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

[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.