Friday, July 31, 2009

Mark to Market making a comeback?

Accountants Gain Courage to Stand Up to Bankers

The fictional accounting that made banks look solvent in April may soon be corrected. Last April the FASB caved in to congressional pressure by passing emergency rule changes so that banks and insurance companies could keep long-term losses from crummy debt securities off their income statements. On July 15 they decided to recall the use of fair-market values on corporate income statements and balance sheets. “They know they screwed up, and they took action to correct for it,” This seems very important to me since the rules change led to the rally in banking stocks which got the April stocks rally going. But media attention has been minimal....

Posted by mountain goat @ 12:05 AM (232 views)
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3 thoughts on “Mark to Market making a comeback?

  • stillthinking says:

    mark to market doesn’t work though, because it represents (cash/assets), ten pounds in existence, ten houses in existence therefore one house=1 pound. as the banks moved away from capital reserves they moved into the capability of extending loans, credit creation, to infinity. so mark to market as a pricing mechanism doesn’t work any more. valuations are not done on how much money people have, but how much they are prepared to borrow.
    the link with base money is broken. so prices are arbitary and will fall where they may, maybe an apple is worth 100 pounds, maybe it is worth 1p, just a purely arbitary valuation.

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  • mountain goat says:

    ST – a point carried over from the thread two days ago was that does it really matter how the credit is conjured up leveraged etc, as long as the bank’s borrowing customer will be able to pay it back? If the customer can honour the debt then the bank is safe. Mark to market is important for judging whether the loan is good or toxic, whether it will be paid back etc.

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  • If banks are going to be allowed to use ‘assets’ to cover runs rather than keeping cash in reserve, what matters is how much money they can recover for those assets if they have to sell them quickly. Even the purported market value is probably wrong as a large sale of any type of asset is likely to depress prices for that asset.

    Allowing them to value these assets at anything other than a market price is highly dangerous and in the case of a run, will cause the bank to collapse like a house of cards.

    I would much prefer banks to be required to keep CASH reserves to cover withdrawals. Doing so would force loan-to-deposit ratios to stay within finite bounds and limit the amount of credit the banks can create. In turn that limits bubbles as it limits the total amount of money that can be created.

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