1 Recovery will now take longer. Morons. Them, not you morons.

2 Not sure what to think about this.  Arnold Kling is too far into my ear with his crazy "capital requirement forbearance" ideas.

3 Some Dude -

Huh?  I know I'm a moron (when it comes to the economy anyway) but my understanding is that the rules basically said unless you could find a buyer for your asset TODAY it counted as a zero on your balance sheet.  Not a problem for some holdings, but some kind of running average on the accounting of these things seems like a good idea to me.

4 Awesome. Why value your assets/liabilities at what they're actually worth?

5 Recovery will now take longer.

Please explain.

6

A year late and a trillion dollars short.

This could get interesting.  The government took over Fannie Mae and Freddie Mac after discovering that they were NOT marking to market their subprime MBS.  They protested that they should not have to, since they had no plans to sell them and intended to hold them until the mortgages were paid off.  But the Administration ruled otherwise,. making both companies technically insolvent and allowing the regulator to invoke the new law to put them into conservatorship.  Their former shareholders could have a legitimate case for a lawsuit, as the takeover wiped out the value of all shares.

7 Why value your assets/liabilities at what they're actually worth?

Isn't this why this is a decent idea? For instance, say I own a house - even if I can't find a buyer for my house at a price I'd like in the next 24 hours or so, it doesn't mean my house is worth $0.  If I'm totally misunderstanding this someone please educate me here, I'm a moron!

8

This is a good idea.  We lived without this rule for years, except in cedrtain sectors and for ceratin investments.  It's crept into vogue, and finally we were saddled with the concept as a result of SOX.  The unintended consequences in a downturn have been startling and disruptive. 

The complex, well-intentioned rules work fine when there's no trouble, or only ordinary trouble.  Then, when the plane crashes into the building, the delicate engineering is really put to the test.

Remeber, the rule is only suspended for assets that don't have a a published market value.

9

This really is nonsensical at this point.  Very much like closing the barn door after the horse is out.  One has to wonder if Lehman, Bear Stearns, Wachovia, and WaMu could have been saved if this stupid rule had not existed or had been modified at the earlier stages of the subprime collapse, i.e. early 2007.

People need to understand that there WERE rules about valuing assets like MBS before SOX and FAS 157 were enacted.  But they allowed some wiggle room, for example, they would have allowed Fannie and Freddie to value their MBS fairly highly since they were planning to hold them to maturity.  The problem was thet some shysters like Enron used this wiggle room to dramatically fudge and inflate the value of some of their securities and derivatives.  So the law said, off with their heads, and instituted a draconian rule that is uniform in its application, but hurts everyone in a declining market and creates a spiral of death.

10 Marked to market would create more uncertainty on bank's balance sheets. Investors and other bankers are refusing to provide capital and liquidity currently, as they aren't confident that bank's financials accurately reflect the position, for better or worse, of securities. While MTM beats banks up from a capital requirement standpoint, the correct thing to do would be to ease capital requirements. Suspending MTM would create more uncertainty, as banks would then be taking what amounts to a shot in the dark with regard to their valuations. Would you invest in a company who says their inventory of widgets is worth $1,000,000 when in the market they are worth $100,000, but you know in reality it is somewhere inbetween? Suspension of MTM would make markets less transparent and more uncertain.

11 Another moron here ... wondering what percentage of mortgages in the US are current?  I read somewhere recently that it was something like 96%. 

12 This is a very, very, VERY good thing.

Basically put, what this is doing is recognizing the fact that not all bad mortgages are in default, which means they do have value; it's just that nobody wants to buy them from you at this point in time.

Under mark to mark, if you had a subprime for $500k, the thing counted as a $500k liability on your books -- meaning you had $500k less to loan -- because nobody wanted to buy it. By removing this, what you can do is assign a reasonable value -- i.e., $250k -- which reflects that the thing does have value, but that it doesn't have as much value as it did previously. You're still out $250k, but that's a heckuva lot better than $500k -- and you now have $250k that you can loan.

This also encourages banks to deal. If you can restructure that mortgage with the buyer and ease its value up to $400k, you're still out $100k, but at least it ain't $500k. Under the old system, there was no incentive whatsoever to do it, because unless somebody wanted to buy that subprime, you were still out $500k.

Is this going to fix all the problems? No. Is it something we can do in the long term? Hell no; it's practically an invitation to fraud.

But is it going to put the brakes on the freefall and give the markets time to fix themselves? YES.

13

Good.  This combined with an increase in FDIC limits should go quite a ways in reducing the supposed need for $700 billion in bailout money.

There's no reason that a bank should have to write of the value of a loan as near zero because the market isn't buying them, especially if they plan on holding onto the loan until it's paid off.

I'm starting to be quite glad that the Paulson plan wasn't shoved down our throats with scare tactics- scare tactics that contributed to the panic selling yesterday.

14 >> Posted by: North Dallas Thirty at September 30, 2008 06:39 PM (E3Yxq)

At least now a market can be made on these assets.  Paulson was going to do basically the same thing to find a value for these assets, only now, the market can determine the value.  There was too much temptation to pay too much/give favoritism by letting Paulson do it. 

15 But is it going to put the brakes on the freefall and give the markets time to fix themselves? YES.

North Dallas Thirty...let's hope you're right.

I spoke with a friend who is a finance pro, he says it would have helped awhile back but he's not sure it will now.

If nothing else it will help remind some people (not a lot) that this problem wasn't cause simply because of greed and graft. Everyone is crying for regulation now but mark to market is great reminder that not all regulation helps.

16 Not that I would ever suggest that the former chairman of Goldman Sachs would ever, ever show favoritism.  In fact, I'm quite sure that he would have given them a worse deal just so no one could ever accuse him of favoritism. 

17 Back to fantasy island. FAS 157 says you gotta price these assets at what a willing buyer will pay, not what a seller calculates it to be worth. Mark to market fairly values assets. Smoke and mirrors or more accurately deferral of reality until it fits your view. That could be forever.  Probably won't since there won't be a buyer's strike forever, but still a good long time.  The original bill was garbage for this reason.

18 Look, I've read every single comment here and damned if I know what to think now.  And honestly ( and believe me I'm not trying to insult any one) I don't think any one else does either.  Which is why all the dead level certainty I saw yesterday, and I have see today from folk is so disconcerting.  We are in uncharted waters here.  Maybe doing nothing is bad, maybe it's good.  No one knows for certain. But whatever we do not looking into Fannie and Freddie and what caused them is a big mistake.  Don't let a bail out, if there is one, become a band aid that leads to the blame being swept under the rug.

19 Trump was on Hannity & Colmes last night saying that suspending Mark-to-Market was the right thing to do. Mark-to-Market undervalues during bad times and overvalues during good times. By using a 3-year floating average, there is a WHOLE lot more liquidity, so you'll see the money supply start flowing a whole lot faster. Now if we can get a 3-year suspension of CapGains taxes, the economy will take off like a rocket. 

20

Would you invest in a company who says their inventory of widgets is worth $1,000,000 when in the market they are worth $100,000, but you know in reality it is somewhere inbetween?

Suspension of MTM would make markets less transparent and more uncertain.

No one need invest in the MBS's if they're valued at a reasonable price and the bank isn't planning on selling them anyways.  A better analogy would be an appraisal of widgets fairly appraised at $1,000,000, but the potential buyers conspired to drive the widget price down by not buying them at all.

The argument for the bailout was that MBS's were vastly undervalued, and the government could buy them at a fair (but above current market value) price, then sell them if and when the market price increased.  If they're undervalued, this helps solve the problem without a massive bailout.

21 What caused it? Bullying by affirmative action congressional members to give some of that good free stuff away. Watch the Youtube medley they have up showing all the instances of faceless bureaucrats being blown off by huffin and puffin affirmative action congressional members, geniuses like Maxine Waters. Goddamn mutherfukers on both sides failed us. National Republicans act like California Republicans, worthless pussies.

22 Maxine and the rest of the African American congressional caucus bullied pussy bureaucrats into giving out subprime goodies because "ev-e-reeeee one de-seeeerrrrves a hoooomme to callll their owwwwnnn.  Hallelujah!

23

Back to fantasy island. FAS 157 says you gotta price these assets at what a willing buyer will pay, not what a seller calculates it to be worth. Mark to market fairly values assets.

Mark-to-market works when the market fairly values assets, but in this case they aren't.  Banks aren't terribly interested in selling them even if there were buyers.  Mortgage loans have value no matter what the MBS's are (or in this case, aren't) trading at.

24 PC,
So maybe the Repubs should spend as much time pointing that out as trying to ram this deal down their base's throat?

25

Necessary, but not sufficient.

26 Gee, and that doesn't even require hundreds of billions of dollars.

27 If this works, how soon before Obama claims to have recommended this before March?

28 So why do we need that obscene bailout again? Inquiring minds want to know...

29

If you think it's bad now, just wait till the defaults really kick in.

Who's gonna keep paying a mortgage for a house that's been crushed by the sky?

No one. That's who!

30 Hmmm, I guess a short-term rule relaxation might help, but it's not obvious to me.  One of the big problems right now is counterparty risk.  That is, a lack of trust caused by opaque balance sheets.  Investors know that some firms are in better shape than others, but they can't necessarily tell from the books.  This change means the most-unknown portion of the ledger, the value of MBSs, will get a major numerical bump.  But surely savvy investors will still wonder about a balance sheet full of MBSs?  Such a balance sheet has the numbers change as a result of this rule change, but I don't see that it becomes more transparent.

Anyone that takes seriously a company going from a billion in the red to a billion in the black as a result of this rule change isn't a serious investor.  Serious investors will demand that any company provide much more information when it restates its position due to this.  Of course that won't happen overnight, so I'm not sure the immediate effects of this will be huge.

31 h2u, because the write-downs have already devasted of the balance sheets of the financial firms immensely. If this had happened a year ago, maybe we wouldn't be at this point.

32

I hope this works. It'd give Republicans a big "We told ya so".

Is this MTM part of Sarbanes/Oxley?

It'd be nice if they got rid of Cap Gains while they're at it.

Too bad McCain is an economic putz.

33

Duuuude... none of that shit matters.

I am soooo buying more stocks tomorrow morning.

34

Change of subject, can someone teach the NY Times math?

"The Dow Jones industrials gained 485.21 points, halving the 777-point decline on Monday."

Halving the decline?  In what universe, Obamaland?

Kemp

35

Look, I've read every single comment here and damned if I know what to think now.  And honestly ( and believe me I'm not trying to insult any one) I don't think any one else does either. 

No one knows, and everyone knows that they don't really know even if they have an opinion on how to fix it.

All I know is the way they tried to shove that bill down our throats with little debate or oversight was fishy.  Had I known nothing about it at all I'd have been suspicious.

36 Fellas, what is apparent here is no one knows for sure what happens next or what to do about it.  They know the solution they think would suit them best.  They don't know what is best for the whole economy.  Now out of all these people screaming their own personal plan over and over one person is liable to be right, maybe.  At the end of the day it won't be because he knew anything.  It will be because he was the one that got lucky.  Keep that in mind and try not to call each other names.

37 Hollowpoint,

I agree.

38

It's a good idea in general, but I'm not sure that doing it at this time doesn't actually make things worse.  Long term, there needs to be a way to value things based on some sort of recoverable-after-foreclosure valuse.  With MBS such a formulation would have to subtract out value to account for things like the cost of foreclosure, the time value of money lost, the falling prices of the houses involved and other stuff I can't think of right now.  Even after backing out all that stuff most MBS would still be better than the current 10-20% on the dollar.  Another option might be to value on the payment stream and/or underlying default rate, which would probably produce a higher return rate.

My point is that some investors intend to hold these assets to maturity or at least for a long time, and it is unfair to make them take huge book losses because nobody wants to buy an assets which is still performing quite well (say payment stream at 80%) and which the particular investor doesn't want to sell anyway.   If he's getting 80% of his expected revenue stream, why should he have to take a 90% loss just because his asset is temporarily illiquid?

39 I thought McCain was an idiot. Perhaps not. This IS big, perhaps not politically but economically. No one thought through the ramification of mark to market with these complex instruments like credit default swaps. Why this wasn't done BEFORE a bailout was even CONSIDERED is a scandal.

40 "h2u, because the write-downs have already devasted of the balance sheets of the financial firms immensely. If this had happened a year ago, maybe we wouldn't be at this point." The write-downs have already devastated of the balance sheets of the financial firms immensely? Help me, Jeebus. THAT's a reason to fork over cash to the Fed? Horseshit. Cry me a fucking river. My tax dollars are not going to be spent bailing out financial firms that played a part in this debacle. Go write the Fed a check if you think it will help. Me? I'm still dwelling on the unviability of Social Security and wondering why in BLUE FUCKING BLAZES any conservative would trust the gov't to fix this. For fuck's sake, people. Our gov't is much more incompetent than free market forces ever could be. This bailout is like swallowing poison to cure a headache. You may wind up dead, but at least your head ain't throbbing. Fucking. Clown. Shoes.

41 I spoke with a friend who is a finance pro, he says it would have helped awhile back but he's not sure it will now.

If nothing else it will help remind some people (not a lot) that this problem wasn't cause simply because of greed and graft. Everyone is crying for regulation now but mark to market is great reminder that not all regulation helps.

Agreed. At the same time, though, I would throw in that mark-to-market is not an inherently bad concept; it just can lead to problems in situations where you're dealing with really toxic assets, such as this one. It's great in terms of avoiding Enronesque chicanery, since whatever you're charging for your assets has to have a basis in reality.

Ideally I'd like to see them come up with something similar to what Trump was talking about. A good analogue is to the accounting rules around depreciation, which involve taking a an average rate and applying it consistently over a specified period of time. That way, you keep the grip on reality, but you don't enslave it to whipsaws in the market.

42

you're a classy and supremely rational guy h2u.  Banks and other providers of credit collaspe, money supply collaspes and a downturn turns into a depression.  Why is that so hard to understand?

43 My point is that some investors intend to hold these assets to maturity or at least for a long time, and it is unfair to make them take huge book losses because nobody wants to buy an assets which is still performing quite well (say payment stream at 80%) and which the particular investor doesn't want to sell anyway.

That's probably a good argument for a multipronged system.

It could be something as easy as saying that, if you hold an asset for more than three years, you are allowed to use the three-year-average value for your valuation; however, if you flip it within that period time, you must restate based on the actual buy and sell. Conversely, you can opt to NOT use the three-year-average value, mark to market, and avoid restating if you sell within that time period.

With things like mortgage securities, the government really should be encouraging buy and hold, versus buy and flip.

44

This change means the most-unknown portion of the ledger, the value of MBSs, will get a major numerical bump.  But surely savvy investors will still wonder about a balance sheet full of MBSs?  Such a balance sheet has the numbers change as a result of this rule change, but I don't see that it becomes more transparent.

Anyone that takes seriously a company going from a billion in the red to a billion in the black as a result of this rule change isn't a serious investor.  Serious investors will demand that any company provide much more information when it restates its position due to this.  Of course that won't happen overnight, so I'm not sure the immediate effects of this will be huge.

Except there aren't any investors at the moment, banks aren't selling MBS's and investors aren't buying.  Banks are holding them, but even though they have actual value in the form of the house the mortgage was taken out on, they're worth almost nothing on paper.

45 "you're a classy and supremely rational guy h2u. Banks and other providers of credit collaspe, money supply collaspes and a downturn turns into a depression. Why is that so hard to understand?" Because it's based on irrational assumptions and fear. People like you were also predicting the stock market would crash and blue chips would lose 70% of their value by the end of the week. Tuesday is now at a close and the market rebounded. The week ain't over yet, but mark my words: you Chicken Littles are going to be pulling your feet out of your mouths very soon. Fucking. Clown. Shoes. NEVER trust the goddamn gov't to fix the economy. It's like asking a plumber to tune-up your car. Just plain dumb.

46 Interesting that the first course of action is to spend taxpayers' money, and only later is suspension of troublesome legislation considered as part of the solution.  Dat's Washington.

47

With things like mortgage securities, the government really should be encouraging buy and hold, versus buy and flip.

 

Exactly - broker dealers should probably have to mark-to-market since they really are flipping, but if an insurance company or even a commercial bank buys them to hold, they shouldn't have to radically restate downwards every week like we've seen.

48 yeah the market rebounded because the bailout hopes revived.  it all goes away if congress rejects it. 

49 for good, that is.

50

I've gotten the idea this is probably a bad move, based on talking to people who are not stupid like me.  I myself know little about these things, but let me put this argument out for smarter people to criticise.

The suspension is a bad idea, since it makes assets more illiquid.  Yes, things are bad now because there is no market for these crappy MBS things, since no one knows what they are really worth.  If you don't suspend mark to market, a lot of these banks will fail as they are forced to sell the MBS's, or record them as being almost worthless.

But if you set aside mark to market and fix a number some other way, then any bank that wants to buy these things and thinks that they are worth less than they are marked for, has to record a loss on the books.  That makes it hard to buy these things, because if the bank doesn't look healthy on the books it dies, whether or not it is in good shape.

Is this more or less the argument against this suspension?  That its better to just let the weakest banks fail, and let the stronger ones that didn't become too overleveraged buy the crappy assets at their firesale prices?

51

Except there aren't any investors at the moment, banks aren't selling MBS's and investors aren't buying.  Banks are holding them, but even though they have actual value in the form of the house the mortgage was taken out on, they're worth almost nothing on paper.

And, if you suspend mark to market, they can record the mortgage as having value based on the actual value of the house in question -- which means it's no longer sopping up the available credit equal to the original value of the mortgage, but only the difference between the original value of the mortgage and the actual value of the house.

Which, if you think about it, is the same as if the government were to buy the mortgage for the actual value of the house in terms of what it makes available credit-wise.

52

you're a classy and supremely rational guy h2u.  Banks and other providers of credit collaspe, money supply collaspes and a downturn turns into a depression.  Why is that so hard to understand?

The deficit increases thanks in part to the $700 billion price tag, The Fed releases $630 billion of new money to the banks, the dollar goes into free-fall, inflation skyrockets and we're suddenly living in Zimbabwe.  Why is that so hard to understand?

53 Phronesis,

Actually you and h2u are sort of mirrored images of one another.  I don't think either of you are winning any converts with the assertions from on high.  Other folk's mileage may vary.

54 "Interesting that the first course of action is to spend taxpayers' money, and only later is suspension of troublesome legislation considered as part of the solution." Stinky fucking nails it and I wrote something similar a few days back. Don't fucking trust our political class when they ask for money before fixing the root causes. Money. Ain't. Solving. Shit. Especially when it's being managed by our useless Federal Government. "the market rebounded because the bailout hopes revived. it all goes away if congress rejects it." Spin it to win it, I guess. Thankfully some folks see right through your (and others) bullshit. The market rebounded because fear and panic were yesterday's order of the day. The " Monday Collapse" didn't even break the top ten worst days in terms of percentage losses. Yet clowns are still wailing, "Oh noes! Teh sky is falling!!!!1111one!!1uno!!!1ehad!1!!"

55 IT'S BAAAAAAAAAAAAAAAAAAAAAACK the video that wouldn't die, Despite Timw Warner & googlehttp://tinyurl.com/3ptdzy

56 "Actually you and h2u are sort of mirrored images of one another. I don't think either of you are winning any converts with the assertions from on high. Other folk's mileage may vary." The Obvious, Please. I'm suggesting cautious skepticism about trusting the government with our money. That's based on actual historical evidence. I support action that can help this financial debacle, but I don't support any action that refrains from first resolving the cause of the crisis. That's reasonable, no?

57 "The deficit increases thanks in part to the $700 billion price tag, The Fed releases $630 billion of new money to the banks, the dollar goes into free-fall, inflation skyrockets and we're suddenly living in Zimbabwe. Why is that so hard to understand?" Because it doesn't fit the narrative.

58 It's great in terms of avoiding Enronesque chicanery, since whatever you're charging for your assets has to have a basis in reality.

NDT...

Sure but that tends to be the challenge with regulations...you can fix yesterday's problems but you may very well create tomorrow's.

The idea of having to mark to market every position you have on a quarterly basis (as I believe Sarbanes-Oxley requires) is insane. It fails to take into account the underlying value of the asset and the simple fact that the company doesn't necessarily want to sell something at that moment, let alone 4 times a year.

I'm not saying let companies cook the books or there should be no rules but people can't pretend that 'regulation' is any more of a panacea than 'diplomacy'.

Your multi-pronged systems seems like a reasonable starting point. Very rarely to one size fits all options actually you know, fit.

59 All I know is the way they tried to shove that bill down our throats with little debate or oversight was fishy.

Especially since it seemed to bring Pelosi and Reid such overwhelming joy. That's a clear indication that something was grotesquely wrong with it.

We were told if nothing was fixed by last Friday we'd be in the great depression. Could it be that things aren't as bad as people screamed, and further that the American economy is so huge and powerful that it can absorb even this?

Incidentally the stock market cratered when people thought the bill would pass and rebounded when they saw it didn't. There's just no other way to read the timing.

60 I am just an absolute moron when it comes to financial stuff, but I have taken a couple of hours to learn a smidgen about mark to market.  The way I see it: my home was bought for 500K in a really nice area.  It's probably devalued to 400K or less, by current market right now.  If I default, the bank has to mark it down to zero?  The lumber and location of the land it sits on is worth more than that.  Slap me up the head and call me doggy, but why would mark to market make any sense at all/  Good for the SEC.   Perhaps a little knowledge is a dangerous thing...but, Ace, that's why I read (and enjoy) this blog.

61 uh, hollowpoint,  because it's not true. the plan is counter-deflationary, not inflationary.   Notice that the dollar strengthen along with the market today as the bailout hopes revived. If what you were saying was correct, that wouldn't be the case.  Inflation has ceded to deflation in this economy, as per last months negative cpi. Indeed commodities and their immediate deriviates were the only things inflating for a long time, and they have been falling for a few months now.  Recessions across the globe (japan and europe in particular) have fueled this deflationary depressure.  Deflation is the clear and present danger.  And anyone, as Bernake studied the great depression and is determined not to repeat, his alternative fix would be lowering the fed funds rte significantly which would be more broadly inflationary across all asset prices versus the palson plan.  The paulson plan is targeted and purposely designed to inflate the toxic debt to arrest the deflationary spiral downard that threatens this economy.

62 Is this more or less the argument against this suspension?  That its better to just let the weakest banks fail, and let the stronger ones that didn't become too overleveraged buy the crappy assets at their firesale prices?

It's more of an argument against the bailout, because all the bailout is doing is perpetuating the overleveraging and overvaluing of the crappy assets and trying to create a market where there is (and should be) none.

Banks should not be looking to sell these assets. They should be looking to service them and restructure them to get some sort of value, however small, out of them. Suspending mark-to-market does exactly that -- by allowing the banks to hold these assets on their balance sheets for less of a hit than the banks would get if they sold them, and much less of a hit than if they're trying to sell them, but can't.

63 "We were told if nothing was fixed by last Friday we'd be in the great depression. Could it be that things aren't as bad as people screamed, and further that the American economy is so huge and powerful that it can absorb even this?" Bingo. "Incidentally the stock market cratered when people thought the bill would pass and rebounded when they saw it didn't. There's just no other way to read the timing." Interesting analysis, Chris. I never saw it that way. I saw it as Wall Street panicking and didn't really place it against the bailout vote timeline. You're making a shit-ton of sense right now. Keep it up.

64 But if you set aside mark to market and fix a number some other way, then any bank that wants to buy these things and thinks that they are worth less than they are marked for, has to record a loss on the books.  That makes it hard to buy these things, because if the bank doesn't look healthy on the books it dies, whether or not it is in good shape.

Posted by: MW at September 30, 2008 07:27 PM (YQsF5)

That's the argument for the bailout proposal. Someone has to be the market maker here. Someone with enough money and the ability to hold on to this stuff until the market starts to find its level again and the mess is untangled by sorting out good stuff from meh stuff from toxic stuff.

That's not to say suspending mark to market might not get things going but it's pretty dangerous for a someone in the private sector to be the first to go.

Yeah, there's risk of having the gov't do it but someone has to. This rule change sets the stage for private investors to do it. The question is...will they? I doubt it. It's too dangerous for them and while the possibility of a bailout is still on the table, what's the incentive?

65

the bottom line is that inflation is a monetary phenomenom, and with contracting money supply you get deflation, not inflation.  We are trying to arrest this to stabilize prices.  banks create money; you don't get massive bank failures, financial deleveraging, and inflation.  The gov.  is just trying to counteract the monetary contraction which occurs when banks and other sources of credit fail.

also tresury yields and the tips spread hardly reflect inflationary pressue and haven't when the bailout was being billed as a fait accompli,so there's more evidence to rebut the inflationary pressue.

 

 

 

66 Except there aren't any investors at the moment, banks aren't selling MBS's and investors aren't buying.  Banks are holding them, but even though they have actual value in the form of the house the mortgage was taken out on, they're worth almost nothing on paper.

Oh, of course.  My comment concerns the perspective of a potential investor in the bank interested in the position of that bank. (Warren Buffett, perhaps? maybe this is a delusion of grandeur...)

However, this rule change, coming from the SEC, does strike me as relating more to the valuation of the bank than its lending capacity (definitely these are related, but it isn't always obvious exactly how).  Will the FDIC treat the "new" valuation of the bank as relevant for allowed leverage?  Does the FDIC even matter for most transactions involving MBSs or between firms that hold MBSs?  Can't investment banks essentially take whatever leverage position they want?  Won't potential buyers of MBSs (or any other instrument based on mortgages, which would by definition seem also to be an MBS) just ignore the rule change and make their own assessment of counterparty risk?

And even if you're talking about generic credit, isn't counterparty risk still relevant?  If one bank is promising to pay back another in 3 months, the creditor bank is going to be interested in the solvency of the debtor, and it will care whether the balance sheet is composed of cash or MBSs, regardless of MBS valuation mechanism.  I mean, the whole assumption here is that we have a credit crunch that is caused by banks not trusting each other.  I don't see the trust level magically changing because the SEC declares a new asset valuation scheme by fiat.  Investors don't have to trust the SEC any more than they trust anyone else.

Sorry I didn't make this explicit the first time; this stuff is hard.

67 I'm not saying let companies cook the books or there should be no rules but people can't pretend that 'regulation' is any more of a panacea than 'diplomacy'.

Absolutely! We're on the same page with this.

The paulson plan is targeted and purposely designed to inflate the toxic debt to arrest the deflationary spiral downard that threatens this economy.

That to me is Paulson's problem in this matter; he's putting in a plan that will be a bonanza for Wall Street, but which only affects one portion of asset issues.

If there's any wisdom that comes out of this situation, it's that allowing bubbles is a really bad idea -- because, as the bubble grows, people start skimming off from that overvalued asset to pay for things in other areas (classic example: people taking out home equity loans to pay their credit cards).

Conversely, what should be obvious to all is that refueling and trying to reinflate that bubble is just going to make more of the same problems and spread the issue across more credit areas.

68 read milton friedman if you don't believe me about the inflation thing hollowpoint.

69 Some Dude makes a really good point here.

It seldom gives anyone confidence when you change accounting rules in the middle of crisis.  It would have been better to ease capital requirements.  This might make distressed securities easier on the balance sheets but even harder to sell.

Revisit mark to market, yes, but do it when it's smooth sailing.

Frankly, let's be honest here, if you're looking to sell these assets, a market valuation is the correct metric.

70 "Yeah, there's risk of having the gov't do it but someone has to. This rule change sets the stage for private investors to do it. The question is...will they? I doubt it. It's too dangerous for them and while the possibility of a bailout is still on the table, what's the incentive?" So lets get the bailout -- at least in its current form -- off the table, eh?

71 So lets get the bailout -- at least in its current form -- off the table, eh?

h2u

Except that removing the bailout option doesn't remove the underlying danger to potential investors. I'm not going to deny that having it out there may stymie some ideas or options but the underlying issues (how much is that shit worth? which bundle is good and which will kill you if you touch it?) will still be there.

So if you take the bailout off the table and private money doesn't stream in to that minefield (and um, where's all this money coming from?), then what?

72 "So if you take the bailout off the table and private money doesn't stream in to that minefield (and um, where's all this money coming from?), then what?" DrewM, remember, I support a bailout in theory. I don't, however, support THIS bailout. If we can get past the debacle that failed to pass the House yesterday perhaps we can actually get a bill that makes sense to the American public. Translated: Don't let Paulson become a Central Planner.

73

At least I don't feel like a complete moron. Arthur Levitt, former SEC boss says it's folly to suspend mark to market.  An accounting sleight of hand he called it. He said mark to market is the tough medicine lenders need to insure they remain risk averse. They didn't and now this.

74 hollowpoint, any rebuttal?

75 WaPO/ABC news Poll Obama up 4http://tinyurl.com/4ds8me

76 That's what I thought.

77 "That's what I thought." LOL - You are SUCH a tard. Perhaps Hollowpoint had to go. But, no, that would make too much sense. You win! Hooray! Ticker tape parade for phronesis for winning a one-sided debate on a blog post that's no longer the most recent. Woohoo!

78 h2u, why don't you give it a try then.

79 how is contracting money supply inflationary h2u, do tell?

80 Not my dog, phronesis. My k9 is running in the "Do Not Trust The Gov't With $700B" lane.

81 right.

82 the crash of 29 did not cause the depression...even friedman sez that....
stock market crashes do not cause depressions...the depression came
years after the crash and was caused by fed and govt policy....

re the 29 stock market crash, as one commentator said -
"something-for-nothing had merely been converted back into
nothing"...and bargains were to be had from companies whose fundamentals
were still good

83 It seldom gives anyone confidence when you change accounting rules in the middle of crisis.  It would have been better to ease capital requirements.  This might make distressed securities easier on the balance sheets but even harder to sell.

Um, no. I think the last thing we want to do at this point is tell banks that they have to keep less cash around. And honestly, I don't see where it's wise to be making it easier for banks to sell these securities. Changing the accounting rules makes it much more palatable to hold them, which will help stabilize the current panic dumping situation and also encourage banks to, you know, make something out of these assets, instead of just looking for some chump on which to dump them.

84

navone. Yes the fed caused the great depression.  But Friedman also answered how the Fed caused it.  The fed caused it  by contracting the money supply as bank failures were already draining it significantly.  This turned a downturn into a depression.  This is what we are trying to avoid.

85 "Who's gonna keep paying a mortgage for a house that's been crushed by the sky?"

I'm living in a hurricane damaged house right now. I mailed the mortgage check yesterday. My neighbors house is damaged much worse and they are still paying rent for it. I bet a million dollars there are people that used to have houses on the Bolivar Peninsula that are making a mortgage payment tomorrow on a house that is not even there today.

I sold stock today. Why? Because I believe that Nancy Pelosi is an idiot. I don't have to understand all the economic ins and outs to see that anything this congress passes is not going to be much of a solution to whatever the crisis is. In my humble cynical opinion.

86 go to patricksplan.com....a bit crude but it gives you the points behind all this.

87 Nancy Pelosi's idiocy is something upon which we can all agree.

88 and "some dude" @1..........the market will now take a real time to "recover".
 what you, and your ilk around here seem to want is magic beans and fairy dust to make everything *look* normal.
 we need it to be real....and that's what the American people have been saying.
 not that they don't get there is a problem, but that throwing more money at the same idiots that caused it will not fix it.
 you guys wanted a pretty bandage over a festering cancer....the rest of us want it cut away.

89 I think the last thing we want to do at this point is tell banks that they have to keep less cash around.

NDT,

Actually, isn't that part of the problem? There seems to be enough liquidity in the system, it's just being held on to, hence the high Libor, etc.

The hording of cash is the crux of the credit crunch we keep hearing about, no?

90 Nancy Pelosi's idiocy is something upon which we can all agree.

Posted by: phronesis at September 30, 2008 08:29 PM (0GYIW)

Give her a break, she's just worried about another Great Depression.  (Though between your and me, I don't see what's so Great about it.)

91

Um, no. I think the last thing we want to do at this point is tell banks that they have to keep less cash around. And honestly, I don't see where it's wise to be making it easier for banks to sell these securities. Changing the accounting rules makes it much more palatable to hold them, which will help stabilize the current panic dumping situation and also encourage banks to, you know, make something out of these assets, instead of just looking for some chump on which to dump them.

Posted by: North Dallas Thirty at September

 

That sounds reasonable.  It also seems like it would be reasonable to see if this rule change and the 630 billion dollars Paulson put out there yesterday have an effect...especially before we decide to give the guy $700,000,000 dollars of taxpayer money.

92 Re: My 89

"High Libor" should be...High Libor-OIS spread.

Sorry about that.

93

uh, hollowpoint,  because it's not true. the plan is counter-deflationary, not inflationary.   Notice that the dollar strengthen along with the market today as the bailout hopes revived. If what you were saying was correct, that wouldn't be the case.  Inflation has ceded to deflation in this economy, as per last months negative cpi.

Uh, forgive me for not taking one day's worth of data as gospel, especially when panic ruled that particular day.  I'm talking a bit longer term than what happens this week.

The Paulson plan increases the deficit by $700 billion- and we were already engaged in deficit spending.  And the $630 billion of crisp new money tossed at the banks- you really think it'll stop there?  Or that there will be absolutely no more bank bailouts after spending the $700 billion?

We're talking a total of 1.3 trillion dollars added into the finance sector- that has consequences, especially when half of it is debt.  A change to the mark-to-market rule increases the assets on hand of lenders and thus freeing up money for credit without a massive increase to the national debt or an artificial increase in the monetary supply.

It might not be enough, but it's a much better place to start than giving Paulson a blank check and hoping he makes it all go away.  If a relatively benign suspension of a relatively recent change to accounting rules can take the place of hundreds of billions of taxpayer money being spent to buy MBS of unknown value at an unknown price, I'll take it.

 

94 Notice that the dollar strengthen along with the market today as the bailout hopes revived.

You keep saying that people are responding well to the bailout, when it's the opposite. When it looked certain to pass, the stock market crashed - the third worst drop in American history. When it failed, the market recovered. Now that it looks unlikely something will get done any time soon, things are doing better.

I'm not saying that's a sign of what should be done one way or another, I'm just saying you are reading the signs way, way wrong.

Who's gonna keep paying a mortgage for a house that's been crushed by the sky?

Er, people who honor their debts and obey the law?

95

read milton friedman if you don't believe me about the inflation thing hollowpoint.

I have.  There's an Austrian that doesn't completely agree.

Not to go all Ron Paul on anyone, but throwing money around to solve what is in part a psychological problem doesn't strike me as wise.

96

Posted by: Christopher Taylor at September 30, 2008 08:45 PM (0+Ggj)

 

That's just not true.  See the front page of todays wall street journal for the chart of the market tanking following the bailout reject.  Read any of analysis of todays action.  The market tanked when the bailout was defeated and revived on bailout hopes today.

97 Pelosi got to be Speaker of the House just so Democrats could boast they elected the first female Speaker. She has bumbled it from day one.

Worst Speaker ever.

98 "Um, no. I think the last thing we want to do at this point is tell banks that they have to keep less cash around."

Call me crazy, but doesn't suspending mark to market allow a bank to take more loans on with the same underlying assets?  Hence, increasing its leverage?  Same result as decreasing a capital requirement.

99 I think that accounting standards attempt to place "fair" value on assets and I agree that a write-down to zero - regardless of market conditions - is not necessarily fair value for these deals that, without doubt, have value.

This change would be an immediate increase in bank capital on the liability side and an increase in something else on the asset side that would be very illiquid.  Because it is 1 for 1, bank capital ratios would be greatly improved.  So, banks would be better able to weather the storm from a survival point of view.  The effect on credit is problematic since the cash banks have available to lend would not change.

So this probably is a good change, but it is hard to see this as a complete answer to the credit problem.  Illiquid assets still sit there on the books with no payback, no interest probably, and thus low impact on future loans.  A bank would be better able to take advantage of the cash the Fed has offered in short term loans however, so that would help some.

I believe that regular loans are not covered by mark-to-market, they go through other FASB and IRS rules relating to the bank's loan loss reserve.  Two out of the three banks that failed on Monday had much fewer problems with MBS securities and much greater problems with regular bad loans.  So this would not have helped there.

As to the money supply, the Fed has quietly added hundreds of billions in various ways.  This might be enough for the short term, but unless credit gets going again contraction is the only result I can see.

The FDIC expanded insurance amounts would have less impact than some think.

100

At least I don't feel like a complete moron. Arthur Levitt, former SEC boss says it's folly to suspend mark to market. 

And who-the-fuck-it-is, current SEC boss thinks it's swell.

What does that mean? I'll tell you what it means.

It means that one of these men is lying, and which decision YOU, commentor on Ace of Spades blog, which decision you make, will decide whether or not his secret plot to start a chain reaction that will convert the entire crust of the plantet into a smoldering lump of strangelets.

Choose wisely...

Choose wisely...

The one and only thing you can be certain of, is that you are not paniced enoughed. Not nearly. We, are, all, going to, die.

101 NDT,

Actually, isn't that part of the problem? There seems to be enough liquidity in the system, it's just being held on to, hence the high Libor, etc.

The hording of cash is the crux of the credit crunch we keep hearing about, no?

True, but the problem with reducing the amount of cash banks have to have doesn't mean they won't stop hoarding it. Furthermore, as a bank consumer, how would you like to hear that banks no longer have to keep enough money around to cover your deposits when you want them?

In my opinion, reducing the required capitalization for banks is too risky, both in terms of what it allows them to do and the very real probability of it exacerbating a bank run. The latter crisis of confidence is really the very thing that capitalization requirements were put in place to manage, and I don't think the FDIC guarantee suffices at this point, having seen IndyMac.

I would rather tell banks that they can ascribe value to assets that we know have value, even if it's less than what the bank originally paid for them, and use that adjusted value as the basis for the bank's ability to loan. No one's going to call a bad mortgage due and demand that you flip the asset overnight. Depositors, on the other hand, could call their deposits due right away.

102 "Not to go all Ron Paul on anyone, but throwing money around to solve what is in part a psychological problem doesn't strike me as wise." That isn't going Ron Paul. That's just echoing common sense. And I agree wholeheartedly. Don't fucking trust the gov't to fix this problem. They CREATED this problem -- so why the fuck would their throwing money at it fix anything? Some people just want to believe anything the political class tells them...

103

Er, people who honor their debts and obey the law?

Oh. Sure. Sure. Oh yeah sure.

We'll see if you're singing the same tune when a giant chunk of sky falls down and crushes your home, Mr. Principled Ideological Man.

104 "We'll see if you're singing the same tune when a giant chunk of sky falls down and crushes your home, Mr. Principled Ideological Man." ROFL. Entropy, that was pretty damn funny.

105 Call me crazy, but doesn't suspending mark to market allow a bank to take more loans on with the same underlying assets?  Hence, increasing its leverage?  Same result as decreasing a capital requirement.

Yes.

However, in that case, you're increasing leverage for cash -- or basically, you're using theoretical money to back real money. In the case of reducing capital requirements, which are expressed in cash or very liquid paper, you're using real money to back real money.

The problem is that we're between two extremes. If we value these assets at zero, we've put the banks on a no-leverage, cash-only basis. If we value them at full origination value, we've put them at an all-leverage, no-cash basis. By getting rid of mark to market, we've allowed the intermediate; we're not forcing banks onto all-cash, which would be stifling, but we're not allowing all-leverage either. Instead, we're rationally swapping out some theoretical money for real money, while acknowledging that the theoretical money is worth less than the real money.

The basic problem is that we need to get banks back leveraging again -- or, put differently, trading time for cash. The current rules force the banks to sell these assets immediately or write their value completely down to zero. Under the suspended rule, they can hold these assets without selling them, but still use them, until the market recovers (or the loan becomes profitable).

106 Changing capital requirements won't help, nor will suspending MTM, both introduce more risk into the market. Government intervention may not be the best solution to solve the problem, but its the only workable solution we have right now that can be implemented in the time frame needed to prevent further detriment to our economy.

107 NDT, thanks, I wasn't sure if we were on the same page there or not.

I don't really have a problem with suspending mtm, by the way, I'm just concerned a bit with the psychology.  Changing the rules in mid game.  One of the quickest ways to make a buck during the .com bust was to find the accounting revisions and then short like a maniac.

Any fear we'll see greater skepticism about the balance sheets now?

I'd love to be able to create two asset classes here.  Transferable mbs, valuated by mark to market until things are calmer.   And non-transferable mbs, valuated by some modified discounted cash flow.

108 Any fear we'll see greater skepticism about the balance sheets now?

I wouldn't call it fear; if anything, there should be healthy skepticism about balance sheets that have mortgage assets.

I'd love to be able to create two asset classes here.  Transferable mbs, valuated by mark to market until things are calmer.   And non-transferable mbs, valuated by some modified discounted cash flow.

That is an excellent idea.

109 Furthermore, as a bank consumer, how would you like to hear that banks no longer have to keep enough money around to cover your deposits when you want them?

NDT,

Well, they don't now and never really have (I've seen It's a Wonderful Life!).

IndyMac also had the Schumer element and that's why Wachovia was announced Friday instead of over the weekend, when they prefer to make those announcements.

Now, I'm not saying we can count on making it work every time, one mistimed closure could screw the pooch but we've got to get banks back in the game. Which brings us back to where we started.

110 I'm not really sure how this MTM thing even makes sense. I get that you could drastically overinflate the value of a MBS on your books, but how is it fair to mark them zero? They can't be worth zero...it doesn't make any sense. Even the worst of the sub-primes can't possibly be worth zero. Is there any other accounting method so that banks can give them value that is somewhat reasonable?

111 It means that one of these men is lying

When two disagree, at least one is wrong,

112 Alex,

It's the 'market' part that gets you to zero. If no one is willing to buy it, it's worth...zero. The fact that you aren't trying or interested in selling makes no difference.

113 The boat has a hole in it,
This plugs one of them. Now we can start throwing money at it.

114

Let's suppose that you want to recover (place back on the books) a security that has in the past been written down to zero.

Banks assets are on the left and are listed in order of liquidity starting with cash, then loans and securities and then stuff that almost never gets sold like buildings and pension funds and stuff.  Liabilities (deposits) are on the right and what's left is capital.

The transaction would debit some asset category (let's call it "Extremely illiquid Securities") that should be placed with illiquid stuff since there is no market.  The credit would go to some expense category probably (recoveries), within capital.  Assets go up and capital goes up, and the capital to asset ratio gets better by a lot.

There is no impact on cash, the stuff banks need to lend.

115 This is all we need. Seriously. Happy new year.

116

No, now we need to repeal the Qwinn.

117 Time for an Update:

SEC, FASB Resist Calls to Suspend Fair-Value Rules

http://tinyurl.com/fuckthisurlshit01

118

Well if you fuckin goobers would learn how to operate a compootar, maybe you wouldn't have so many problems.

But yeah, this new url shit sucks worse then what it fixed. Who the fuck did Pixy get to code it, Congress?

Just make the URL's linewrap.

119 See?

120 i hear some ppl saying "there is no credit! there is no credit!" i hear others saying that's not true, i don't know who to believe. but whether there is or is not credit available, creating money out of thin air isn't the answer, there is nothing backing that money up, it's like an empty quart of Valu-Rite, it says "Valu-Rite Vodka... 1qt" right there on the label, but you take the cap off and there's nothing in it.

121 We'll see if you're singing the same tune when a giant chunk of sky falls down and crushes your home, Mr. Principled Ideological Man.

I don't own a home. But the fact is, principles aren't changed by how hard they are to keep or how fair it seems. Either its right or wrong, regardless of how much I care for it.

122 Er, that was me, damnable sock puppets

123 I've been pretty pro bail out until tonight.  My biggest problem is when I listen to people like phronesis, as much as I respect his position and his knowledge I feel like I'm getting the bum's rush,  the tone of the bail out's supporters is just too hysterical.  And the way the Senate is pushing this thing through on the sly attached to a freaking tax cut is just too much.  I've changed my mind.  I wouldn't mind if the vote in the Senate fails tomorrow.  If it succeeds in the Senate I wouldn't mind seeing it killed in the House.

124

Unless it's a shack down by the river any accounting rule that values a house at ZERO is stupid.

125 BTW where can I get one of these MBS's? I'll give them a dollar fot it.

126 Unless it's a shack down by the river any accounting rule that values a house at ZERO is stupid.

What about a VAN ... DOWN BY THE RIVER!!!!

I guess that doesn't amount to JACK!!! SQUAT!!!

127 The Obvious.  I'm  sorrry if i offended you.  It wasn't intended. I've succumbed to snark more often than I should lately.   I just think I have a pretty decent understanding of the theory and my job requires me to look at the capital markets, so I see a lot of this information daily.  All of this leads me to believe we are in a serious mess here, and while I don't know that this best plan possible, time is of the essence and I doubt congress will produce something more effective than the collective wisdom of the Fed and treasury.  Certainly I might be off here, but all the data sways me to err on the side of doing too much given the consequence of no action or ineffective action.

128 Phronesis,

You maybe right, but after all I've heard to this point I just don't trust your judgment on this any more.  I'm sorry.  If I'm wrong, I'll be sorrier.

129 What say you about this set of ideas:
http://www.daveramsey.com/media/pdf/the_common_sense_fix.pdf
?

130 the obvious, if this doesn't pass and we don't see some other form of intervention, I hope I'm wrong too.

131

Steve Wynn on Fox had a great idea...forget buying the paper, buy preferred stock in the banks.

 

132 An example I heard; Two houses in a market, one was a dilapidated wreck, the other an upscale home. They were both foreclosed, and therefore were given the same value. By removing mark-to-market rules the banks could more accurately give a higher value to the the nice home which in turn would increase the banks assets. Which would increase the asset to liability ratio. Isn't this a good thing?

133 Wait, so Ace's menstrually induced hysteria that the world was going to implode if we didn't give some dude $700 billion was wrong, and there's some other way to save us from the devil credit crunch? Imagine that!

Sheesh.  I'm embarrassed.  So many of us have pushed this site on our friends as a fantastic, albeit crude conservative site.  And then suddenly, when the crunch comes, Ace turns into a liberal 'tard and supports the government controlling us and our market.  THIS IS NOT 'OK'!  It's not even CLOSE to ok.

Your an embarrassment, Ace.  You've embarrassed all of us who have for so long supported you.  You are making us ashamed of that commitment.  Fix it.

Regain your manhood and support the conservative principles you espouse!  Nut up!  Don't become another Andi Sullivan.  Be a man. The market can take it if no action is taken.  You can too.  Let us know that you still trust the invisible hand.

134

Kevin,

WTF are you talking about? It is not as if he has been yanking anti-bailout posts or refusing to consider and attempt to rationally argue the points raised by dissenters.

As far as the hyperbole, overreaction, and meltdowns goes?  Hell, man, that's Ace.  It's why we are here.

135

A couple points:

the expanded application of mark to market is relatively recent, and the result of actions by the accounting profession, encouraged by the SEC, in turn encouraged by SOX

the rule creates uncertainty when it requires a valuation of assets that don't have a recognized market (and therefore no market to "mark" to)

application of the rule in uncertain situations (caused by market downturns) results in the "appearance" of inadequate capital for lenders and borrowers

[the goodwill write-off and impairment rules should also be reviewed and appropriately adjusted]

elimination of bad accounting rules will not, of course, bring back housing prices that have been affected by oversupply of housing and over supply of credit- these issues have to be separately addressed, by reform of the cdra and fannie and freddie

 

 

 

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