This sounds like a winning plan.

[unixronin]

...NOT.

WASHINGTON—The board that sets U.S. accounting standards on Thursday gave companies more leeway in valuing assets and reporting losses.  The changes should help boost battered banks’ balance sheets and financial stocks rallied on Wall Street, but the rules may undercut a new financial rescue program.

Here’s the meat:

The FASB issued new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions.  The changes, which apply to the second quarter that began this month, will allow the assets to be valued at what the banks project they might sell for in the future, rather than in the current, distressed environment.

Waitaminnit.  This allows banks to make up what they think an asset “ought to be” worth.  Isn’t that exactly the kind of voodoo-accounting shenanigans that got us INTO this mess in the first place?

(Pointer via bratling, in another venue)

Comments

[jhetley.livejournal.com]

"Mark to market" is a genuine problem when dealing with long-term loans. What's *today's* value of a 30-year mortgage in a "down" real-estate market, even if the borrower keeps up payments? Not talking about foreclosed property here, but a viable loan . . .

Smoke and mirrors, either way.

[ilcylic.livejournal.com]

In a fiat economy? Who the hell knows?

[unixronin.livejournal.com]

(Side note: I still say Fiat needs to build a roadster or convertible and call it the Lux.)

[ilcylic.livejournal.com]

That would be pretty awesome.

Panda + Hemi, anyone? :D

[lebo-superman.livejournal.com]

LOL!

[ithildae.livejournal.com]

The value should be the amount of interest payments made over the life of the loan plus property appreciation. Sale price of the security should be a significant percentage of the interest due for the remainder of the loan.

Mark to Market is the mechanism that is forcing the bank to write down their asset base because the security no longer carries value in the present market. Banks have very little leeway to ignore market prices, and insist that the instrument has value that the market will not acknowledge. All we need to do is wait out the market, and our collateral will regain it's value. That thinking is wishful, and causes banks to fail because they have no liquid asset that will cover any temporary shorts.

Mark to Market is there because we don't want banks to fail, and that rule has been very effective at preventing bank failures. Part of that is that banks must reduce the value of assets used as capital, putting them in a precarious position, if they were unbalanced in their holdings. Mark to Market does have flaws, but it keeps banks capitalized realistically. Changing it gives banks an open mint to satisfy capitalization requirements. They can say that their worthless paper is valued at whatever they want it to be on their books. Hint: The word is fraud.

[lebo-superman.livejournal.com]

No, the value should be the property value at the time of sale, plus the total of the interest payments over the life of the loan. Don't factor in appreciation on the property, because (as we've clearly seen over the last 5 years) property values can go UP or DOWN, and sometimes by insane amounts. Trying to predict appreciation is what created voodoo economics. It's great when it works, but that's also when the bank officers start getting greedy and want to predict that EVERYTHING will keep going up - and up - and up, with no top or drop in sight. Markets (housing, stocks, commodities, you name it) have ALWAYS been cyclical.

[ithildae.livejournal.com]

I'm sorry, I wasn't clear. The value is the amount of interest due on the loan over the contracted life of the loan. It has nothing to do with property values, only the contract for the loan. When the property value falls below the face value of the loan, the contract needs to be revalued, down. That is precisely what the banks are refusing to do right now. How much that downward valuation needs to be should be determined by the market. The banks are claiming that their is no functional market, so their original valuation should remain valid. Forcing the downward valuation is what Mark to Market is for. If the regulators blink in the face of the standoff we are having right now, it will never matter how much regulation we want to write down, the big banks will never be subject to that painful regulation anyway. Our boom/bust cycles will be amplified and occur more frequently, instead of being damped, which is what Mark to Market does, when we use it.

[lebo-superman.livejournal.com]

Actually, I think it's worse than what got us into this mess. What got us here was glorified "wishful-thinking", and what they are now allowed to do is tantamount to actual fraud.

If I'm reading this right: A bank holding a house that is worth $100K in today's market can say "but if we hold onto it until the market recovers, it's realistic to sell this for $1M." The only way a $100K house will become worth $1M is if they hold it for - what, 30 years - with 10% appreciation (compounded) PER YEAR?

I have a bad migraine this morning, and I'm trying to do that math in my head. Did I get it right?

[unixronin.livejournal.com]

Actually, I think it's worse than what got us into this mess. What got us here was glorified "wishful-thinking", and what they are now allowed to do is tantamount to actual fraud.

And fifty $300K credit default swaps based off a single $300K mortgage wasn't?

I have a bad migraine this morning, and I'm trying to do that math in my head. Did I get it right?

Pretty close. I get between 24 and 25 years with a back-of-the-envelope calculation in bc.

[lebo-superman.livejournal.com]

Point taken on the 50 swaps for one actual loan. Which points to where some REAL reform could be had - require banks to only do loans on 1st-level real property. No bundles, no credit-based-on-credits. Every loan must be backed two ways - by real property, and by liquid currency physically held in the bank. Also, no more using customer's account balances to front loans. That money does NOT belong to the bank, it belongs to the account holder, and should be available in full ON DEMAND.

[unixronin.livejournal.com]

I was thinking similar things myself — no investment instruments that are not based upon physical, tangible assets. Using account balances to front loans is how banks work, though. That in itself has never been a major historical problem, except in runs on the bank, and those are always going to be a problem. The result of requiring full liquid capitalization all the time for all banks is that only the most profitable (which probably means the greediest) banks will ever have any money available to loan out. If they're not loaning out money, they can't make any money on interest, which means they don't have any money available to pay interest with, and there no longer any gain to keeping your savings in the bank rather than in a safe or stuffed inside the mattress. The absence of any loan money will drastically cut down on who can afford to buy homes, cars and other large capital purchases, or start businesses, which will mean less jobs.

Sure, it's sustainable — if we reverted to a 17th-18th century economy. I'm not convinced we could, or that doing so would be a good idea even if it were feasible.

[lebo-superman.livejournal.com]

Ok, then if we leave the banks with the ability to finance loans with account holder's money, then we take away the practice of compounding interest. Simple interest only - a $10K car loan at 10% interest gets $1K profit for the bank, no more.

Perhaps it sounds like I'm being overly hard on the banks, but a couple of months ago our credit card company raised our interest rate from 12.5% to 27%, for no reason other than the fact that the law said they could. We didn't miss a payment, we weren't even late on a payment, and our credit rating is actually fairly good. So I have no love for the banks right now.

[unixronin.livejournal.com]

Ok, then if we leave the banks with the ability to finance loans with account holder's money, then we take away the practice of compounding interest. Simple interest only - a $10K car loan at 10% interest gets $1K profit for the bank, no more.

I could see that, on secured loans. It'd probably be damned hard to do at this point. On the one hand, mortgages would become a lot less profitable; on the other hand, people would be able to pay them off much sooner, so the profit would be seen more quickly. It'd free up huge amounts of money to go into the general economy that's now getting hoovered up by the banks.

Perhaps it sounds like I'm being overly hard on the banks, but a couple of months ago our credit card company raised our interest rate from 12.5% to 27%, for no reason other than the fact that the law said they could. We didn't miss a payment, we weren't even late on a payment, and our credit rating is actually fairly good. So I have no love for the banks right now.

Now on that subject, I have no hesitation about saying there should be interest rate caps on credit cards, payday loans, and related unsecured consumer credit. The current state of unsecured consumer credit is frankly usurious.

To pull some numbers out of my ass, consumer credit interest rates should not be allowed to exceed 15%, period; not more than 10% for accounts in good standing with reasonably decent credit; and banks should not be allowed to apply any penalty for a single late or missed payment, beyond a late fee. (Let's say for the sake of argument the bank must allow you one late payment in any six-month period, or one missed payment in any twelve-month period, without applying penalty rates. And UNDER NO CIRCUMSTANCES may you EVER apply a penalty to someone because they had a late or missed payment on an account with another lender, as long as they're in good standing on their account with you.) If you think the borrower is a poor risk, give them a low credit limit (say, $500) until they prove otherwise.

If you can't make money by loaning money at 10%-15%, then either you're in the wrong line of work, or greed is driving you to be way too indiscriminate in who you lend money to. (But I repeat myself.)



As for that card, frankly, in your place I'd tell them to stuff it and cancel the card. As far as I know, the law still allows you to refuse a rate increase, cancel the card, and pay off the balance at the pre-existing interest rate. (But you have to do it right away.)