This was kicked in last year and is basically known as Fair Market Accounting. There are a lot of investors watching to see if a moratorium is going to be put on FAS 157 in the next 72 hours and if there is a significant 5-10% rally would ensue . It would basically limit the extent that banks would have to writedown some of their ALT A, etc assets.
That would be odd. A change in accounting rules shouldn’t directly affect equity valuation. What would such a moratorium mean anyway? Would they get to restate financials under old accounting rules?
The wouldn’t have to mark to market which would be a big plus. I think fair market accounting is a good thing but it could be a good idea to extend implementation 6 months.
It would just be a way of cheating on their reserve & capitalization requirements. A better way would be just to change those. Otherwise, it shouldn’t effect valuation unless your valuation included some risk of liquidation or dilution.
It could break the cycle of forced seller>low price>new forced seller> lower price> etc etc ending up at capital raising to make up regulatory shortfall. Marking them as held-to-maturity (incidentally what most of the European banks have done) means they can not mark to market, not be forced sellers, and just test for impairment on a credit basis (so subprime is still worth nowt). The prices for leveraged loans is silly at the moment because we’ve had mark-to-market CLOs (60% of the market in '06) breaking covenants left, right and centre and being forced to sell. That means that assets pay 250 bps over libor, with a 5 year life and a 70% recovery rate in the event of default are priced at around 84p in the pound. That implies about half the market going pop over the next 5 years. Not likely. Euro banks have marked them down a bit, but have marked them as held-to-maturity, in clear breach of the reality of the situation as these were always syndicated. The little lies we tell ourselves! It does have the effect however of buying the banks some time to rebuild capital naturally however…
They better hang tough on the accounting or we’ll end up a constipated mess like Japan.