This is the offending part of the diary that is just factually wrong and I will explain why to those who would like to read and understand the details..
So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value--the so-called "mark to market" rule.
Essentially, the mark-to-market rule means marking an asset to the value it can fetch in the open market at the date of the accounting period. If I own a share of XYZ stock which I purchased at $100, but today it's quoted at $60, I mark it on my books at today's market price--$60--not at the purchase price--$100. The reason is obvious: By marking the asset to market value, I'm giving a realistic picture of the financial shape of my company or bank.
However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they're insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe.
Why was FASB rule 157 suspended?
Geitner, Bernanke and Summers seem to have been trying to duplicate what Volcker did so successfully in 1982. This period since March 15, 2009, when the suspension of the rule went into effect, has been called "extend and pretend".
It is the bolded statements that I will address: First some background information and some links:
- The original M-T-M Rule http://www.fasb.org/...
- The Clarification Document http://www.fasb.org/...
The M-T-M rule was not suspended...it was just clarified on how to apply it under the circumstances where assets with no current market value but if held until maturity or for a period of time would have some intrinsic value...
You see the MTM rule was always a 2 part test, the first test is easy, if there is a market (like for a stock, bond) go to the public markets, get the price and you have your MTM value. But what if there is no current publically available market value, is it then zero...absolutely not...
The second part of the test is getting a valuation of the underlying asset as sold in the normal course of business (since the government was not going to make the banks liquidate, no liquidation MTM was appropriate - you can argue they should have, but that is not the accounting standard as applied). So under the second test, the underlying asset(s) are valued by an independent source based on the maturity date or the expected liquidation date, then if appropriate and Discount Cash Flow is applied for cash expected to be received in the future.
That was the intent of MTM accounting all along, but since MTM went into effect there was never any significant time where many investments did not have readily avaialble market values due to liquidity crises...
This was simply a clarification that it was wrong to value these assets at Zero, just as it would be wrong to value them at the original cost (basis) value...I know it is easy to make this into a big conspiracy theory...but it is not...just a clarification of the implementation of a complex accounting rule and making sure people applied the 2nd test where appropriate instead of just MTM to zero (which is the easy and lazy thing to do)...
So now if you looked at the footnotes of the TBTF banks you would see most of the remaining CDS type assets reserved approximately 50% of their original value...in english it means they have already written off 50% of the original value....now that is based on the underlying value of the assets in the CDS and the likely value at maturity...The MTM value is calcualate at least 3 if not 4 of 5 times by independent persons...
- By the bank accountants
- By the independent valuation consultants
- By the independent auditors
- By the SEC examiners and/or
- By the Bank examiners
If any of these are materially different, they must prove their case to the other to arrive at a consensus valuation or the bank will not be able to file its regulatory reports (SEC and Banking)
So this vast Conspiracy Theory (CT) about MTM being suspended is simply not true...for further reading, here is a link on what actually was decided about MTM accounting...
As ammended...if you take the time to read pages 11 - 13 (I cannot excerpt due to copywright restrictions) you will see there is no CT here, simply a clarification of the application in a MTM set of circumstances not anticipated when 157 was drafted...157 is still in effect and for many investments has not changed at all...
So of course the Diarist Responded with his usual, that this is just "Corportist Crap" and I calmly explained the following (His comments are in blockquote and mine are in blockquote/bold):
it is the actual accounting pronouncement from the FASB...which you falsely accused them of suspending MTM accounting and they absolutely did nothing of the kind...there has always been a 2 part test...you may not agree with the 2 part test...but it has not changed at all...
So now lets take your actual comment...
become next to impossible to properly valuate, due to lax regulatory oversight of the product, and more importantly due to industry practice:
The clarification by the FASB specifically addresses this point in their valuation standards, the harder to value the asset the more stringent and conservative the estimate on its value...if you had read my authoratative link you would have seen that...
Investment firms may simply swap out underlying securities, and they frequently replace quality underlying paper with crap at their own discretion. It's a moving target, at least as far as valuation's concerned; so, naturally, it's impossible to get a decent handle on what's really there.
Sure the valuation may be a moving target...but the FASB addresses that with both volatility measures that affect valuation and the fact that the valuations must be updated every quarter or more often depending on the volatility...check that one off...
Furthermore, synthetic paper--frequently contained in CDO's, as well, makes it exponentially more difficult to ascertain the value of much of the underlying crap in the CDO marketplace, today. But, again, you know this, despite your disingenuous comments to the contrary, now.
Just because something is difficult to value does not mean its value is zero, that is a sorry excuse for having a zero valuation and the FASB agrees...but then again you know your diary is disingeneous on this point...
2.) The entire valuation concept of "until maturity" is a totally bullshit double-standard. As many have paraphrased it: "When banks start appraising my home--and setting my mortgage--at its value 30 years from now,
...In fact, your bank is constantly re-valuing your home depending on the LTV ratio...sure if your LTV ratio on the original mortgage is 70% they will not re-value your home, but you bet if you take out a mortgage at 90% LTV and your home drops 20% they are re-valuing your home and determining the risk of loss on that mortgage based on your credit and payment status...
that's when they should be allowed to valuate their own assets 'at maturity.'" Until then, it's mark-to-market for all.
So if you want to change rule 157 go ahead, make your case to the FASB, but that rule has not been changed since its inception, scenario #2 was always there for assets that did not have a publically traded market such as an investment in a private company, patent, product (royalty stream)...all of these investments under your theory since they do not have a readily marketable value should be marked to zero...that would be just as bad as keeping it on the books at its original cost...You see in accounting you need to be consistent...you either do MTM or keep everything at cost...in financial institutions, it was determined that MTM was the best measure...
3.) The same rules should/would apply for credit default swaps; however, there's been a deliberate, successful attempt by Wall Street to: a.) maintain their sweet markups on these products by thwarting the existence of a truly open marketplace; and, b.) the entire concept of notional versus real value strikes at the very heart of Wall Street's VaR calculations; and, if uncovered, would shine an exceptionally bright light upon: i.) the truth that it's an unregulated casino; and, ii.) undermine the house of cards that today we call the INSURANCE industry.
Now this is a completely different issue than MTM...this is financial regulatory reform and we both agree on this point...(OK go buy a lottery ticket...I said we agree)
So I have called you out on your falsehood in your diary that states incorrectly...
So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value--the so-called "mark to market" rule.
Again there has been no suspension of the MTM rule, part 2 of that rule has been there since its inception...as soon as you stop lying and exaggerating about this fact, I will stop commenting...because I generally agree with the financial reforms you propose.../peace
And you know it is truly sadd because bob and I actually agree much more than we disagree on a whole host of issues...specifically related to the need for financial reforms
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