Banks want to suspend accounting rule in bailout (dangerous territory)

[UpInArms]

Source: Associated Press

WASHINGTON - Congress has embraced an idea to help prop up the financial system: Give banks a break by letting them value their bad mortgage assets at a price they could fetch later, not now.

Lawmakers want the Securities and Exchange Commission to implement the idea as part of the $700 billion financial bailout package. But critics fear that might only postpone the reckoning for banks — and taxpayers.

Since 2007, the banks have had to value their mortgage-related assets at current market prices, a form of accounting called "fair market value," or the snappier "mark to market."

The board that governs accounting principles imposed the rule out of concern that companies had misled investors for years about the true value of their assets.

Devastated by the write-downs they have been forced to take on mortgage assets since the collapse of the housing market, banks are pushing hard for a change. They say today's hammered prices shouldn't set the long-term value of their assets.

But critics, including analysts and advocates for investors, say such a change would be dangerous.

"Financial statements would essentially lose all meaning," says Octavio Marenzi, head of consulting firm Celent.

Read more: http://news.yahoo.com/s/ap/20081001/ap_on_bi_ge/meltdown_accounting_rule

[The Magistrate]

1. They Cannot Be Allowed To Do This, Ma'am

Accountancy is not creative fiction, at least it is not supposed to be....

[merwin]

35. Exactly...

[GetTheRightVote]

2. I have an accounting background and this would be very bad and certainly dangerous ground

especially for us. They will ask for more false money/funds later. We will get stabbed to death in the back many thousands times over, not good, not good at all.

:grr::grr:

[dipsydoodle]

55. It's not just that

the USA would lose credibility worldwide if they pulled that stunt. Who would want to invest in deliberately falsified asset valuations.

[TwilightGardener]

3. Just sounds like creative accounting that attempts to re-inflate the bubble that burst.

[moodforaday]

37. Or to extract a bigger chunk of the bailout

If the bailout (oh, sorry: "rescue") bill passes, the government would be buying those junk papers at whatever the banks consider the potential future worth, isn't that the idea?

The seven hundred billion isn't going to last.

[NC_Nurse]

4. Fuck that.

[Solly Mack]

5. Please, Sir. Turn the screw a little more.

snort

[Xipe Totec]

6. They want to up the prices just before the $700 Billion bailout

When Uncle Sugar comes over to buy those bad mortgages, they want top dollar for them.

That's the game.

[olddad56]

32. the real cost is probably closer to 700 Trillion.

The credit derivative market is rumored to be riddle with several hundred TRILLION dollars of worthless paper.

[angstlessk]

7. I thought 'coulda, woulda, shouda' existed in the realm of fantasy

and 'can, will, and shall' exists in reality...am I wrong here???

..."assets at a price they could fetch later..."

[gopbuster]

8. "Congress has embraced an idea " they are in dangerous territory

with the pitchfork crowd as well

[Wizard777]

9. Thus begins the NEXT bailout.

[Winterblues]

10. This is the Republican push for the bail out

It will be included to get Republicans on board. Along with the kitchen sink and wooden arrow shafts..

[ozymandius]

11. Cross-posting from today's Stock Market Watch: this plan is pure crap

Why the Progressive Solution Won't Work

Mark-to-market exists for a very important reasons: it tells us what an institution is worth. The whole argument that some assets are undervalued in a particular environment is true; right now there are some assets that are valued below what you could sell the for in a roaring economy. The question now becomes, what assets would sell at higher prices in a strong economy and which ones wouldn't? The answer is simple: we have no idea. And anyone who tells you they can tell is lying because there is no way to perform that analysis with any degree of accuracy. There area simply too many variables to consider. People have been trying to do that for years. In market parlance, they are called value investors. Most aren't that good.

.....

Right now everybody wants to get rid of mark to market. The SEC just eased the rules. This is like their short-selling ban -- let's prevent the market from working like it should. Now financial institutions will be able to say, "this is really worth more because at some future date it might sell for X." And that's crap. Because that is a complete unknown.

This is another 'trust us' gambit. Fuck that noise.

[pokercat999]

12. My house could be fairly valued around $400K now but in 10 or 12

years if everything goes OK it could be worth maybe twice that. Can I please borrow $800K now? I'll send you the keys when the first payment is due.

[Carni]

13. Is THIS the Mark to market thing I kept hearing about today?

I am not even savvy enough to know if I have spelled the *mark* term right, but is this article relevant to that issue?

Thanks in advance from someone who wishes they had studied this genre IN DEPTH as a youth! :(

[happyslug]

51. Yes, the old accounting rule was "lower of cost or market"

The term "lower of Cost or Market" meant any asset kept on the book had to be valued at the lower of Cost to buy that Asset OR the present Market value of that item (The Mark Price). The Banks have been getting away from it for values of the housing secured by mortgages kept going up so did the value of the mortgages. Thus in the 1980s, 1990s and since 2000, there has been a tendency to up value these Mortgages (and other assets) to their market value (When it was higher then the original cost of the item). This was of questionable accounting usage, but permitted banks to recognize "gains" sooner i.e. instead of having to waiting for the mortgage to be paid off to recognize any gain in income do to the mortgage being paid off (Or the mortgage paid off below the value of the house when the mortgage was entered into i.e. the cost of the Mortgage) the banks would recognize such profits as the value of the house went up. This increased profits for each year the value of homes went up even if the bank did NOT entered into any new mortgages. No one complained till housing value started to drop. At that point the banks would have to recognize huge losses and did not want to. Congress then stepped and told the banks to value any mortgage at what the bank could expect to be able to sell the mortgage for (i.e. returning to the "lower of Cost or Market" rule for most of these Mortgage had long exceeded cost but now the Market was dropping and under "Lower of Cost or Market" the mortgages value was way below the Cost of the Mortgage on the books. Congress told the banks to value Mortgages at the lower of cost or market, but given no mortgages had been held at cost value in years it meant the Mortgages had to be reduce to reflect the drop in housing value.

Thus what the Bank want to be able to do is keep up the value of Assets on its books even if that asset is worthless. It would make Accounting a joke for any financial statement would be built NOT on facts but what the bank THINK the value of those Mortgages are.

[PSPS]

14. This is pure Enron accounting principles

The claimed values of these toxic mortgages was overinflated beyond what they'll ever be worth. That 900 SF house will never really be worth the $1.1 million mortgage it has on it, so why should the taxpayer buy it at $1.1 million? It will never be worth more than about $220K even if they did install the usual uranium counter tops.

No wonder republicans like the plan. It helps their ilk to further rob the treasury and fatten their offshore bank accounts.

[ixion]

15. no no no...damnit

I'm really tired of hearing what terms banks want. The only thing they should be getting is indicted.

if this robbery goes through, the BFEE pillage mission will have it's retirement gift. :wtf:

this bogus piece of legislation should not be allowed to pass, pure and simple.

[noiretextatique]

16. enron accounting

inflating the value of assets is totally bogus.

[Selatius]

17. No. The banks can go FUCK themselves if they want this. That rule wasn't invented for fun. nt

[chill_wind]

18. It just keeps getting better. n/t

[PDJane]

19. No. Absolutely no.

This kind of creativity is what led the US to this mess in the first place, and it will ensure that when the final bill becomes due we will all, worldwide, be paying the bill with assets instead of fiat. The dollar is going down, there's no sense in making sure it hit rock bottom and takes the entire system with it.

[Thor_MN]

20. Fucking hypocrites

"Let the market decide. Let the market decide. Let the market decide."

Until the market decided that these derivatives of derivatives of sliced up mortgage packages aren't worth jack. THEN, they start screaming for bailouts and fictitious valuations. The value of any asset is only what someone will buy it for. If no one will buy it, it is worth nothing, regardless of what you paid for it.

[mcollier]

22. No Accountability Please???

Sure do what ever the fuk you want.....


We get screwed in the end.

This makes about as much sense as giving $700 billion to the very assholes that are ripping off American's.

[unblock]

21. wow. simple, costs the government nothing, directly addresses what they all say is the problem,

we MUST oppose it at all costs!

as long as the rule is temporary, this is actually sheer genius.

the big problem is that someone has a fire sale and that lowers the price ridiculuously. then everyone has to "mark-to-market" at that ridiculously low price, so the next company has to post a huge loss. then, to make the increased capital requirements, they have to sell something else at a fire-sale price. and the cycle continues.

this would stop that.


of course, there has to be SERIOUS oversight to make sure it's not abused, and TEMPORARY for the same reason. but this would certainly directly address one of the main underlying problems at the heart of the financial crunch.

[girl gone mad]

50. I agree..

especially if it is paired with more transparency requirements.

[Veilex]

23. With banks doing their damnedest to freeze liquidity

It seems to me there is a certifiable opportunity for businesses here.
It used to be that businesses would create loans between themselves and either other businesses or consumers... in these cases most businesses made a decent profit on the loan (aside from any items purchased with the loan if any). Seems to me that businesses could again make that profit margin (and bypass having to pay the bank their usual fee).

Just a thought...

[Grinchie]

42. Bingo!

We have a winner in the Credit Liquidity solution department.

You will now be discredited and sent to Guantanamo for going against the wishes of Bush and Paulson by letting people know about interbusiness loans that make no profit for banks.

[sarcasmo]

24. More band aid fixes before the bottom falls out, what a nightmare.

[mrJJ]

25. The return of ENRON Accounting

Mark to market for dummies
http://www.bellaonline.com/articles/art52952.asp

Bailout 4: Mark-to-model vs. mark-to-market
http://www.youtube.com/watch?v=w_GZqhAR0I4&feature=user

[BrklynLiberal]

39. Yep. That is ENRON accounting - and that rule was put in place to prevent it from happening

again...but I guess they really don't give a shit anymore
I really wonder how many of those who voted for this actually read the bill..

[Zhade]

26. Hey, everyone knows houses could go for A BILLION DOLLARS APIECE someday, right?

This is utter madness.

[metapunditedgy]

29. there is no market right now

On one hand, it is true that the markets for some things have seized up; just because nobody wants to buy something right now doesn't mean it is worthless.

On the other hand, we've been told all these years that we should sit back and let free markets tell us what the value of everything should be. Well, now the markets are saying that the value is low, and we're acting like the market is wrong.

Problem is, there _is_ no market right now, so you can't tell what something is worth.

Hopefully, the "no regulation" folks will be getting earfuls of this for decades to come.

[razors edge]

27. "mark to market."

Well we know who the market is, I guess that makes us the "mark".

[ozone_man]

30. Good one!

Yes, we are the mark all right.

[JerseygirlCT]

28. Someone tell me why in the world this would be a good idea?

What tangibles would be included when setting this dream price? I mean, I could say that I expect I can sell my house for 2 million, right? But that doesn't mean the bank ought to extend me credit accordingly.

This is cracked.

[bulloney]

31. We're in the mess we're in because these goobers have been 'creative' and suspending rules.

[debbierlus]

33. Is it safe to ask Obama to oppose this now? No. Not until after they vote.

:sarcasm:

[struggle4progress]

34. I wanna use my broken vacuum cleaner as collateral for a $100,000 loan

Someday it's gonna be really a valuable antique

[Plaid Adder]

36. Oh for Christ's sake.

If we're going to let them lie about their assets, why do we have to give them $700 billion? Just let them SAY we gave them $700 billion and that's apparently all they need!

:argh:

The Plaid Adder

[BrklynLiberal]

38. So, this is part of the bill the senate just passed?

Federal Reserve Chairman Ben Bernanke has lent his support, too. As part of the bailout, Bernanke has suggested the government could buy banks' bad assets at a "hold-to-maturity" price, based on estimates of what the securities would eventually be worth as payments came in over the years.

So our tax money should be used to buy assets at whatever price the banks think they will be worth at some future date??????
Is this for real????
They are already ripping us off, and the bill has not even passed the house yet.

[dbonds]

40. Do the banks have some Crystal Ball we don't know about?

How do they know what the properties will be worth later? Things could continue to crash and they never be worth what they guess they will be. If they are valued at a future value, then they have to be moved out of the equation and frozen just like a 401k would be.

[Grinchie]

41. I am so confused -- WHY IS OBAMA SUPPORTING THIS!?

I mean really, WTF?

First Telecom Immunity.
No Support For Impeachment
Joining the Lemmings running over the cliff.

What is Obama trying to do? He really doesn't need to do anything but remain aloof and read a good book or two about why the Central Banks should not be trusted. He could drop hints about the problems that might occur, and promote a more thoughful process into whether this bill is really a solution or the ripoff that it is.

Instead, he wades into a crap sandwich without weaders and implores his fellow democrats to follow suit.

This is starting to smell.

Is Your Colon RoundUp Ready?

[jakefrep]

43. "mark-to-market" isn't worth diddly-shit if nobody can figure out what "market" is

The problem is not so much that these assets are worthless, but that nobody can come up with what the stuff is worth. Wall Street hates few things more than uncertainty.

[mcollier]

44. MUST READ

http://www.webofdebt.com/articles/derivative-disaster.php

[Neshanic]

45. Accounting 101 in 2075...."Well we generally ballpark a number then start from there."

[Lucky Luciano]

46. This proposal is dangerous and leads to less transparency.

Not good.

[defendandprotect]

47. How many Americans understand that much of our debt is unreported ...

It's "off-budget" --- !!!

Haven't we had enough of creative accounting ... ????

[Name removed]

48. Deleted message

Message removed by moderator. Click here to review the message board rules.

[muriel_volestrangler]

49. WSJ says the SEC already has the power to do this

and this part of the new bill is just an 'encouragement' to do it:

A proposal contained in the revised financial-rescue bill the Senate considered Wednesday reaffirms the Securities and Exchange Commission's existing authority to suspend "mark-to-market" accounting. The language was meant to send a message to the agency to re-evaluate the issue. The practice, adopted in the aftermath of the savings-and-loan collapse in the 1980s, pegs the value of assets to their current market price, rather than the price paid for them. Banks have complained the strict application of mark-to-market rules has forced them to write down billions of dollars worth of mortgage-related securities, intensifying the squeeze in the credit markets.

Critics of the proposed changes to the "mark to market" rules say gains created by easing the rules would be illusory and would delay resolving genuine doubts about the value of mortgage assets that has caused the recent crisis in confidence.

As of Wednesday, the industry appeared to be gaining support for easing the rules, in part because some lawmakers believe it could cut the cost of a potential financial-industry bailout.

http://online.wsj.com/article/SB122290736164696507.html?mod=googlenews_wsj

How they work out that last paragraph, I can't tell. Seems like it'd be bound to increase the cost, to me.

A coalition of accountants and investors counter that the rules provide transparency about a company's health. With public confidence in the financial system waning, congressional hostility toward the rules puzzles Larry Wojcik, a corporate lawyer and past chairman of the Illinois CPA Society.

"How could telling people how bad the situation is make things worse?" Wojcik said. "Is the other choice that you mislead people?"

The practice of mark-to-market originated at futures exchanges in order to limit risk. CME Group requires members to mark-to-market their trading positions twice daily.

http://www.chicagotribune.com/business/chi-thu-mark-to-market-oct02,0,660234.story

Does seem to me that lying, or taking unrealistic guesses at the value of assets, was the main cause of the problem we're in now. I can't see any good reason to encourage that, from the public's point of view - only those who will be allowed to inflate the prices of their assets will gain.

[high density]

52. "Postpone the reckoning"

Bush has been doing this for over a year now. If the value of the assets on the market is zero, then that is the value of the assets. Ignoring that they're zero is not going to help.

This proposal is the sort of accounting I'd expect from a third world country, not from us.

[dipsydoodle]

53. They should be valued

at net realisable value now -not soem Micky Mouse future value.

[Hugin]

54. Oh, it'll happen...

Hahahaha!

Because the lobbyist want it!

[AzDar]

56. No. No. NO.

Flood Congress with faxes, phone calls, and emails...:mad:

[NuttyFluffers]

57. beggars do not determine the terms of the donation...

and turn about is fair play.