterday.

      Also, on this basis, it doesn’t make sense to say the bank is insolvent, just like it doesn’t make sense to say the landlord is insolvent.

  27. Blake Kelly says:

    saying that there isn’t a market is garbage, I’ll pay a dollar for them(I can always go bankrupt lol). Now there is a market.

  28. RogueWarrior says:

    Seems to me that the banks or the real-estate holding companies know something we all don’t. Exhibits A through five-thousand Zs: New, never been occupied homes that have been for sale for YEARS are STILL for sale at or nearly at the same price they were listed at originally. Granted there’s a ton of severely marked down stuff out there but it’s usually in a cookie-cutter development in the middle of stinking nowhere. But it appears that the really nice stuff that’s been sitting on the market for years isn’t being marked down at all. There’s no effort whatsoever to turn it into cash. Are the banks and holding companies sitting on what they think is the the good stuff hoping to sell it for big bucks later?

  29. Drew5764 says:

    I’m going to start revaluing my A-Rod and Roger Clemens baseball cards for a lot more than I can find a buyer for. I mean, despite the fact that it turns out they weren’t worth what I paid, I should be able to get something that I deem fair, right????

  30. quail says:

    Some accounting rules and government bureaucratic financial massaging can be asinine at times. Whether this one is or isn’t, I haven’t got a clue. Banks shouldn’t be able to create whatever value they want but then again a house does have value even if the mortgage doesn’t. I know. It’s the logic that lead the banks into lending to people who’s credit was too bad to even rent an apartment.

    But still. I’m not sure which is the right argument for this situation.

  31. ageshin says:

    Hibi jibi alla kazam. Yes sir just step up and take this pill and it will raise the dead, cure the common cold and make things bigger! It was just this kind of bs that got us into this mess, and they are at it again. Remember just relax the rules and everything will be ok. Take radioactive waste, just relax the rules a bit and your problem is solved, a new stuffing for beds. Maybe us humans are, like the dodo bird, just to stupid to live.

  32. MooseOfReason says:

    Get rid of mark-to-market.

    No one, besides the government, would buy the toxic assets. The market knows they’re worthless, and some banks would go bankrupt, if the government didn’t spend your money buying those toxic assets.

    However, since Congress isn’t likely to listen to common sense, this might make for larger bailouts. Or more blockhead 90% tax ideas.

  33. Anonymous says:

    Money, like religion, is an act of faith. Otherwise, without a gold standard, all you have are printed pieces of papers, or streams of electron.

    It is the popular trust in money as a mean of transaction that grants it any value whatsoever,. It has no intrinsec value of its own.

    The same rule then applies to valuation: Anything is only worth as much as what you can get for it. Land, perhaps, but house, a car, a painting have no intrinsec value. The value only exist if there is a market for them.

    For instance – what is the value of a beach front property, if rising oceans submerges it 5 years from now? It will be worth something different depending on intended purpose, from zero to a lot. The market asssigns it value.

    I think Tom Wolfe’s book on the creation of value in the art market has some great insigth that should apply to the financial market.

    How then to value anything wiothout a market? We got in trouble because we believed financial intruments were worth something, only to find out they were not. They were papers and electrons.

    Is it so hard to wake up from that group hallucination that we feel the need to fall back into it?

  34. xkevin108x says:

    They were doing this all along and the local governments have gone along with it because inflated values equate inflated personal property tax bills. The whole system is a sham.

  35. savdavid says:

    Have their cake and eat it, too!

  36. RedwoodFlyer says:

    Awesome idea! Here’s the formula they should use to predict the future value of their assets: