Congress May Force The SEC To Suspend Mark To Market

[Robbien]

Source: Business Insider

The prospects the the reform and possible for suspension of mark to market accounting rules are looking brighter this morning. About an hour ago, at 10 am, the House Financial Services Subcommittee began its hearings on the issue. Right off the bat, the chairman of the panel signalled strong support for reform.

Congressman Paul Kanjorski said he might force the hands of the Securities and Exchange Commission and the Financial Accounting Standards Board by introducing legislation to require reform. This is a 180 degree turn for Pennsylvania Democrat, who had previously said Congress shouldn't intervene in establishing accounting rules such as the so-called mark-to-market standards now at issue.

The news of this stance is spreading across trading floors. It is generally viewed as a strongly bullish sign, providing relief to troubled financial institutions that may be in peril of falling under regulatory captial and reserve requirements.

Read more: http://www.businessinsider.com/congress-may-force-the-sec-to-suspend-mark-to-market-2009-3

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When the banksters were creating toxic assets the Mark to Market rule was their friend. Now it isn't, so off with its head.

Mark the toxic assets anywhich way you please says Democrat Kanjorski.

Bankster lobbyists must have signed the check.

[AngryAmish]

1. What can possibly go wrong?

As we know the congress of the United States should be the last word on financial regulation. Because they are so smart. And have done so well with the finances of this nation.

[Critters2]

2. Can someone explain mark to market for me? TIA nt

[AngryAmish]

5. A financial company has 100 shares in company X

Company X is worth $45 per share. So the financial company can put $4500 of stock in Company X as an asset on their balance sheet.

If the price of Company X goes to zero because nobody will buy it, the $4500 in assets is off the books.

So...these toxic assets everyone is talking about (bonds based on subprime mortgages) nobody will buy at any price since they do not know how much will come in from them during the life of the bond. So since there is no market, the value right now is $0. This screws up a bank's balance sheet since they have no assets. There will be an income stream from these bonds. Nobody knows what that stream will be.

So the mark to market rule is you have to mark the value of financial holdings in your asset column to the market price. This is for transparency's sake.

Get it, or am I explaining it poorly?

[Critters2]

9. I get it. Thanks! nt

[hugo_from_TN]

12. And when the assets are valued at $0 it causes a real problem for something like a bank.

They have to have a certain amount of assets available in order to lend money. If a lot of assets are marked at $0, they have to stop lending since they are basically insolvent. Right?

[AngryAmish]

18. yup

[depakid]

25. Trouble is- the value really isn't always (or even in most cases) zero

If the company goes into bankruptcy liquidation- the common stock is zero'd out. However, the deal with these toxic assets is that they're illiquid. They still have some value- but since no one really knows what that is- very few want to speculate.

For various reasons- a lot of these things had AAA ratings back at the hieght of the bubble. Like the shacks and shed in the California Bay Area that were selling for $700,000+ a smart person knew these things weren't "worth" anywhere near that much- but it sure looks good on a balance sheet, propping up the net worth (or short term stock prices) for the entities causing executives to justify exhorbitant bonuses- or ordinary folks to spend (or borrow) much more than they could afford.

So mark to market looked pretty good then- but it's a two edged sword. Like those shacks and sheds- most of these instruments are still worth something. But unlike housing, which has instrinsic value in addition to market value- nobody wants to buy them so who can say what they'll be worth in two year's time.

[GinaMaria]

26. that was an excellent explanation

thanks :hi:

[marmar]

7. from wiki:

Mark-to-market is an accounting methodology of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would currently fetch in the open market.

[AngryAmish]

8. So much better than my stupid explanation above

[No Elephants]

23. Nah. Your explanation read much more clearly.

[Critters2]

10. Thanks! nt

[Ilsa]

13. There are accounting rules that require banks to write down the value of

nonperforming loans to a value equal to or less than the assets that secure the loans. Those assets, real estate in many cases, have lost value over the last year, so a 90% loan to value ratio is overstating the value of the asset. The loan would need to have a reserve set up in case it needs to be charged off. That lowers the total loan portfolio value and lowers income for the bank.

The accounting rules are set so a bank or other company can't misrepresent their value to investors.

I hope that helps a little. Here's an article that may help also:
http://www.boston.com/news/nation/washington/articles/2009/03/04/congress_to_examine_mark_to_market_accounting_source/

[marmar]

3. Mark-to-market should have died with Enron (or should never have been allowed, period).....

..... but those who don't learn from history.......

[AngryAmish]

6. That is crazy

Mark to market makes sense 99% of the time.

[Robbien]

11. Mark to market has served the financial system well for many decades

why do you feel it should have died?

What system would you put in its place?

[dbackjon]

14. decades? It is a fairly recent rule, and has not been widely used until the past 20 years

[earcandle]

16. Assets should be booked at cost, depreciated over time and not valued again until sold.

Letting assets fluctuate as a result of market prices causes instability and provides no real way to value net worth.

A building and land can only go to zero if mark to market and sliced repackaging is allowed, right? The building is
still the same building that sold for $1M, but now is worthless because of these untraceable loans that bury their worth.

Am I understanding this correctly?

What I know I don't understand is why would financial banks want to make assets valueless? Or fluctuating?
There may be a gambling chance that you are in at the beginning and make money but isn't there always an eventuality that someone ends up losing? Don't we have regulations that protect the public from this kind of gambling? And aren't these new accounting abilities just a result of criminal behaviors preying on the leaders ignorance, and the people's trust?

Intangible assets.... stocks are the place to gamble and play games. Bonds used to be safe, but now they too are unstable.
I just don't get the point for any of it, unless the point is to intentionally commit fraud to destabilize a country?

Looks to me these asshats have come to rape America as well, and it backfired.

[Sgent]

28. Not quite

the mark-to-market rules only apply to financial assets that can be readily valued (stocks traded on an exchange, corporate bonds, etc.). The problem is the liquidity crisis in many bonds, which are owned by banks and the like.

[w4rma]

19. Mark-to-Model is what Enron used. (nt)

[mbperrin]

4. So now it will be legal to lie about the value of assets! Hurray!

Now I'M a billionaire, too!! Ya-hoo!!!

[dbackjon]

15. There is good and bad in this

When asset values are wildly flucutating, it can cause extreme balance sheet swings.

And the market is not always the best indication of an assets TRUE value, just what it could be sold for today.

[DCKit]

17. It's not lying when a corporation does it, just wishful thinking.

And if the (non)regulatory agencies, Congress, the DOJ or anyone else gives them a pass, it's all good.

What could go wrong? We're ALL Brazillionaires!!!!

[No Elephants]

21. Bernie, is that you?

[WatchWhatISay]

20. The problem arises because of income manipulation

What the entity wants is to show a relatively level income year to year. When income is signifigantly lower than normal, in order to hide that fact, so that stockholders don't flee, the value of assets is overstated so that income is increased via phantom gains. When income is higher than normal, the value of assets can be understated and written down, so that expenses (depreciation) is increased and income does not appear to be as high as it really is, which results in lower tax liability. The goal is a relatively level income from year to year, thus portraying a stability that may not really exist.

Since market value on some assets is hard to determine, mark to market allows a company to value those assets at different times in whatever way they need to according to thier strategy. It obscures real analysis of the financial position of a company.

[PSPS]

22. Oh great. Now we'll have mark-to-fantasy.

And the taxpayer will end up paying the "fantasy" price for these worthless mortgages.

[mbperrin]

24. Winner!!!! Ding! Ding!

:toast: :toast:

[daleo]

27. My house was worth about 90K when I bought it in the mid 90's

Last summer it was supposed to be worth about $375K. Today, it's supposed to be worth about $275K. What is its true value?