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October 01, 2008 – Comments (2)

That seems to be the thrust of the SEC's recent "clarification" on mark-to-market standards for illiquid securities. Funny how everyone loves marking to market on the way up (when "profits" can be booked, bonuses paid on those "profits," and capital deployed according to inflated estimates of asset value), but no one is too happy when things move the other direction.

I *think* I even heard a former FDIC chair on the news claim that mark-to-market accounting is to blame for the current credit crunch, and that this is a "manufactured crisis." (Don't quote me on that, as I was finishing a glass of cheap, Argentinian red when the news came on.) Here is a story attributing that line to California Congressman Darrell Issa. Maybe he's the one promoting this idea.

I am no expert on accounting, and I am sympathetic to the view that overly-strict rules could cause trouble for banks and others when securities that are temporarily impaired have to be marked down and therefore force margin calls, necessitate capital raises, liquidation of other assets, etc.

However, it seems to me odd to presume (as the SEC clarification appears to) that banks, insurance companies, and other holders are being unduly pessimistic in valuing their securities, and need a reminder that they can make up better numbers for this stuff. Is anyone really going to take a worst case scenario view, especially when it might start a financing death spiral for the company?

Anyone out there doing any accounting on toxic debt? (Voices against here.)


2 Comments – Post Your Own

#1) On October 01, 2008 at 12:11 PM, wolfhounds (64.14) wrote:

I haven't posted or updated my caps in over two months while watching this whole thing unravel. However, your last comment had me go back to a number of posts I did on my analysis of the annual reports and financial statement notes of several banks, and an earlier study of about 10 smaller banks.

I wrote then that banks were not making correct assumptions of their exposure MAINLY due to exceptions for reporting under various FASB pronouncements. One that I pounded the table on was exposure to letters of credit and similar commercial paper where the counterparty ability to repay was not even estimated. Many of these items were off balance sheet. I'm sure any CPA out there with enough years of investing found the same thing. 

The true rub is none of this mark to maket has any substance in the real world except when the paper is sold. Under IRS rules, these losses are paper losses only. Which begs the question why do we have these make believe SEC and FASB rules anyway. I have not seen, nor expect to see, temporary relief in the form of IRS regulations which would allow these type of losses to be recognized and then carried back for refunds. But don't bet that some institutions  aren't thinking about it. If that is even mentioned, short them all.

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#2) On October 01, 2008 at 12:37 PM, devoish (64.87) wrote:

How does the United States buying assets from the banks at "mark to imaginary" prices create a value for the assets? Calculated Risk has estimated toxic debt here.

It seems to me this is a battle between buyers of debt who want to profit and sellers who don't want to take a loss. The US should have stayed out of it from the beginning. The stock markets problems are being caused by Paulson and Bush and Franks going on television and crying armegeddon, and Politicians attempting to suggest that stock price fluctuations are indicative of a good or bad plan is manipulative and nothing more.

I am truly scared by the idea that we are dependent upon debt to function, and must stay beholden to our lenders forever. I saved $15,000/year from 1997 until 2005 in order to pay cash for a second house or have a very low mortgage. While I was busting my a**  I watched easy credit put those houses further and further out of my reach.

To hear CNBC suggest farmers cannot buy seed without a bailout is pathetic. If it becomes that desperate the United States can buy the seed for them for much less than 700bil, and get them off the debt merry-go-round. Farmers can also get credit from employees on the promise of bonus pay when the cash comes in, not just from banks, as can most business's.

Suffolk County executive Steve Levy is working to build affordable housing on Long Island even as we type, and Congressional Representative Steve Israel is voting to keep housing prices from collapsing.

Steve Levy will be succesful, Steve Israel cannot hold back the inevitable even with 700bil. The bottom wage earners got a minimum wage increase and the top is getting 70 times that as a gift.

I promise one thing. It is going to be a bad idea to wear a suit to a restaurant soon.


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