Mark-to-Market Gone and Lost Forever

[Rickson]

Oh my darlin JSA the fraud and rape of you continues!

Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets."

This way we'll never know the true cash flow based value of any asset. Now it's just pull a number out of Harry's ass and we'll book that! Woo Hoo!

[JUICE]

Isn't there some sort of professional standard w.r.t. financial accounting? Or is accounting just a giant joke? One that is decreasingly funny, IMO.... :shake2:

[Aaron Brachowitz]

Oh my darlin JSA the fraud and rape of you continues!



This way we'll never know the true cash flow based value of any asset. Now it's just pull a number out of Harry's ass and we'll book that! Woo Hoo!
I wouldn't say never. If they foreclose on a loan they have to book the loss. They could choose not to foreclose and book some fantasy value, but eventually the loss will show up due to lack of cash coming in. And that tells you the mission for Obama/Bernanke/Geithner -- pump up the banks' profits for as many years as it takes to even out the built-in losses.

[Rickson]

I wouldn't say never. If they foreclose on a loan they have to book the loss. They could choose not to foreclose and book some fantasy value, but eventually the loss will show up due to lack of cash coming in. And that tells you the mission for Obama/Bernanke/Geithner -- pump up the banks' profits for as many years as it takes to even out the built-in losses.

See my post on Commercial Real Estate and the lack of foreclosure(s).

Once they have stollen enough they'll start to foreclose.

When are the JSAs going to wake up to the fraud and rape?

[whisper]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.

[Rickson]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.

k, I'll give you that...

But to have a MBS held at par when all the loans have defaulted...come on...and same goes to the derivatives and insurance on these same MBSs.

Same goes for the commercial stuff. they leave it as performing when it's not.

[JUICE]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.

Mark to market gives you a better idea of value than face value.
Financial accounting is supposed to paint an accurate picture of a company's financial situation. (Here comes the :lol: in 3, 2, 1....)
This convenient rule is a clear case of the tail wagging the dog.

[Apache Leap]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.It might if there's a reason the book value exceeds the market value.

[whisper]

Mark to market gives you a better idea of value than face value.

Mark to market gives you a picture of what the company would be worth if sold immediately. If you posit a rational and efficient market, there is a lot to say in favor of mark to market - even with the built in distortions I mentioned.

The rational market part is definitely a questionable assertion, and people could argue about the efficient part. It's hard to determine the true value of a company, and mark to market adds a lot of noise to that analysis.

Is it a valuable estimate? No doubt. It certainly gives a useful estimate of the liquidation value of a company. It's essentially the minimum value. The liquidation value of a company though doesn't necessarily equate to the true value of the company.

[whisper]

k, I'll give you that...

But to have a MBS held at par when all the loans have defaulted...come on...and same goes to the derivatives and insurance on these same MBSs.

Same goes for the commercial stuff. they leave it as performing when it's not.

Very true, and this is a problem.

It's more of a "performance" value issue more so than a mark to market issue. A fixed coupon bond that you bought that market wise is more valuable b/c of a drop in interest rates, isn't performing any better for you than when you bought it. The stream of income hasn't changed. If you're not going to sell the bond, the mark to market creates a distortion.

A fixed coupon bond that you bought and has defaulted, it's no longer performing the same when you bought it - and the accounting rules need to reflect that.

[gomer_tree]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.

I agree.

Mark to market makes sense with certain holdings, and quite honestly makes very little sense with others. For one thing, it's actually quite inefficient in some cases. Tie up cash on the balance sheet to make up for market burps on an asset where there is zero intention to do anything otehr than hold it to maturity? That doesn't make sense.

I'm all for full disclosure of the difference between book and market values so that investors and others can determine how harmful the difference actually is. But when accounting requirements tie up liquidity for something that really isn't necessary, it does more harm than good.

[gomer_tree]

Very true, and this is a problem.

It's more of a "performance" value issue more so than a mark to market issue. A fixed coupon bond that you bought that market wise is more valuable b/c of a drop in interest rates, isn't performing any better for you than when you bought it. The stream of income hasn't changed. If you're not going to sell the bond, the mark to market creates a distortion.

A fixed coupon bond that you bought and has defaulted, it's no longer performing the same when you bought it - and the accounting rules need to reflect that.

Exactly.

[ElDucky]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.

Does this mean pension liabilities shouldn't be valued based on bond rates, but instead the expected rate of return on the assets?

[whisper]

Does this mean pension liabilities shouldn't be valued based on bond rates, but instead the expected rate of return on the assets?

I'm not a pension actuary, but I'll try to answer your question in what I mean.

Lets assume an absurd situation, where you've immunized your pension via cash flow matching with risk-free assets. The net value of the total pension portfolio is zero - your liabilities are perfectly offset with your assets.

In this case, the market value of the assets is irrelevant. Who cares what the mark to market value is of the bonds - it doesn't change the cash flow immunization.

What matters is the performance of the the total and how it reacts to whatever is important. So, if your performance is sensitive to bond rates, than they should be valued on that basis.

[gomer_tree]

Further, what I would say is that it's entirely fair to have a public disclosure as to the bond ratings, immediate required impact of any defaults, full disclosure of current marked-to-market valuation, etc.

All those things will provide all the information people need to assess the state of pension funds or any otehr investment holdings. It just doesn't tie up capital in a meaningless way, which in turn reduces investment opportunities. (This is true of not just current opportunity lost, but if companies know they are subject to these requirements in volatile markets, they will be much more reluctant to tie up cash for investment if they fear they'll need to liquidate assets just to satisfy accounting requirements.)

[DixieFlyer]

Mark to Market doesn't tell you the true cash flow of an asset either.

If you hold a bond to maturity, the mark to market value will fluctuate, but the true cash flow won't.

I don't think that the issue is the carrying value of a bond; rather, the issue is the value of equity-like instruments, which should be valued at market

[JUICE]

if an asset becomes impaired.... in the woods with no one around.... and no one ever has to report a loss on that asset, does the loss really exist?

[ShebaPoe]

Mark to market gives you a picture of what the company would be worth if sold immediately. If you posit a rational and efficient market, there is a lot to say in favor of mark to market - even with the built in distortions I mentioned.

The rational market part is definitely a questionable assertion, and people could argue about the efficient part. It's hard to determine the true value of a company, and mark to market adds a lot of noise to that analysis.

Is it a valuable estimate? No doubt. It certainly gives a useful estimate of the liquidation value of a company. It's essentially the minimum value. The liquidation value of a company though doesn't necessarily equate to the true value of the company.

bahahahahahahhahaa at the bold. where have you been the last few years?

[whisper]

bahahahahahahhahaa at the bold. where have you been the last few years?

Hmm. I guess I must have missed the government forcing everyone to mark to market everything and how those marked to market valuations were worth so much more than their true value....

[Jigsaw]

whisper doesn't know what he is talking about.

the accounting rules worked fine, the banks were insolvent, the accounting statements showed that, which is exactly what they should show. they changed the rule, the banks are insolvent, yet the accounting statements show them profitable. that's the problem.

[ShebaPoe]

whisper doesn't know what he is talking about.


that's a big 10-4.

[whisper]

whisper doesn't know what he is talking about.

the accounting rules worked fine, the banks were insolvent, the accounting statements showed that, which is exactly what they should show. they changed the rule, the banks are insolvent, yet the accounting statements show them profitable. that's the problem.

:roll:

Sure, if you ignore what I write.

Very true, and this is a problem.

It's more of a "performance" value issue more so than a mark to market issue. A fixed coupon bond that you bought that market wise is more valuable b/c of a drop in interest rates, isn't performing any better for you than when you bought it. The stream of income hasn't changed. If you're not going to sell the bond, the mark to market creates a distortion.

A fixed coupon bond that you bought and has defaulted, it's no longer performing the same when you bought it - and the accounting rules need to reflect that.

Marking to market creates distortions. Enron is a fine example, the liquidation value of the firm was significantly higher than the actual performance of the firm. That created an false impression in how great a company it was. (They were recording huge "revenues" but paying little tax - the "revenue" was all unrealized mark to market changes.)

The problem is not that the accounting rules aren't requiring the banks to no longer mark to market. The problem is that the rules are allowing banks to ignore the performance of the assets.

[gomer_tree]

Mark-to-Market rules for derivatives were idiotic. Basically, it lumped all assets that even remotely looked the same into the same bucket, and the valuation was essentially based on the last trades. So, part of the issue was that these weren't necessarily efficient markets, and weren't properly differentiated.

It would be like saying you had to value your fleet of 1-year old Mercedes at a certain level based on the last sale of an 8-year old Toyota. You know, because they are both cars, so they must be the same.

When the problem mortgages tanked, the market essentially froze, and price plummeted for everything because nobody dared play in the market at all. But there are numerous strata of martgage-backed derivatives that range from troubled assets to very secure assets. A company could have been very careful about playing in the market, and had a policy of only dealing in the least risky assets, and they would have been required to set aside capital to reflect a downturn in a market that did not look at all like the market they actually played in, other than they were called the same thing.

Anyone who doesn't think there were issues with the mark-to-market requirement, as implemented, is wrong.

[JUICE]

serious question: if the banks never have to report the losses, do they really exist? there's lost revenue from the impaired cash flows, yes? (offset of course by the 0 borrowing cost arbitrage) but as long as they don't have to report the decline in asset value, balance sheet stays clean, right? they could, in theory, hold defaulted mortgages at marked-to-fantasy value for the full 30 years.

[whisper]

serious question: if the banks never have to report the losses, do they really exist?

At the end of the 30 years - the banks would have nothing and would have to be reported. Performance will be realized eventually. The bigger question is how to realize performance.

[Rickson]

At the end of the 30 years - the banks would have nothing and would have to be reported. Performance will be realized eventually. The bigger question is how to realize performance.

They'd have the property the loan was made on at a cost of creating and storing the 0's and 1's for 30 years.

Pretty good gig to me...push a few keys and steal real property.

[whisper]

The mark to market mindset helped fuel the crisis as well.
The mortgage brokers convinced homeowners to take "equity" out of their house when they refinanced. When the housing market crashed - these homeowners now had mortgages that were higher than their loan amount. Had they left the "equity" there in the 1st place, the homeowners may have had equity able to absorb the market price crash.

[whisper]

They'd have the property the loan was made on at a cost of creating and storing the 0's and 1's for 30 years.

Pretty good gig to me...push a few keys and steal real property.

You're ignoring the fact that the original owners of the property got paid. So, no they wouldn't have gotten the property 30 years later for just storing 1 and 0s.

[Rickson]

You're ignoring the fact that the original owners of the property got paid. So, no they wouldn't have gotten the property 30 years later for just storing 1 and 0s.

Got paid with 0's and 1's from pushing buttons....

[2pac Shakur]

If I bought a house for $1million 10 years ago, and it's only worth $100k today, would that mean I'm still a millionaire?

[ShebaPoe]

The mark to market mindset helped fuel the crisis as well.
The mortgage brokers convinced homeowners to take "equity" out of their house when they refinanced. When the housing market crashed - these homeowners now had mortgages that were higher than their loan amount. Had they left the "equity" there in the 1st place, the homeowners may have had equity able to absorb the market price crash.

truly, you have a dizzying intellect.

[ShebaPoe]

Mark-to-Market rules for derivatives were idiotic. Basically, it lumped all assets that even remotely looked the same into the same bucket, and the valuation was essentially based on the last trades. So, part of the issue was that these weren't necessarily efficient markets, and weren't properly differentiated.


No. If you're talking about swaps, which you probably are, most swap agreements are done through ISDA, and counter-parties are required to post margin...often daily. The counterpart would make margin demands, just like Goldman did to AIG, based on the underlying asset. Again, if you're talking derivatives, they might have been illiquid, but the underlying were often much more liquid. That was your mark-to-market right there: margin settlements.


It would be like saying you had to value your fleet of 1-year old Mercedes at a certain level based on the last sale of an 8-year old Toyota. You know, because they are both cars, so they must be the same.

I'm at a loss to understand the point you are trying to make.


When the problem mortgages tanked, the market essentially froze, and price plummeted for everything because nobody dared play in the market at all. But there are numerous strata of martgage-backed derivatives that range from troubled assets to very secure assets. A company could have been very careful about playing in the market, and had a policy of only dealing in the least risky assets, and they would have been required to set aside capital to reflect a downturn in a market that did not look at all like the market they actually played in, other than they were called the same thing.


The problem mortgages tanking led to demands for swap collateral. That's what led to stock price collapse: asset selloffs to make CDS margin calls. If a company was careful about what they bought, then, there wouldn't be margin calls because the underlying would not have collapsed in price.

Again, I don't really understand your point.


Anyone who doesn't think there were issues with the mark-to-market requirement, as implemented, is wrong.

Are they "wrong" because some assets are hard to value? or another reason? If it is because assets are hard to value, then what role should these assets play in banks' regulatory capital needs?

[whisper]

truly, you have a dizzying intellect.

Oh, how lovely of you.