Finally Some Intelligent Banking Moves

On the way back home from a spring training baseball game this week, my three friends and I actually mixed in a discussion of the impact of “mark-to-market” rules on the terrible banking situation – with our baseball talk. (For a discussion of “mark-to-market” see my previous post last month on this subject.

Last week, the mark-to-market rules were relaxed slightly, as reported in the article from Marketwatch posted below. It is my opinion that this change will have a major impact in turning our banks around and righting the situation – and that if this change had occurred last year, there would have been no need for a TARP or a bank bailout package amounting to hundreds of billions of dollars. Just as Ted Stevens might still be US Senator from Alaska were it not for prosecutorial misconduct, Senator McCain would probably be president were it not for the November, 2007 imposition of “mark-to-market”.

Until this week’s change, banks have had to mark down the values of, not only mortgages that were in default, but also the values of mortgages that were being paid on time if the market value of the underlying collateral (usually a house) fell below the outstanding balance on the mortgage. These markdowns then rippled through to the derivatives in the secondary markets and substantially lowered their value on the balance sheets of financial institutions. Mortgage derivatives, which were the safest investments one could make, crashed with the crash of the housing bubble.

FASB approves more mark-to-market flexibility

Panel passes measure unanimously; measure could boost bank profit

By Ronald D. Orol, April 2, 2009 MarketWatch (Excerpt)

WASHINGTON (MarketWatch) -- Responding to pressure applied by lawmakers on Capitol Hill, the Financial Accounting Standards Board on Thursday voted unanimously to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value.

The new guidance, which is expected to boost bank operating profits when they report first quarter results later this month, alters so called mark-to-market rules, which have required banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset.

Banks have complained that they have viable assets with strong cash flows that can't be sold because there is no market for them.

Seeking to resolve this situation, FASB's new guidance allows banks and their auditors to use "significant judgment" when valuing the illiquid assets such as mortgage securities.

For example, if companies have assets with strong cash flows that can be estimated, then those cash flows would be used to approximate market value in the illiquid market. This approach could be used when bank auditors determine there is a "significant decline of a market for new issuances," in other words if there was a primary market and now there is no market.

FASB Chairman Robert Herz said the agency reached out to analysts, accountants, hedge funds, mutual funds and rating agency officials before approving the new guidance. He said auditors will need to make a greater effort to judge whether something is distressed or not.

"The majority supported what we were doing," Herz said. "There no longer will be the presumption that these assets are being sold in a distressed sale."

The FASB approval comes after an effective lobbying campaign on Capitol Hill by the American Bankers Association and other interest groups. Roughly 800 bankers gathered in Washington earlier this week, in part, to meet and press lawmakers to send a message to FASB that the accounting rules needed to change.