Mark to market reform - IMPORTANT
Posted September 30th, 2008 by claytonslade
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This is a VERY important reform that house republicans are trying to add to the bailout. Bailout or no bailout, this reform is necessary.
"Another possible change to the bill would modify "mark to market" accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years.
Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided."
This is one of the many contributing factors to this "crisis". Banks and institutions like Fannie who do NOT have a habit of selling most of their loans were required to mark down the values of their mortgage assets based on the fact that other smaller players who often originated and sold loans were no longer able to get the prices they wanted. So if Bank of America plans to hold a loan forever, and that loan is performing, why should they care that Quicken is having a hard time selling their loans?
This forced big banks to claim paper losses on their balance sheets which restricted their ability to loan money out due to reserve requirements.
Whether or not you support the current fractional reserve system, you can probably agree that we should at least make the best of it while we have it. In order to do that, we need to allow banks to value assets appropriately. For a mortgage writing/flipping/reit type company, mark to market makes sense.
But for a bank that plans to hold loans forever, they should value the loan based the expected future cash flows, discounted for a risk of default. This is by the way how such loans have been valued for a very long time. This mark to market regulation only came about relatively recently during this real estate run up, to allow banks to post huge earnings. It was dishonest on the way up, and unfortunately, the dishonesty on the way down has caused this "crisis" - even though people are still paying their loans.
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Must keep the MTM Rule as is.
The only reason they want to eliminate the MTM rule is because they want to maintain an artificially high valuation on their worthless or next to worthless paper. These over inflated assets need to be liquidated ASAP. Otherwise we'll continue on the path of a regulated-quasi-free-market system. Well all know what is what got us here in the first place.
Does
anyone have comments on this? It seems that abolishing this mark to market acounting is is just another step in tipping the scale in favor of the the bankers and the large corporations.
If I wanted to borrow some money and use my home as collateral, the collateral that the bank would look at is what my home is assessed at NOW. I would never be allowed to borrow money based on a balance sheet with my assets assessed on a previous or future date.
Actually, I have heard that this MtM rule...
was very devastating and unrealistic when dealing with multi-year investments and that it SHOULD be repealed. In the case of your house, for example. Yes, if the bank was going to lend on your house today... they would want an appraisal at today's prices. BUT If they have already lent on a 30 year basis, and there is a downturn in values two years from now, that doesn't mean that the bank's loan is worthless. The 30 year loan allows them to go with the ups and downs during the entire 30 years, and in the end the investment of their money is usually worth it. To make them estimate values during a downtrend, when that isn't the purpose of a 30 year loan is comparing apples to oranges. So I think (from my limited knowledge) that this one is on the RIGHT track in some aspects.
There are other areas (stock options for executives, for example.. and the recognition of bad debts -- they LIE) where Mark to Market might be good so it is difficult to make a blanket statement. I just hope the congressmen know what they are talking about in this and have consulted some experts to design the change intelligently........ oh, excuse me..... hahahaha
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"Not armies, not nations, have advanced the race; but here and there, in the course of ages, an individual has stood up and cast his shadow over the world."
But,
my problem with it is that we, as little people, would never be able to use anticipatory gains to make our balance sheets look better.
The rule should include all of us or nobody.
It has already been implemented on a limited scale and on ...
a short term basis.
It will not make a difference either way in the long run.
Transparency is the only answer.
The markets are screaming for it.
WAHOR!!
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