mark to market... the end?

did anybody hear any rumours that part of the US bailout package will be a relaxation on the need to mark assets to market?

what does that mean?

It means we can go back to thinking we’re rich

‘mark to market’ means you price assets at the level they will sell at or at the level other similar assets sold at.

imagine you have a gaffe in dublin, the one down the road goes for 50k, then yours is (if its similar) worth roughly the same, or it is the price that somebody will actually pay for it.

the issue is - in stock market and houses - what is the price when there is no market? so banks feel that they are doing an overkill on the valuations of assets in writedowns because when there is ‘no’ market the prices have to go well beyond what may be a fair market value. that doesn’t mean you keep prices high but it would mean (for instance) a three bed house in longford is not worth 15k instead of the 170k paid for it, anyway, that’s kind of the basics.

The value you place on assets on your balance sheet don’t need to reflect what the market would buy them for.

It means we are back where we started from .
Democrats - Banking
Republicans - Oil

lulz XX


I think you have come up with the freudian slip (apt spelling mistake) of the year. You should add it to the glossary. (This isn’t a dig at you)

Gaff: House to live in.
Gaffe: The second house you bought and now realize was a terrible mistake.

I believe it is being separately mooted and a return to the methods of valuation used before mark-to-market accounting existed is envisaged.

I’m not sure it will make much difference. The question has moved on from whether synthetic financial constructs are worth as little as the m-t-m valuations indicator to whether they are worth anything at all. It all boils down to the underlying assets - the quality of mortgage assets is still decreasing:

  • still rising unemployment
  • still falling home prices
  • still no activity in the market

As predicted, it has moved from subprime to Neg Am, to jumbo, to near prime, to Alt-A, and to prime. Commercial reals estate, LBOs, student loans, car loans, credit card debt, auction rate securities, muni bonds… all are going to have default rates never seen before. And no-one can tell what the rates of default will be.

This will mean two things:

  • the banks will be able to hold securities at discounted cash flow values (where income is generated) - but income is, in many cases, falling, so values will continue to fall and hence write-downs will continue.
  • for assets without cash flows, there will be no price. It is like moving from an auction system for a house to moving to an asking price. It is still not worth much if no-one will buy it!

The result is that uncertainty about the balance sheets of banks, insurance companies and pension funds will continue. The pace of the bailouts will slow, but they will turn from a torrent to a steady flow. It is, IMO, an admission of failure by the Fed. It is not going to be possible to reflate the banking system, so all that can be done is to slow its decline.

Welcome to Japan.

YM: y’know there is one red button that could be pressed and while it would solve it all (with lots of losers too) it is the one thing the ECB fear most - inflation

did you see the 3m money today? 1.999%! cheaper than the base rate! whatcha make of that? collapse in demand [no], wall of liquidity approaching [maybe?], fear of deflation to the point that 1.999% sounds good? luv to hear your thoughts!

It took Japan more than 5 years to get were the US has gotten in the last 5 months. Basel II and FASB 157 were defacto abandoned at least two months ago. The Bank Of America wobble last month shows just how far the situation has changed since Sept 2008. We are now back to 1980’s South American crises style disaster management. Thank God.

The damage has been done so now its time to dig out of the rubble, at least in the US and UK. The ECB looks like it wants to go through a full reenactment of the whole Japan crises, all 15 years of it.

Mark to Market did not cause the crisis but once everything started spiraling out of control it acted as an accelerant and spread through parts of the financial system that would have been virtually untouched under the old rules. Another case study of how ill-conceived regulation turns a crisis into a catastrophe.

Bingo. It really is amazing the extent to which Western politicians and technocrats appear to be trying to replicate the twenty year era of negligible interest rates and economic stagnation.

2)Quantitative easing
3)Abandon mark to market aka Zombie banks.
4)Maintain the mantra that housing asset prices must be supported at all costs

I’ve come to the conclusion that they believe the Devil you know etc. and are especially attracted to the prospect of a long period of ultra low rates to support housing.

On the contrary, on the way up, I believe it contributed to the problem hugely.

Look at it this way. You have a set of mortgage bonds that are paying 8% interest packaged in 2000. Under cash flow accounting, their value is fixed at the income stream that can only decline (by whatever the default rate is). Under mark-to-market, their value is relative to the current interest rate, that is, relative to what other assets are yielding. Along comes Mr. Greenspan who lowers interest rates to 1% post dot-com in an attempt to prop up the stock market. Suddenly your mortgage bonds are seriously valuable. You can reflect that increase in value as a gain on your balance sheet and borrow against it immediately, despite the fact that interest rates will rise at some point in the future. As you have more borrowings, you can pump more credit into the economy inflating a credit bubble. Everyone leverages themselves to the hilt and gorges on the low interest rates. Wild and foolish credit is underwritten. You write lots of subprime mortgages at 10% - they suddenly have a notional value of 108% of the underlying asset, giving you a full percentage point of yield above the prevailing interest rate of 1% (a 100% differential). You sell these on to someone who needs a fixed income and the runaway train gathers speed down the hill.

Still your greed for more cash encourages you to do some wizard financial engineering and slice and dice bad assets based on short historic default rates. You get more cash for your assets which gives you more to lend.

When interest rates do rise, you have to take mark-to-market losses, as the lower yield means the assets are less valuable. This results in you choking off credit at the same time that higher interest rates are increasing the price of it. Suddenly, credit is no longer cheap and default rates start to rise. You take further mark-to-market losses, but you would have to take these under cash flow models aswell, as default rates affect the cash flow. Suddenly, you have a flood of paper losses on the assets you are holding. The problem? You have leveraged them to the hilt with real money that has to be paid back in the short-term and which takes no account of your cash flow over time.

So why didn’t lowering rates again fix the problem? Once the loss rate (due to defaults, for example) exceeds the yield, the price has to go down. And as the loss rate is still increasing for different types of assets, you are in a spiral of losses. Again this applies both to cash-flow and mark-to-market. Both have a reducing cash flow, so the yield keeps falling. The overleveraged consumer can no longer be used to source newer securites to average out your losses - the consumer is going through the same process. As are companies that bought or developed commercial properties. As are companies that debt-financed LBOs. As soon as credit becomes tight, all suffer. The resultant economic downturn lowers the price of every asset.

My problem with mark-to-market accounting is as follows:

  1. It only works with falling interest rates. Rising interest rates cause losses. This removes the ability of central banks to control the cost of money.
  2. It increases the amount of credit available without recourse to the monetary authorities. Anyone in possession of m-t-m assets suddenly has more credit available to them without a change in the income stream of their asset. This applies to homeowners who remortgage as much as banks. The rental value of the house has hardly changed, so the cash-flow generating ability disappears.
  3. Despite all the monetarists in the positions of power in the world, asset price increases (and the extra credit they generate) aren’t reflected in inflation figures. Therefore the inflation of the money supply caused by these asset price increases is consciously ignored.

We have already had our hyperinflation, we just didn’t notice it at the time because the cost of goods was deflated by global wage pressures.

PS: usual caveat applies - this is a strictly amateur theory that may fit the facts as I see them, but almost certainly does not fit the facts as they exist, so please pick holes in it.

Accounting Brothel Opens Doors for Banker … refer=home

Let the next PONZI scheme start - equities will be GREAT VALUE!!

mark to market is just showing what a cos assets are worth. if the cos assets are worthless dont u think this should be reflected in the a/cs to give a true and fair view.

if u get rid of mark to market why stop there, why not just add a 0 to the companys profits, maybe the co should print its own $$ the GE dollar, the Ford Focus coin the GM Eagle.