http://www.cnbc.com/...
The SEC is currently preserving all the mark to market accounting rules. Nothing has been changed yet, despite the push for a relaxation in the rules.
I don't know a lot about mark to market accounting systems, but I did some research and now I have a bit better understanding of what it is - and why (possibly) people want to preserve it. I also understand the criticism of it. But I am leery of what might happen if we relax the rules on mark to market, mainly because no one can even give me possible outcomes, not even speculations.
Here's some basics on mark to market accounting procedures:
http://www.thesouthendnews.com/...
Since the genesis of the current financial crisis, bankers, pundits, members of Congress and even officials from both the Bush and Obama administrations have blamed mark-to-market accounting and have wanted it abolished. Yet it still exists.
So what exactly is mark-to-market, and if it is really as damaging to our economy as some say, then why is it still around?
Excellent question! Because, if you're not a financial guru or genius, some of this stuff just makes no sense. I couldn't find any rhyme or reason to it, so I didn't know if mark to market hanging around was a good deal, a bad one or whatever.
But here's some of what I've learned:
Mark to market uses the current transaction price of an item as its value and is standard for US banks. It's a dynamic process, based upon the idea that an item is only worth what someone will pay for it at that time (ie, doesn't have a steady or long term value).
Let's say I have a house, and today you want to pay me $150K for it. That is what the house is valued at today, and what it is put on the books as being worth. But if tomorrow, you only want to pay me $75K for it, and I have no other buyers, that day its only worth $75K - no longer the $150K from yesterday.
Most of us view assets in a long term, not short term, way. A house, we presume, holds a fairly steady value. It either appreciates over time, or depreciates over time. But generally it is the 'long view.' The bank tends to view it in more immediate, almost daily, terms of value.
The problem for banks started when nobody wanted to buy many of the mortgage-related assets banks held. It wasn’t that people believed that all the loans were completely worthless, most mortgages were current, they just weren’t sure how bad the housing problem would become and, understandably, did not want to purchase assets backed by loans of such questionable value.
Okay, that's pretty clear. Housing prices were falling (still may be) and so no one knew from one day to the next the value of these mortgages or the attached properties. Ouch. Therefore, no one wanted to purchase them and the last purchaser got stuck with them.
That's when the fun began.
This was compounded by the growing realization that the risks associated with many of these mortgage-related products were clearly understated by the rating agencies. An absence of interested buyers translated into a lack of a market for the product, which caused the book value of many of the mortgage-related assets held by banks to decline by hundreds of billions of dollars. Under mark-to-market accounting, items that nobody wants to buy have no value at that time.
(Italics mine)
Whoa. Hold up. Repeat that last? 'Under mark to market accounting, items that nobody wants to buy have not value at that time.' The mortgage backed securities are deemed worthless because speculation on the housing market is ongoing and/or has collapsed. A self-reinforcing downward spiral, if you will.
The argument for mark to market:
Replacing the current mark-to-market financial accounting system with a new methodology designed to give bank assets the appearance of increased value will fool no one and further erode trust in the U.S. financial sector.
Even if a minor, short-term benefit were to be realized by "cooking the books," it would be offset by long-term capitalization problems as investors would not want to become involved with institutions which utilized an accounting system that lacked transparency, was subjective and imparted a value on assets which was higher than the price anyone would actually pay in the real world.
Here's the argument against mark to market:
http://www.thestreet.com/...
Meanwhile, there is an increasing chorus of support for one key factor behind the problem: last year's implementation of FAS 157. This well-intentioned measure, introduced by accountants to avoid a Japan-like situation where institutions maintained assets on the books at unreasonable prices, instituted a procedure for mark-to-market evaluation.
It is a good idea, implemented at the wrong time in the wrong way.
The mainstream media have covered only one side of this debate. It is easy to champion free-market pricing and point to the hazards of Japan. It is more difficult to draw a distinction between normal trading and distressed and illiquid markets. The result is that few followed our lead over the last year, when we pointed out the dangers in letting accountants -- unelected and with little oversight -- form our public policy.
The new mark-to-market rules are creating capital shortages by valuing assets as cautiously (meaning low) as possible, without a reasonableness test.
The mark-to-market rules discourage takeovers (the bane of short-sellers) by forcing prices for post-merger assets to be lowered overnight (when reasonableness would argue that their value would increase due to the deeper pockets of the acquirer).
However, the SEC disagrees.
The SEC said in a new report that mark to market, or fair value accounting, has its merits in determining assets and said it was not to blame for the financial troubles or credit crunch that has hit banks and lenders. Congress mandated the SEC look at mark to market accounting when it passed the $800 billion Wall Street bailout.
The SEC report did call for some changes to accounting rules but did not go as far as some mark to market critics hoped for.
The problem is, no one seems to be able to share what the proposed changes would be. Maybe they don't know; but if they don't, it would be extremely hard to predict what trajectory those changes would put us on.
And such changes?
Business groups have been pleading with the SEC and the Financial Accounting Standards Board to suspend or amend the rule so that banks will be able to account for their hard-to-value assets more favorably amid the distressed markets.
A House Financial Services subcommittee is set to examine the accounting rule on Thursday. Ahead of the hearing, dozens of business groups and federal home loan banks expressed their concerns to the top lawmakers on the full House Financial Services Committee.
"Appropriate changes in mark-to-market accounting should not wait until mid-year or year-end," said the letter addressed to Barney Frank of Massachusetts, the committee's chairman, and Spencer Bachus of Alabama, the committee's top Republican.
Naturally, I am suspicious by nature and through experience of what these business groups are asking for, since they are the ones who perverted the system for their own gain in the first place. And, as I mentioned before, we don't know what revisions will be made or if they will have a positive effect on the economy.
So, maybe the government is just taking a 'hold 'em' stance on market to market accounting rules for the interim. I do know that Europe has eased its rules. To what end yet, we don't know. I would stop short of calling for the US to do the same until we see what the proposed 'relaxation' entails.