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LuckyOne

Further To The Mark To Market Accounting Threads .....

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If FASB decides that all loans should be accounted for at fair market value, we are in for a very bumpy ride. I would guess that loans that are currently performing but unlikely to be paid back are not yet accounted for at fair value on banks' balance sheets.

As has been mentioned before, just because borrowers are liquid at the current unnaturally low rates of interest does not mean that they are solvent. This is particularly true for interest only borrowers who have seen their debt service costs fall but the value of their assets fall materially below the value of their liabilities.

If this truth is recognised on banks' balance sheets, things will get interesting ......

http://www.bloomberg.com/apps/news?pid=206...id=a1Qa_Q_PbGWc

Investors should beware the Financial Accounting Standards Board’s decision yesterday to consider expanding fair-value rules, said Brian Wesbury, chief economist at First Trust Advisors LP in Wheaton, Illinois.

“Like a horror flick monster that just won’t stay dead, FASB’s accountants are proposing to expand the application of mark-to-market accounting rules across the board to include all financial assets, including regular loans,†Wesbury said.

The CHART OF THE DAY, fashioned from one Wesbury is presenting to investors, tracks the performance of the Standard & Poor’s 500 Index since the Securities and Exchange Commission and FASB clarified the meaning of the rules in September 2008.

“Twice the market was teased with a sense of potential changes for mark-to-market accounting. Twice those hopes were dashed and twice the market fell to new lows,†Wesbury said.

The biggest reason that stocks have rallied since March, Wesbury said, is that the House Financial Services Committee forced FASB to loosen its mark-to-market rules. Other reasons for the rally are the easiest monetary policy in the Federal Reserve Board’s 96-year history and the end of panic selling, he said.

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If FASB decides that all loans should be accounted for at fair market value, we are in for a very bumpy ride. I would guess that loans that are currently performing but unlikely to be paid back are not yet accounted for at fair value on banks' balance sheets.

As has been mentioned before, just because borrowers are liquid at the current unnaturally low rates of interest does not mean that they are solvent. This is particularly true for interest only borrowers who have seen their debt service costs fall but the value of their assets fall materially below the value of their liabilities.

If this truth is recognised on banks' balance sheets, things will get interesting ......

http://www.bloomberg.com/apps/news?pid=206...id=a1Qa_Q_PbGWc

It's difficult to find language which isn't cliched to describe the change in people's thinking (paradigm shifts, scales being lifted, tides going out, end of the delusion etc.).

You feel somewhat like Cassandra for the better part of a decade as time and again your feeling that people have lost their senses is confounded yet again as some new layer of madness is accepted as part of the "it's different this time" culture.

You know the emperor wears no clothes but no-one's listening, too caught up the euphoria. The last decade has been more like a revivalists' meeting than a marketplace.

Edited by happy?

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It's difficult to find language which isn't cliched to describe the change in people's thinking (paradigm shifts, scales being lifted, tides going out, end of the delusion etc.).

You feel somewhat like Cassandra for the better part of a decade as time and again your feeling that people have lost their senses is confounded yet again as some new layer of madness is accepted as part of the "it's different this time" culture.

You know the emperor wears no clothes but no-one's listening, too caught up the euphoria. The last decade has been more like a revivalists' meeting than a marketplace.

The one thing that I have learned after watching a few businesses implode in the last decade or so is that you can mask the truth for a while by bending the rules. This is the first time that I have seen regulators and lawmakers being so overt in their complicity.

Ultimately it doesn't matter how much you bend the rules. If the assets are worth less than the liabilities, you do eventually get found out and go bankrupt.

What I don't like about the bening of the rules is that it unneccessarily increases systemic risk. What should be a slow and gentle continuous decline from solvency to insolvency for some businesses becomes a binary event (here to-day, gone to-morrow) for which the market isn't prepared.

Regulators and law makers think that they are being clever by bending the rules more and more to mask problems. They don't yet understand that they have exchanged continous risk for binary risk which is worse than the original problem.

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