Mark to market?

[Larry Gude (Premo)]

Last weeks question was 'short selling', this week is 'mark to market'.

Did you know banks, troubled banks, have more cash now than they did 6 months ago?

Did you know what most of the losses are paper loses, due to mark to market, and that actual cash flows are, and have been, just fine?

Mark to market needs to GO.

[ImnoMensa]

I dont even know what Mark to Market is. I googled it and still dont understand it.

I do know who will be paying for all these bad schemes and it wil be the 95% that Obama promised tax breaks to. In the end it's the taxpayer that gets the bill.

[Larry Gude (Premo)]

Originally Posted by ImnoMensa

I dont even know what Mark to Market is. I googled it and still dont understand it.

I do know who will be paying for all these bad schemes and it wil be the 95% that Obama promised tax breaks to. In the end it's the taxpayer that gets the bill.

Mark to market accounting demands that there be a constant balance sheet value for a given asset that changes daily depending on all sorts of factors.

So, if you are AIG and you bought an asset for $1 billion and the market for that asset falls today, this week, this month, then mark to market says you have to constantly update your balance sheet which could make investors uneasy and they sell your stock, lowering your value, more stock owners sell in response to that, etc.

If you bought an asset for $1 billion and could leave it on the books at $1 billion for at least a quarter if not longer seeings how you're not even trying to sell it, then your books are stable.

The idea was to get a more 'realistic' picture of what balance sheets should actually look like. The down side is, like your house, if you have to value everything TODAY, right now, the value is likely to be way less in a recession, unrealistically less.

If you bought your house for $200,000 and the market is asking $150,000 these days yet you had to account for it RIGHT NOW, mark to market, it might be worth only $100,000 or even less if you had to sell it today or this week.

Mark to market played a key roll in making all of this mess far worse than it should have been.

[somdrenter]

Originally Posted by Larry Gude

Mark to market accounting demands that there be a constant balance sheet value for a given asset that changes daily depending on all sorts of factors.

So, if you are AIG and you bought an asset for $1 billion and the market for that asset falls today, this week, this month, then mark to market says you have to constantly update your balance sheet which could make investors uneasy and they sell your stock, lowering your value, more stock owners sell in response to that, etc.

If you bought an asset for $1 billion and could leave it on the books at $1 billion for at least a quarter if not longer seeings how you're not even trying to sell it, then your books are stable.

The idea was to get a more 'realistic' picture of what balance sheets should actually look like. The down side is, like your house, if you have to value everything TODAY, right now, the value is likely to be way less in a recession, unrealistically less.

If you bought your house for $200,000 and the market is asking $150,000 these days yet you had to account for it RIGHT NOW, mark to market, it might be worth only $100,000 or even less if you had to sell it today or this week.

Mark to market played a key roll in making all of this mess far worse than it should have been.

So, if I purchased a product for $200,000.00 and right now it’s worth $150,000.00, I can simply say “no”, it’s worth $300,000.00???

[aps45819 (Premo)]

Originally Posted by somdrenter

So, if I purchased a product for $200,000.00 and right now it’s worth $150,000.00, I can simply say “no”, it’s worth $300,000.00???

Not legally

[Larry Gude (Premo)]

Originally Posted by somdrenter

So, if I purchased a product for $200,000.00 and right now it’s worth $150,000.00, I can simply say “no”, it’s worth $300,000.00???

You're gonna have to explain that a little better for me.

[This_person]

Originally Posted by Larry Gude

Mark to market accounting demands that there be a constant balance sheet value for a given asset that changes daily depending on all sorts of factors.

So, if you are AIG and you bought an asset for $1 billion and the market for that asset falls today, this week, this month, then mark to market says you have to constantly update your balance sheet which could make investors uneasy and they sell your stock, lowering your value, more stock owners sell in response to that, etc.

If you bought an asset for $1 billion and could leave it on the books at $1 billion for at least a quarter if not longer seeings how you're not even trying to sell it, then your books are stable.

The idea was to get a more 'realistic' picture of what balance sheets should actually look like. The down side is, like your house, if you have to value everything TODAY, right now, the value is likely to be way less in a recession, unrealistically less.

If you bought your house for $200,000 and the market is asking $150,000 these days yet you had to account for it RIGHT NOW, mark to market, it might be worth only $100,000 or even less if you had to sell it today or this week.

Mark to market played a key roll in making all of this mess far worse than it should have been.

So, let me see if I understand (I don't think I do)....

If I am a bank, and I've loaned $250,000 for a house, and the house was worth that when I loaned it, everything is fine. If the people keep paying every month, there is no problem.

But, I've got to prove that to auditors, so they look at what is being paid for. They see there is still $225,000 left on the loan, but value the house, today, at only $175,000. So, they see me as being $50,000 overextended. No one has defaulted on any loan, my payees are paying fine, no risk of foreclosure, etc., etc. My "actual" balances are just fine, but I "look like" I'm $50,000 in the hole, because of an accounting practice.

Do I understand it correctly?

[somdrenter]

Originally Posted by Larry Gude

You're gonna have to explain that a little better for me.

How are you to value your assets that are on the books? What they could be in the future, what they are worth right now, what I say they are worth, what someone else says they are worth, once purchased at $XX they are always worth at least $XX, or current market value?

I see your caveat of “at least a quarter”, but stocks are traded daily.

[Larry Gude (Premo)]

Originally Posted by This_person

So, let me see if I understand (I don't think I do)....

If I am a bank, and I've loaned $250,000 for a house, and the house was worth that when I loaned it, everything is fine. If the people keep paying every month, there is no problem.

But, I've got to prove that to auditors, so they look at what is being paid for. They see there is still $225,000 left on the loan, but value the house, today, at only $175,000. So, they see me as being $50,000 overextended. No one has defaulted on any loan, my payees are paying fine, no risk of foreclosure, etc., etc. My "actual" balances are just fine, but I "look like" I'm $50,000 in the hole, because of an accounting practice.

Do I understand it correctly?

Perfect! You got it.

[Tilted]

I have mixed feelings about the mark to market issue, but I just want to add something to Larry's points about it.

Some of the problems with mark to market accounting, arise when dealing with highly specialized assets. Sometimes you own things that have almost no value to someone else, but they are very valuable to you because they facilitate your business operations. Their actual, tangible value to your business can be high, even though no body else would pay you a plum nickel for them - nor would you be interested in selling them.

Also, some assets are very illiquid, and trade infrequently. With mark to market, in theory, you are valuing your assets based on the sale price that similar assets are seeing in the marketplace. If its a kind of asset that rarely gets sold, and the only time it does is when someone has to because they are desperate, then the price they get for it may not accurately reflect the value of your, similar, asset.

Think of it like this. Everyone in your neighborhood is in fairly good fiscal shape. Maybe, realistically, the values of the houses around you have dropped from around $500,000 to something like $375,000. But, one guy down the street has serious financial troubles. He needs cash quick - maybe his kid needs life saving surgery, or he's run afoul of the law and needs major cash to pay a top-notch attorney (I don't know, use your imagination). Or maybe, he just wants to screw his wife over in the upcoming divorce. He has a fire sale, and sells the house for $150,000 cash so that he can settle in 3 days.

That doesn't really represent the fair value of every other house in the neighborhood. But, since no one else has sold a house in a long time, that sale IS the market for such assets. Now, add to that regulations that say you can't let your assets (the value of your home) fall below a certain level relative to your liabilities (what you owe on your home), and the mark to market principle has just created some problems for you. Maybe you have to sell your house, or maybe you can't borrow any more money to buy a car you want - in spite of the fact that you are really in sound fiscal shape.

Many people will argue that mark to model accounting principles allow for much more accurate valuations for certain assets, taking into account more realities specific to a particular asset.