What’s the news on this? Are they considering making adjustments on how financial firms (banks) write down their assets? Chances of this news coming out this weekend? I’m trying to figure out if I should hold my leveraged short financials ETF over weekend…
hmm nevermind I think I found the answer, to those who are interested http://www.reuters.com/article/governmentFilingsNews/idUSN1834601520090319 FASB has scheduled a meeting on April 2 to discuss the proposals.
taking away mark to market is a recipe for disaster.
^Agreed. Blaming mark to market for a company’s problems is like blaming a doctor for diagnosing you with cancer. Getting rid of MTM just makes all of these already opaque financial companies (and others) even less transparent.
There’s a happy medium somewhere that we have yet to find. Still holding those leveraged ETFs kblade?
FrankArabia Wrote: ------------------------------------------------------- > taking away mark to market is a recipe for > disaster. I’m going to take a different tone than this board is used to–I respectfully disagree with this, but I understand the sentiment. I’m a believer in some sort of medium. Let me explain why. The GSEs (Fannie and Freddie), for example, were taken under almost entirely because of mark-to-market accounting. Cash losses to the GSEs were minimal in the sense that they would not have caused a company with their cash positions to fail. Quite literally, these entities that literally buy and hold long-term assets (on average about 15 years) were forced to take heavy accounting losses on the short-term values of their portfolios (as well as taking huge loan loss reserves that never materialized but is unrelated). The nation saw unprecedented–literally–housing price declines and many were forced into a “fire sale”. However, the overwhelming majority of those assets were not, are not, and will not be for sale for a very long time. All those losses were phantoms. Those losses, however, are indicative of present day reality. But those losses are not indicative of operations and long-term reality. I don’t know what the medium ground is, but I think there definitely needs to be some sort of sensible mark-to-market reform. Forcing Fannie and Freddie into conservatorship and literally destroying the company’s debt and equity positions over 6-year-old accounting rules, in my humble opinion, was a mistake.
Hank Scorpio Wrote: ------------------------------------------------------- > ^Agreed. Blaming mark to market for a company’s > problems is like blaming a doctor for diagnosing > you with cancer. Getting rid of MTM just makes > all of these already opaque financial companies > (and others) even less transparent. It depends on the industry and the economic conditions. You could do book value with very very bold qualifications in annual reports and other quarterly reports that also report the mark-to-market value of assets. Transparency doesn’t need to be lost.
kkent Wrote: ------------------------------------------------------- > FrankArabia Wrote: > -------------------------------------------------- > ----- > > taking away mark to market is a recipe for > > disaster. > > > I’m going to take a different tone than this board > is used to–I respectfully disagree with this, but > I understand the sentiment. I’m a believer in some > sort of medium. Let me explain why. > > The GSEs (Fannie and Freddie), for example, were > taken under almost entirely because of > mark-to-market accounting. Cash losses to the GSEs > were minimal in the sense that they would not have > caused a company with their cash positions to > fail. Quite literally, these entities that > literally buy and hold long-term assets (on > average about 15 years) were forced to take heavy > accounting losses on the short-term values of > their portfolios (as well as taking huge loan loss > reserves that never materialized but is > unrelated). The nation saw > unprecedented–literally–housing price declines > and many were forced into a “fire sale”. However, > the overwhelming majority of those assets were > not, are not, and will not be for sale for a very > long time. All those losses were phantoms. > > Those losses, however, are indicative of present > day reality. But those losses are not indicative > of operations and long-term reality. I don’t know > what the medium ground is, but I think there > definitely needs to be some sort of sensible > mark-to-market reform. Forcing Fannie and Freddie > into conservatorship and literally destroying the > company’s debt and equity positions over > 6-year-old accounting rules, in my humble opinion, > was a mistake. I disagree completely. M2M is just a method of finding the present value of future outlays and payments received. If the M2M value is lower, it must be realized today. If we get rid of M2M, we’re going to have to depreciate assets on a subjective basis as they ACTUALLY depreciate, not on a time schedule. See how they’re related? As for the GSEs, they needed to die anyhow, who cares what ultimately brought them down. If you believe there shouldn’t be M2M, you must love Keynesian theory. Spreading losses out over a longer time period will not necessarily bring about a better solution.
I haven’t look in to it too much but is M2M really the PV of CF? Or is it the market value of an asset. If it’s the latter, then I agree with the limo driver. If it’s not, then requiring companies to M2M long-term illiquid assets seems a bit pointless.
M2M is fine and necessary. The problem is in implimentation of things that do not fit into the neat little boxes. But there are ways for accountants to value things that have no liquid market if they want to. Accountants are trainned to do this. I think the problem is that the accountants are scared because the amount of work involved and the resonsibilites and punishment attached to an incorrect valuation are extreme so accoutants who are not a generally brave bunch just fall back on what ever sale has gone on in the market place to value things. That way if anybody questions the valuation they say well here was the last price so we used it. It is a CYA thing. The problem then becomes the regulatory capital reqiuirements and the correspondong ratings from the rating agencies (questionable at best of times) require increased capital and the downward cycle continues. Why does anybody believe anything that comes out of any of these rating agancies? It just a regulation that has unintended consequenses. The government screws up like this all the time. I can name several other instances where they have some great idea so they implament a rule or regulation and all the practioners say this is never going to work. The practioners then just act according to the minimum standard of the rule or statute and leave their own intelligence/experience at home when the go to work.
MattLikesAnalysis Wrote: ------------------------------------------------------- > kkent Wrote: > -------------------------------------------------- > ----- > > FrankArabia Wrote: > > > -------------------------------------------------- > > > ----- > > > taking away mark to market is a recipe for > > > disaster. > > > > > > I’m going to take a different tone than this > board > > is used to–I respectfully disagree with this, > but > > I understand the sentiment. I’m a believer in > some > > sort of medium. Let me explain why. > > > > The GSEs (Fannie and Freddie), for example, > were > > taken under almost entirely because of > > mark-to-market accounting. Cash losses to the > GSEs > > were minimal in the sense that they would not > have > > caused a company with their cash positions to > > fail. Quite literally, these entities that > > literally buy and hold long-term assets (on > > average about 15 years) were forced to take > heavy > > accounting losses on the short-term values of > > their portfolios (as well as taking huge loan > loss > > reserves that never materialized but is > > unrelated). The nation saw > > unprecedented–literally–housing price > declines > > and many were forced into a “fire sale”. > However, > > the overwhelming majority of those assets were > > not, are not, and will not be for sale for a > very > > long time. All those losses were phantoms. > > > > Those losses, however, are indicative of > present > > day reality. But those losses are not > indicative > > of operations and long-term reality. I don’t > know > > what the medium ground is, but I think there > > definitely needs to be some sort of sensible > > mark-to-market reform. Forcing Fannie and > Freddie > > into conservatorship and literally destroying > the > > company’s debt and equity positions over > > 6-year-old accounting rules, in my humble > opinion, > > was a mistake. > > > I disagree completely. M2M is just a method of > finding the present value of future outlays and > payments received. If the M2M value is lower, it > must be realized today. If we get rid of M2M, > we’re going to have to depreciate assets on a > subjective basis as they ACTUALLY depreciate, not > on a time schedule. See how they’re related? > > As for the GSEs, they needed to die anyhow, who > cares what ultimately brought them down. If you > believe there shouldn’t be M2M, you must love > Keynesian theory. Spreading losses out over a > longer time period will not necessarily bring > about a better solution. That’s the issue, my friend. There were no “losses” to be spread out–these banking institutions were forced to mark-to-market illiquid long-term assets that they had no intention of selling and that were not in distress. Simply put, there was no market for buying and holding mortgage loans, particularly for the GSEs because the GSEs WERE the market for buying and holding loans on their books (which is why they exist). The reform I would propose would be to not have blanket M2M rules for all industries or subsectors of industries. It doesn’t make sense in all industries or with all products.
I disagree completely. M2M is just a method of > finding the present value of future outlays and > payments received. If the M2M value is lower, it > must be realized today. If we get rid of M2M, > we’re going to have to depreciate assets on a > subjective basis as they ACTUALLY depreciate, not > on a time schedule. See how they’re related? > > As for the GSEs, they needed to die anyhow, who > cares what ultimately brought them down. If you > believe there shouldn’t be M2M, you must love > Keynesian theory. Spreading losses out over a > longer time period will not necessarily bring > about a better solution. What discount rate are you going to use? A company’s WACC, just cost of equity, or a hedge fund’s demand for a price because they see a huge opportunity in an illiquid asset to make a 80% profit unleveraged? This is the true problem. Just because you CAN sell it at 80% doesn’t mean you SHOULD or WILL. So why are you forced to value it at what you COULD sell it at? Especially when that value is silly and unreasonable for your asset? MTM was put in place in 1928 also. In a normal situation it works great, as soon as you’re required to mark to an illiquid or non-functioning market, it is the world’s worst nightmare.
recycler Wrote: ------------------------------------------------------- > I haven’t look in to it too much but is M2M really > the PV of CF? Or is it the market value of an > asset. If it’s the latter, then I agree with the > limo driver. If it’s not, then requiring companies > to M2M long-term illiquid assets seems a bit > pointless. According to FAS 157, generally the fair value of the security would be the current market price of the security. However, distressed markets/fire sales may not be indicative of the fair value, and in many cases management could opt to use the PV of future CF.
kkent Wrote: > That’s the issue, my friend. There were no > “losses” to be spread out–these banking > institutions were forced to mark-to-market > illiquid long-term assets that they had no > intention of selling and that were not in > distress. Simply put, there was no market for > buying and holding mortgage loans, particularly > for the GSEs because the GSEs WERE the market for > buying and holding loans on their books (which is > why they exist). > > The reform I would propose would be to not have > blanket M2M rules for all industries or subsectors > of industries. It doesn’t make sense in all > industries or with all products. Most banking institutions held these assets in their trading portfolios, so I would argue that they did have the intention of selling them. Of course, changing the OTTI analysis on their AFS portfolios (mostly small for banks, but larger for other companies such as insurance) is another story.
I agree, Hank. Most large banks sell off their loans to Wall Street or to the GSEs. But most banks also have a held loan portfolio. And the GSEs, of course, are almost 100% held portfolio.
kkent Wrote: ------------------------------------------------------- > I agree, Hank. Most large banks sell off their > loans to Wall Street or to the GSEs. But most > banks also have a held loan portfolio. And the > GSEs, of course, are almost 100% held portfolio. Hey kkent, which banks are you talking here? It is my understanding that most local banks don’t porfolio (hold) any loans anymore. All is shuffled off to wall street or GSE. I don’t have much knowledge of this area though.
I thought they had two books of loans one they planned to hold and one they planned to sell but they had to mark them the same even thought they really shoudl have been treated differently
mwvt, all–or nearly all–banks have held loan portfolios. It’s why many of these banks have failed–when they mark-to-market their loan portfolio in this environment, many banks have not had the required asset-to-liability ratio. If this happens, they need to raise money (usually debt) in the capital markets. However, many banks have difficulty raising this debt capital in such volatile market conditions. If this occurs, the regulator takes over and wipes out equity holders and seeks to find a buyer of the bank’s deposits. If there is no buyer, then the FDIC takes over. Also, some lenders have loss (or risk) share where they will take portions of losses when loans fail.