“An Opinion on Mark to Market” (reposted)

In April the Financial Accounting Standards Board, FASB, changed Mark to Market. They are now considering reinstating the Mark to Market rules.

Some are opposed to FASB getting involved, claiming it will destroy our economic recovery. But the important aspect of reinstatement is a better accounting of toxic assets still on the books of many BIG banks.

In April I commented on how rescinding Mark to Market would allow banks to hide toxic assets and mask their earnings for a couple of quarters. Here is the actual article I posted on It’s Worth and Opinion:


Originally posted – April 6, 2009

Was the new change in Mark to Market accounting a positive thing?

The move last week by FASB the Financial Accounting Standards Board was met with a positive reaction by the markets. On Wednesday markets advanced in anticipation of a change in the Mark to Market rule. On Thursday the markets advanced even further after the board’s announcement (Dow up 201, 2%; S&P up 18, 2.3%) driven by what traders thought would be good for the banks, even those that are still deeply troubled.

Was the decision by the FASB Board more beneficial to the banks? Does it adequately protect investors? Will it be good or bad for the economy?

To put this in perspective, just ten short years ago this same board changed Mark to Market at the behest of Enron and WorldCom, and I’m sure we all remember how well that went. Though FASB is an independent organization that sets accounting standards, political pressures appeared to be the cause of the change before Enron and WorldCom became the largest bankruptcies in our history.

With that in mind where does this recent change during bad economic times leave us?

My opinion is, it is a band-aid for the banks, worsens the protections for investors, and only stalls, like Enron and WorldCom, the inevitable for the economy.

With the change, banks stand to benefit the most. At least in the short-term. They can now mask the fact that they’re under capitalized for a couple of quarters or so. Admittedly it is difficult to value assets where there is no market, or where there is no recent market valuation of a set of assets. And banks have complained vigorously that they’ve been forced to mark the asset values below what they think their ‘real’ value should be.

Ultimately, the argument about the value of an asset rages on.

But, what is an asset that has no market worth; one that the market does not want to buy? Quite possibly zero. The banks, of course, think that even a zero value asset is worth at least 50 to 70 percent of its original value. Therein lies the rub for the investors.

What is good for the banks is not necessarily good for the investors as evidenced by the free-fall of Enron and WorldCom leaving investors with worthless stock and toxic assets.

Banks have never been truly transparent which means investors were applying various levels of faith in owning any bank stock. As a result of the relaxing of Mark to Market accounting standards investors will receive even less transparency from the banks.

At least Mark to Market forced the banks to mark these zero assets down to levels that could be less than ‘real‘ value, but investors would rather be surprised to the up side than shocked on the downside.

The affect to the economy could be minimal in the current cycle. But if the easing in the transparency manages to mask potentially damaging losses then it has only succeeded in pushing the pain further into the future.

Meanwhile, the bankers have extended the time they are able to keep their hands in our pockets. So, FASB, again under political pressure, has allowed the incompetent’s, through another sleight of hand, to rob investors and the American Taxpayers.

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