FASB meeting with regard to mark to market

[Tilted]

It would seem likely that banking institutions will get indication of some forthcoming relief, on mark to market accounting principles, from the Financial Accounting Standards Board tomorrow. They are scheduled to take up several issues relating to how fair value accounting principles are applied, including possible additional guidance for Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, in accordance with Statement 157, which was issued in late 2007, and on which many people place partial blame for the cascading problems we have witnessed among financial institutions in the last year.

Some people argue that requirements which force banks to value some of their investments to 'market' prices, have combined with regulations which require them to maintain minimum capital holdings levels, to cause a self-perpetuating cycle of financial distress within the financial world, which has paralyzed banking operations and helped to freeze the credit markets.

With some kinds of investments, where the market is very illiquid, a limited number of 'distressed' sales (fire sales, if you like) have forced banks which held similar assets to take premature 'paper write-offs' - indications of loses before they've actually had them. They have had to mark the value of their investment assets down to a level consistent with what the market says they could sell them for today - even if they have no intention of selling them anytime soon. Critics argue that the market value of the assets are likely to recover significantly before they are sold, if they ever are (some of them will likely be held by the banks for the duration of their life, and their value is dependent on the cash flow they generate, and not their eventual sale). Additionally, critics point out that the 'distressed' sales prices don't give a fair indication of the assets' real values, especially when they are held by fiscally healthy institutions.

When banks are forced to take these so-called 'paper write-offs', their capital levels fall, and their business operations may be limited by regulations which require them to maintain certain levels. Their ability to lend money may be restricted, and they may need to sell some of their assets to raise capital. In turn, those asset sales can lower the valuations of assets on the books of other institutions.

Whatever changes come from the FASB tomorrow, I wouldn't expect them to be sweeping - the issues involved are fairly nuanced - but they may well provide a a point of optimism for the financial markets. If we don't get any indication of changes on this issue, it may signal a short-term end to the rally in bank stocks.

As for me, I've read a myriad of opinions on the issue, and I think some flexibility with regard to these valuations, for regulatory purposes, would be good. But, we shouldn't oversimplify the situation, because as I said, it is fairly nuanced. Marking to market is a powerful tool for engendering investor confidence - and that is important when it comes to attracting the capital needed to grow businesses and the economy. A complete abandonment of mark to market for some asset classes may open the door to fraud, and a perceived lack of transparency. Different asset classes warrant different accounting treatment. And, I don't think it unfairly and severely injures the investor relations of businesses, to have market based valuations reported - investors are capable of discounting their importance when the situations call for it.

Anyway, it will be interesting to see what the results of tomorrow's meeting are.

 

[Larry Gude]

Whatever changes come from the FASB tomorrow, I wouldn't expect them to be sweeping - the issues involved are fairly nuanced - but they may well provide a a point of optimism for the financial markets. Damn right they would. Balance sheets could explode with assets with proper regulation and rational accounting. This could be HUGE If we don't get any indication of changes on this issue, it may signal a short-term end to the rally in bank stocks.

As for me, I've read a myriad of opinions on the issue, and I think some flexibility with regard to these valuations, for regulatory purposes, would be good. But, we shouldn't oversimplify the situation, because as I said, it is fairly nuanced. Marking to market is a powerful tool for engendering investor confidence - Yeah, maybe so when things are stable. When a sudden storm pops up, we've seen what it does to the herd and that is important when it comes to attracting the capital needed to grow businesses and the economy. A complete abandonment of mark to market for some asset classes may open the door to fraud, and a perceived lack of transparency. Different asset classes warrant different accounting treatment. And, I don't think it unfairly and severely injures the investor relations of businesses, to have market based valuations reported - investors are capable of discounting their importance when the situations call for it.

Anyway, it will be interesting to see what the results of tomorrow's meeting are.

At the end of the day, we're talking about long term assets, right? Housing, right? Derivatives, right?

This should be Obama's ace in the hole, his trump card and if he thinks this is the time to play it, that he can't take much more battering, then, he (they) plays it strong and balance sheets start getting well. Quick.

Thanks!

 

[Tilted]

At the end of the day, we're talking about long term assets, right? Housing, right? Derivatives, right? For the most part, the assets that people are concerned about with relation to the effect of mtm accounting are long-term assets. Obviously, there are many different kinds of assets that get marked to market, some of which are short-term holdings. But, the point of contention is with regard to assets that banks hold well beyond the reporting period within which they must mark down the assets value (whatever that period may be). In theory, the question is when do you lose money - when something you own loses 'market' value, or when you sell that something? The reality is that it really depends on the context in which, and the purpose for which, we are asking.

This should be Obama's ace in the hole, his trump card and if he thinks this is the time to play it, that he can't take much more battering, then, he (they) plays it strong and balance sheets start getting well. Quick.

Thanks!

I definitely think changes could have a significant positive effect on market sentiments. They might also have a significant positive effect on the actual operations, and long-term fiscal prospects, of the institutions involved. But, I don't think the depth and breadth of that effect can be accurately anticipated at this point. We just don't have a good enough feel for the real state of many of these asset holdings - what are they really worth? How are they really performing? Obviously, the effect will vary from institution to institution.

But further from that, I suspect the changes that we get will be incremental, and not necessarily all that profound. So, their real effect may be smaller than their symbolic effect or perceived effect. I mean, they aren't going to come out today and say - 'Okay, you don't have to mark any of these securities to market anymore - have a nice day.'

By the way, if you're bored and want to listen in on their meeting, here is a link to the webcast of it. Meeting starts at 8:00 AM. (Yeah, I'm kidding - I doubt they even want to listen to their meeting )

The markets must expect something 'good' to come out of it - index futures are up 2-3% this morning (and of course, oil is up close to 5%).

 

[Larry Gude]

I definitely think changes could have a significant positive effect on market sentiments. They might also have a significant positive effect on the actual operations, and long-term fiscal prospects, of the institutions involved. But, I don't think the depth and breadth of that effect can be accurately anticipated at this point. We just don't have a good enough feel for the real state of many of these asset holdings - what are they really worth? How are they really performing? Obviously, the effect will vary from institution to institution. That's right and that is what went wrong; the free fall of balance sheet health. Now, if they do something intelligent, balance sheet health will be here, now and that means the herd starts thinking about stampeding the other way

But further from that, I suspect the changes that we get will be incremental, and not necessarily all that profound. So, their real effect may be smaller than their symbolic effect or perceived effect. I mean, they aren't going to come out today and say - 'Okay, you don't have to mark any of these securities to market anymore - have a nice day.'

By the way, if you're bored and want to listen in on their meeting, here is a link to the webcast of it. Meeting starts at 8:00 AM. (Yeah, I'm kidding - I doubt they even want to listen to their meeting )

The markets must expect something 'good' to come out of it - index futures are up 2-3% this morning (and of course, oil is up close to 5%).

Small, incremental, it's ALL good. Consider; investors look for what; direction. The flght that started last year has stopped and is now wondering what to do because there is NO sense of direction. Nothing but meaningless spasms rather than clear steps.

If they signal that a $100 million mortgage deriviatve won't be valued at $.50 anymore because that's what you could get for it RIGHT NOW, but will be more valued at the QUALITY, ie, the god damn cash flow, then, these things WILL go up. 5% today. 10% this month. 15-20 for the year. Viola.

Signs.

Sing it with maaaa!!!

 

[Tilted]

Small, incremental, it's ALL good. Consider; investors look for what; direction. The flght that started last year has stopped and is now wondering what to do because there is NO sense of direction. Nothing but meaningless spasms rather than clear steps.

If they signal that a $100 million mortgage deriviatve won't be valued at $.50 anymore because that's what you could get for it RIGHT NOW, but will be more valued at the QUALITY, ie, the god damn cash flow, then, these things WILL go up. 5% today. 10% this month. 15-20 for the year. Viola.

By and large, I agree

Signs.

Sing it with maaaa!!!

Damn earworm video

Great - I'll be riding around today, aerating my yard, screaming 'Signs, Signs, everywhere signs ...'. Hopefully, the forest critters won't be traumatized.

 

[Tilted]

Okay, I have to admit that I've got the audio feed of the meeting on in the background, while I'm doing some other research this morning.

Having made that difficult admission - I'm getting the sense that the board is not going to go as far in changing/clarifying the guidelines, as the markets had hoped or expected. I obviously could be wrong about this, but I'm interested to see how the media will portray their actions, and how the markets will interpret and react to them. As I've said, these issues are pretty nuanced, so people could take their actions and run either way with them.


On a different note, I heard BOA CEO Ken Lewis say this morning that $700 Billion worth of their $2.4 Trillion worth of assets were marked to market.

 

[Tilted]

Jebus flippin trist - this is depressing - people in important decision making positions who clearly have significantly limited cognitive abilities, with regard to the issues they are making decisions about. I have no doubt that everyone on this board has a much better developed knowledge base on these issues then I do, but this one guy clearly doesn't grasp what I would consider to be a fairly simple concept.

The board was discussing a subtle proposed change in the language of the guidelines, as they relate to a specific portion of the accounting principles. Without getting lost in the details, this one guy can't grasp that there is a difference between an institution having made a definitive decision to hold a particular instrument for a certain period of time, and them not having made a definitive decision to sell it. The rest of the board was trying to explain to him that those two things aren't exactly the same (i.e. there are situations where one is true, but the other isn't). Skeery.

 

[Tilted]

Well, we're already getting over-simplified reporting of their decision (even though they haven't finished making their decisions yet).

Regardless, it's good news for the markets, and probably good for the banks in general.

Banks Given More Leeway In How They Value Toxic Assets

 

[Tilted]

Citigroup: FASB Change No Impact On Financial Statements

 

[Larry Gude]

Jebus flippin trist - this is depressing - people in important decision making positions who clearly have significantly limited cognitive abilities, with regard to the issues they are making decisions about. I have no doubt that everyone on this board has a much better developed knowledge base on these issues then I do, but this one guy clearly doesn't grasp what I would consider to be a fairly simple concept.

The board was discussing a subtle proposed change in the language of the guidelines, as they relate to a specific portion of the accounting principles. Without getting lost in the details, this one guy can't grasp that there is a difference between an institution having made a definitive decision to hold a particular instrument for a certain period of time, and them not having made a definitive decision to sell it. The rest of the board was trying to explain to him that those two things aren't exactly the same (i.e. there are situations where one is true, but the other isn't). Skeery.

Being intelligent and being educated are two different things.

 

[Larry Gude]

Well, we're already getting over-simplified reporting of their decision (even though they haven't finished making their decisions yet).

Regardless, it's good news for the markets, and probably good for the banks in general.

Banks Given More Leeway In How They Value Toxic Assets

The one guy said it all:

"I find one of the most unfortunate parts of this to be the fact that we're continuing to take the responsibility on rather than having the regulators to take this on," said Linsmeier, a FASB member for three years and former chairman of Michigan State University's accounting department.

Where the hell is SEC??????????????????????????

"Here, you guys walk out and let us know how the ice is. I've got elections to consider..."

This is the kind of obscure myriad 'small' things that permeate our world where politicians insulate themselves from responsibility yet won't hesitate to take credit.

 

[somdrenter]

Banks Given More Leeway In How They Value Toxic Assets

Huummmm, there’s little question in which way the will “lean” when valuing toxic assets.

 

[Larry Gude]

Huummmm, there’s little question in which way the will “lean” when valuing toxic assets.

I think rentals should move to mark to market. That way, this afternoon, you're place will be worth nothing and you're rent will go to zero.

Then, repairs and maintenance will stop because there will be no value in it. Then, the poor and the vagrant will move right on in. Maybe someone really charming will start cooking meth next door to you or on the front lawn. Get some goats and chickens going on the property. You can get you a windmill to power your electricity. Maybe burn chicken #### for heat.

After all, we sure can't have some slum lord garnering the benefits of some phony baloney value of what his property MIGHT be worth if he sold or what it MIGHT be worth on the first of the month IF someone paid a rent on time. We need to know what it's worth, right now, to have an accurate view of the REAL value, right?

 

[somdrenter]

I think rentals should move to mark to market. That way, this afternoon, you're place will be worth nothing and you're rent will go to zero.

Then, repairs and maintenance will stop because there will be no value in it. Then, the poor and the vagrant will move right on in. Maybe someone really charming will start cooking meth next door to you or on the front lawn. Get some goats and chickens going on the property. You can get you a windmill to power your electricity. Maybe burn chicken #### for heat.

After all, we sure can't have some slum lord garnering the benefits of some phony baloney value of what his property MIGHT be worth if he sold or what it MIGHT be worth on the first of the month IF someone paid a rent on time. We need to know what it's worth, right now, to have an accurate view of the REAL value, right?

Yea Larry, that’s the ticket. Glad you thought this thing through. I do fancy myself as self-sufficient, not having to rely on government bailouts or questionable accounting practices to survive.

These, after all, are toxic assets. They are asset backed. With what your sarcastically (maybe) sugesting above, lenders need to do away with PMI and down payments. The intrinsic value of the asset would be inconsequential. Only that the mortgage has some cash flow. Negating any possibility of the borrower deciding to walk away (especially after seeing his neighbor get great interest rates and principal reductions via a bailout), or simply move because of a job. (If you haven’t heard, unemployment numbers don’t look so great Larry)

The “value” of these assets were based on loose lending, toxic mortgages and oh yea, bogus appraisals. No one in their right mind will dispute that. But no worries, it matters not to these toxic asset holders. They will simply value them higher than what they are intrinsically worth. What that asset is backed with has no bearing on the situation. Be it a $400k double wide on an acre, a $500k 1930’s box with no insulation matters little; so long as some fool paid for it with a liar loan, negative amortized, ARM and the appraiser was paid off.

When banks have more leeway to value these toxic assets, there’s no question that the "value" will be higher.

 

[Larry Gude]

When banks have more leeway to value these toxic assets, there’s no question that the "value" will be higher.

Yes. The value will be higher than what the could sell them for by end of business each day. Just like an apartment. Or your car. Or your running shoes. Or your computer.

Mark to market works for something like a gallon of gas. It does NOT work for an asset like a home, especially one with a good payment history.

 

[somdrenter]

Yes. The value will be higher than what the could sell them for by end of business each day. Just like an apartment. Or your car. Or your running shoes. Or your computer.

Mark to market works for something like a gallon of gas. It does NOT work for an asset like a home, especially one with a good payment history.

Yes Larry, they will value them higher. And higher. And higher. And higher. Until their balance sheets show them well into the black and they can easily get their million dollar bonuses.

You seem to forget (yet again) that these mortgages are asset backed. The asset has plunged in value.

But then again, contrarily, you say “The value will be higher than what the could sell them for by end of business each day. Just like an apartment. Or your car. Or your running shoes. Or your computer.”

If the value is “higher” than what they could sell them for at the end of the day…..you’ve not only done away with mark to market, you’ve done away with the definition of “value” altogether. Value is no longer what the market will bear (i.e. the price it would bring in an open and competitive market), but rather what the note holder says it is.

How convenient for the banks…..not only do we have fiat currency, we now have fiat accouning practices.

 

[Larry Gude]

Yes Larry, they will value them higher. And higher. And higher. And higher. es.

I figured it out! You're the wicked witch of the 7th district and you're sick and tired of people inflating houses and floating heavy mortgages because they pop and then they keep dropping on your sisters and you've had it!

Am I close?

 

[somdrenter]

I figured it out! You're the wicked witch of the 7th district and you're sick and tired of people inflating houses and floating heavy mortgages because they pop and then they keep dropping on your sisters and you've had it!

Am I close?

Not even. I’m all for inflating home values….200% a year I say…just don’t ask for a bailout and be willing to pay the piper when the bubble pops. You want to be financially irresponsible? Fine. Nothing against the law about being foolish. Just don’t expect me to be eager to reach into my wallet when you crash.

 

[Tilted]

I feel the need to clarify a couple of things. The changes made to accounting guidelines by the FASB have been somewhat overstated. Those changes were fairly nuanced, and they didn't fundamentally change the basis for assessing an asset's value. Furthermore, the scope of the changes they did make is fairly narrow. The tone of FSB 157-e was more 'Hey, people might be misinterpreting and misapplying the guidelines we provided in FASB statement 157, so we are going to provide further clarification on some of them', than it was 'Yeah, some of the rules in FASB statement 157 don't work to well, so we are going to change them'.

They created new guidelines for determining which 'inputs' (e.g. market transactions) should be used for determining asset values, and how they should be used . But, regardless of what inputs are used in determining an asset's value, the basis of the fair value measurement remains the same - determining the theoretical 'exit price' of an asset for the measurement date, and NOT the 'entry price' (or a modified entry price) for the asset. This is without regard to whether or not the holding entity plans to sell the asset, or did sell it within the reporting period.

FSB 157-e, which was approved by the FASB on Friday, provided factors to be considered in determining whether or not a market is active. It further stipulates the presumption that a transaction made, within a market that is not active, is a 'distressed transaction', unless two conditions are true for that transaction. Making the determination that a transaction is distressed may mean that it has to be significantly adjusted in order to be used as an input in determining the fair value of similar assets - or it may mean that it isn't used at all. FSB 157-e also makes other subtle changes to the text of statement 157, including the addition of the word 'relevant' before 'observable inputs', when referring to market transactions which might be used to determine fair value.

The details of the changes aside, the essence of their effect is the posit that the fair value for an asset is the price that it would sell for in an 'orderly' transaction, under current market conditions, on the reporting date. The goal isn't to stop assets from being 'marked to market', but just to prevent fire sales, or distressed transactions, that occur in an illiquid or inactive market, from fixing the price of other similar assets. The notion being that, allowing them to do so, might sometimes be highly inappropriate.

It should be noted though, that reporting entities are required to disclose any changes, pursuant to FSB 157-e, in the valuation technique of an asset, as well as the reason for the changes and the estimated effect of those changes. That requirement should provide investors with the information they need to assess the legitimacy of the valuations. The reporting entities would effectively be providing two valuations - one based on the original guidelines, and one based on the guidelines as amended by 157-e. One other note - these new guidelines are not retroactive.

The FASB also made changes to the conditions which dictate how a reporting entity must account for loses due to an 'other than temporary impairment' of a debt security (e.g. how they report the loses, whether or not they can amortize them over the life of the asset). Under the old guidelines, in order to report the loses in a certain manner, a company had to assert that it had the intent and ability to hold the security until the recovery of its cost basis. Under the new guidelines, they must merely assert that they do not have the intent to sell the security, and that it is more likely than not that they will not have to sell the security before recovery.

Again, the practical effect of these changes is regulatory forbearance. And in that regard, the scope of their impact may be rather limited - as you can see by the link I posted earlier, Citigroup has already stated that they will have no affect on their financial statements. Any notion that we have thrown out 'mark to market' accounting is severely misinformed.

 

[somdrenter]

I feel the need to clarify a couple of things. The changes made to accounting guidelines by the FASB have been somewhat overstated. Those changes were fairly nuanced, and they didn't fundamentally change the basis for assessing an asset's value......

While I don’t necessarily dispute your comments, I remain wary.

When given the choice of lining their pocket books or being honest, the banks/lenders/wall street/politicians will always chose the former. I must wonder what changes (fundamental or otherwise) have been made that the banks will exploit next.