More Mark-to-Market
Starting at around minute 40 of this video, Princeton Economist Alan Blinder has an informative discussion of the mark-to-market issue. Let me try to give a written account that’s less flip than what I wrote this morning. The idea of mark-to-market accounting is that when you’re reporting your balance sheet — your assets and your liabilities — you need to report the value of your alleged assets at what you could actually get for them on the market. In a normal highly liquid market, this is easy and non-problematic. But as Blinder says, in an illiquid and non-functioning market, as we currently have for our “troubled” assets, you get into trouble. Specifically, you get these huge spreads between the bid price and the ask price for the assets and no actual sales happening. Blinder’s example is that if the highest bid is $20 and the lowest bid is $60, where do you value the asset? Thus, “there are legitimate problems that need some attention in how you apply mark-to-market accounting when markets aren’t functioning.”
He continues, however, with “having said that, I know a wrong answer, which is to put it in at face value.” And that’s what proponents (mostly on the right, but also some on the left) of ending mark-to-market want to do. They want to say that you can value your assets not at what you could sell them for, but at what you paid for them. Blinder returns the example of the $20/$60 bid/ask spread and notes that “I’m pretty sure $100 is the wrong answer.” And yet this is the essence of the proposal — take the fact that the assets are hard to value, and use that as an excuse to unambiguously overvalue them. Mark-to-market, Blinder concludes, is “the worst form of accounting until you start thinking about the alternatives.” For obvious reasons, though, this switch has substantial support in some sectors of the finance community and also appeals to some in congress as a “free” way to “solve” the problem.
72 Responses to “More Mark-to-Market”
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October 1st, 2008 at 11:05 am
Why not just use the more generous value in these cases? If the spread is known, $60 is surely a better estimate than $100. This is surely more complicated than is implied here.
October 1st, 2008 at 11:09 am
you are just some blogger
October 1st, 2008 at 11:12 am
You. Matthew. Asshole. Why don’t you just stick to what you know – blogging about Lost and the Wire – and leave economics to people with brains
October 1st, 2008 at 11:15 am
The problem at hand is a bit more specific than that. Current practice for the $20/$60 bid/ask spread is to keep it marked at $60, or whatever it was the last time you marked it–until the same or substantially similar assets are sold by someone somewhere (publicly), in which case the assumption has been that you mark to that sale price. The problem is what if some hedge fund blows up (as hundreds or thousands will probably do in the coming months), and it’s holding these assets: it has to sell them for whatever it can get–$20–and so under current practice everybody else would have to mark their assets to $20 even if that’s not the “real” price for them.
The new FASB guidance basically says that if the trade is clearly part of a fire-sale you don’t necessarily have to mark to the sale price, you just have to use your best judgment as you adjust your mark to fit the new price information. It doesn’t suspend mark-to-market accounting; in fact, it claims to not even change the rules, only to clarify an ambiguity in the existing regulations. Of course, it opens up a giant loophole that will allow plenty of companies to essentially avoid marking to market, given that these assets are never liquid even under normal circumstances, and probably it will only serve to prop up insolvent firms longer and to reduce transparency in the market. But properly marking to fire-sale prices does present a genuinely difficult problem.
BTW, this issue is a big part of the argument for a TARP-style bailout–again, which is not to say that’s necessarily the best approach.
October 1st, 2008 at 11:18 am
Hmm… I guess it does suggest that these private, illiquid markets are not good in these situations. That fits with the idea that we should move CDS trading to a clearinghouse system, right?
October 1st, 2008 at 11:20 am
For obvious reasons, though, this switch has substantial support in some sectors of the finance community and also appeals to some in congress as a “free” way to “solve” the problem.
It’s also the way things were done for all of time until about 2002. Agree it’s probably not the best solution, but it’s not some crazy scheme someone cooked up out of nowhere.
October 1st, 2008 at 11:23 am
Matt,
I don’t know what’s happened to you since you moved over from The Atlantic, but you don’t seem to be cross pollinating ideas before you turn them into posts.
Dave H. and Right have legitimate comments to your point (particularly Right’s). Hopefully you’ll read them and research in the direction they’re mentioning, to have a more thorough understanding of the issue.
October 1st, 2008 at 11:25 am
Well, you need to keep in mind, that even in the best times these assets and derivatives were hard to value. Don’t think that there was reliable prices back 2 years ago – there was not.
This is a huge issue made worse by the fact that we are in a crisis.
mpowell – itis going to a clearinghouse system. The clearing corporation is going to clear these by the end of the year.
October 1st, 2008 at 11:35 am
Matthew, you seem like an intelligent guy, so I’m not going to bs you. You’re wasting your life as a professional blogger. As far as I can tell, your job seems pretty straightforward: find reasonably interesting stories on the web and re-post them online. No offense, but you’re not a real reporter (I know you can argue that bloggers serve an important journalistic function, but I’m not talking about that. You can’t deny that journalism requires actually getting out of the house. My 11-year-old daughter has a blog, for jesus’ sake). And unlike other professional bloggers, you’ve never written anything of any significance that would qualify you as an expert in anything. No books, no magazine articles, zip. Nor have you ever had a career outside of blogging (again, unlike many other bloggers). Matt, my question to you is this: what qualifies you to inform the rest of us about anything? What can you tell the rest of us – who have real jobs, who can read the papers and surf the web on our own – that we can’t figure out for ourselves?
October 1st, 2008 at 11:43 am
Jill,
Matt did write a book (Heads in the Sand).
October 1st, 2008 at 11:45 am
And unlike other professional bloggers, you’ve never written anything of any significance that would qualify you as an expert in anything. No books, no magazine articles, zip.
Ouch. That’s pretty cold, seeing as how the Amazon link for Matt’s book is over there on the right.
October 1st, 2008 at 11:46 am
Did Matt read this? Another day, another deception.
FROM: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081001/REG/810019993/1036
October 1, 2008 8:43 AM ET
(Reuters)—U.S. securities regulators on Tuesday gave the financial industry a reprieve from marking hard-to-value assets down to fire sale prices, throwing a lifeline to an industry beset by strained credit markets and the latest round of bank failures.
The U.S. stock market added to gains on the news, in hopes that regulators’ new interpretation of fair value, or mark-to-market, accounting rules, will slow or reverse the heavy flow of mortgage-related losses on banks’ balance sheets.
October 1st, 2008 at 11:48 am
Yes, Matt, how dare you have an opinion about something that requires expertise in finance. When we lay people hear about mark-to-market accounting, the uptick rule, and SEC waivers of net capitalization rules granted to five investment banks (no longer with us, by the way), we need to back off and let the experts handle it. They’ve done a fine job of it so far, and if that happens to lead us into the next Great Depression, that’s the price we have to pay.
October 1st, 2008 at 11:49 am
Jill (above) – if you think MY is not qualified to inform you about anything, you can choose not to read his blog. Hopefully no one is forcing you to do so.
October 1st, 2008 at 11:49 am
Just out of curiosity, which randroid website linked to this post and sent over these asshat commenters who bitch pointlessly about Matt’s credentials?
October 1st, 2008 at 11:50 am
Jill, what qualifies anyone to comment on the news of the day? What qualifies you, for instance, to call Matt unqualified?
Answer: The quality of the evidence you provide. You provide none.
Matt, here, is showing his work – he tells us how he arrived at his conclusion, and although we’ve seen some ad hominem attacks on him, we haven’t seen a real rebuttal. (I’d characterize the comments by “Dave H” and “right” as being elaborations on the points made by Matt and Blinder, rather than rebuttals).
So what’s your rebuttal? Where did Matt screw up? And what qualifies you to say so, if factuality isn’t sufficient?
October 1st, 2008 at 11:53 am
The current crisis is caused by the fact that financial
institutions are holding unknown quantities of assets that
hardly anyone wants. No-one cares to put a value on subprime-
related securities; and given the apparently widespread risks of insolvency, no-one cares to put a value on the trillions of dollars of credit-default swaps. The difficulty is that both
the financial instruments, and the various positions, are highly opaque.
Nevertheless, right now the balance sheets are sufficiently meaningful that people have a pretty fair sense of which institutions are relatively strong, and which are on the brink. Weaken the mark-to-market rule, and all the accounts become *more* opaque, not less. That’s a step in the wrong direction. Essentially everyone would have two sets of accounts: the fictional accounts with inflated asset values, used to satisfy regulators; and the more realistic accounts used to figure out the actual risk of default.
Now maybe this would have worked if you were changing the rules at a time when institutions were generally trusted. But changing the rules right now, when nobody trusts anyone else, is just going to perpetuate the current distrust. Everyone will show the regulators healthy-looking balance sheets; but everyone will be lying, and everyone will know that everyone
else is lying.
Terrible idea. And probably one that will end up with an even bigger and wider crash, also involving the accounting firms.
Right now we need to let the weak entities get swallowed by the strong ones. In the longer term we need to bring all these derivatives into a market with standards and rules and transparency enforced by centralized institutions (like the NYSE and NASDAQ – centralized but probably not government-run).
October 1st, 2008 at 11:55 am
Matt and Blinder are correct: you can’t pretend your way out of a financial crisis.
Oh, and could you please call off your goons, Yglesias? I’m getting sick and fucking tired of being forced at gunpoint to read your blog.
October 1st, 2008 at 11:57 am
kafka, I think you’ll find that Dave H. above is more accurate in his portrayal of the SEC guidance than Reuters. It’s not at all clear that the SEC is saying anything really new, and SEC/FASB explicitly professes to be offering “clarification” rather than new rules.
Here is what the SEC actually says:
October 1st, 2008 at 12:00 pm
Richard Cownie has it exactly right. In a crisis of confidence, you want to do things that bolster confidence. Increasing the opacity of accounting is not the way to do that.
October 1st, 2008 at 12:02 pm
And unlike other professional bloggers, you’ve never written anything of any significance that would qualify you as an expert in anything. No books, no magazine articles, zip. Nor have you ever had a career outside of blogging (again, unlike many other bloggers). Matt, my question to you is this: what qualifies you to inform the rest of us about anything?
Others have pointed out the ad for Matt’s book that you managed to miss on your way to writing this brave message. I’ll also point out that Matt has also been published in The American Prospect, The Atlantic, the LA Times, the New York Times, and probably others. (Maybe I should make sure: those first two are magazines, Jill.)
October 1st, 2008 at 12:04 pm
A couple of important points that Matt and other people around here don’t seem to be aware of:
The mandate to use mark-to-market (FASB 157) wasn’t until November 2007.
Suspending that rule would return us to the accounting procedures used before mark-to-market was mandated.
Whatever the problems of the old rules, and there were many, they appear to allow for a more orderly valuation method than the mark-to-market rules.
October 1st, 2008 at 12:05 pm
The issue seems to be close to what got us here in the first place. All I had to do to get a home loan was to have somebody (an appraiser) inflate the price of the asset and presto! Instant Cash.
October 1st, 2008 at 12:11 pm
The reason mark to market was added in the first place was to keep other Enrons from happening. The old accounting method was abused horribly, so it was changed. Maybe further tweaks are needed, but going back to the old way is not going to be helpful.
One of the biggest problems right now is that lenders do not trust people to pay them back, so credit is frozen. (Or more specifically, they don’t know how much interest to charge given the risk in the market.) Allowing entities to price their assets at face value is going to increase the uncertainty in the market.
Think about it this way. Would it help the mortgage market if we let people go to banks and ask for home equity loans based on what they paid for their houses rather than what they’re worth on the market right now? Something tells me banks would originate fewer mortgages without accurate appraisals of the property they’re loaning money against.
October 1st, 2008 at 12:15 pm
Well,
The interesting tidbit here is that the SEC essentially just said “f-you” to the entire IFRS conversion approach towards accounting standards. At the end of the day, this is exactly why there can never be a true convergence of accounting standards throughout the world, because accounting standards (like taxes) are politicized rather than being a true academic endeavor (i.e. – trying to find the answer most consistent with the general principles of accounting).
Well – as a CPA having to learn an entire new framework, I think this is evidence that all of the hoopla over IFRS and the US going to a true IFRS framework is dead.
October 1st, 2008 at 12:15 pm
Since the markets for these shiny turds on the books are inactive, the “clarification” will let management use their “assumptions” and “judgment” on how to value them. Great, what could possibly go wrong?
October 1st, 2008 at 12:15 pm
JRVJ is absolutely correct. Matthew’s blog has gotten significantly worse since he moved to CAP – his posts recently generally consist of Obama boosterism rather than considered thought. I am hopeful that this is an artifact of the election season rather than the move to CAP, but we’ll see, I suppose. That said, Jill’s comment is moronic – if you don’t think Matthew has “never written anything of any significance” then why is Jill reading him?
On the topic at hand, Matthew quotes Blinder: ” Blinder returns the example of the $20/$60 bid/ask spread and notes that “I’m pretty sure $100 is the wrong answer.””
In the presence of an illiquid market, this is not necessarily correct. The $20-$60 spread in such a market does not give you good information as to what the price would be in a liquid market – the price in a liquid market could very well be $100. The very fact that the market is illiquid means that the bid and asks do not represent valid information as to the value of the security. As the SEC and FASB point out in their guidance yesterday, “when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker”. In other words, the $60 ask may be based on the same type of model as the $100 valuation except that the broker, when calculating the $60 ask has less information than the holder of the security that values it at $100. So the fact that there is a $60 ask, where there is an illquid market, doesn’t necessarily give us any more information as to the value of the security than the $100 valuation by the current holder.
October 1st, 2008 at 12:18 pm
Whatever the problems of the old rules, and there were many, they appear to allow for a more orderly valuation method than the mark-to-market rules.
We live in disorderly times. I’m open to the possibility that mark-to-market rules have created problems, but as best as I can reckon, those rules appear to merely require companies to accurately describe problems. Remember that the rules don’t require companies to pretend that there is a functioning market where there is none.
October 1st, 2008 at 12:20 pm
kafka, I think you’ll find that Dave H. above is more accurate in his portrayal of the SEC guidance than Reuters.
The lead in to the article I linked to was this:
SEC says estimates—not mark-to-market—good enough for distressed assets
Regulator tells banks they can rely on level 3 input; ‘pick a number, any number
Maybe it’s an exaggeration. But in the current climate, it’s really hard to trust anyone, let alone the SEC.
October 1st, 2008 at 12:44 pm
“Remember that the rules don’t require companies to pretend that there is a functioning market where there is none.”
Argh, of course I ‘remember’ that, because the SEC just ‘clarified’/changed the rule to that interpretation YESTERDAY.
“but as best as I can reckon, those rules appear to merely require companies to accurately describe problems. ”
That isn’t the case. Until the ‘clarification’ yesterday mark-to-market accounting was facilitating a death spiral of selling as large ongoing entities like AIG were forced to sell into an illiquid market or take an enormous hit on their credit rating instead of allowing them to hang on to assets for a year or two while things calmed down (the policy they would have employed as an insurance company at any time in the past 50 years). Essentially mark-to-market accounting greatly intensified panic-selling.
Look this isn’t a partisan point. A year ago I would have thought that mark-to-market accounting was a great improvement over tried and true older methods. But it turns out that mark-to-market has serious problems in markets when a bubble pops because it severely discourages what we would normally think of as a good long term look.
October 1st, 2008 at 12:45 pm
Would it help the mortgage market if we let people go to banks and ask for home equity loans based on what they paid for their houses rather than what they’re worth on the market right now?
No, but it would (and does) help that we mark houses to model (that’s what an appraisal is), not to market; it would not in my thinking be an improvement to say that “your house is worth whatever the last house sold in your subdivision sold for”.
October 1st, 2008 at 12:48 pm
As someone above pointed out, Matt seems to believe that mark-to-market is the long-standing accounting standard when it’s implementation is really brand-spanking new. My basic college accounting courses I took just 4-5 years ago based everything on historical or book value.
October 1st, 2008 at 1:11 pm
We live in disorderly times. I’m open to the possibility that mark-to-market rules have created problems, but as best as I can reckon, those rules appear to merely require companies to accurately describe problems.
The issue is that as one institution collapses and has a fire sale on an assest, all the other institutions have had to value their assests at that new “market” price. Since they are all using leveraged money, they loans get called and they have to unload their assests at an even lower price. The next thing you know folks are selling at 22 cents on the dollar and the market has imploded. Of course, it doesn’t matter that this asset is actually a bunch of mortgages on REAL PROPERTY that is mostly in good standing and none of which have lost 80% of their value or suffered an 80% default rate.
What should happen is these mortgaged backed securities (and others of their kind) should be allowed to have a floor value based on the real assets that back the mortgages (or even 70-80% of that value). Even if you only institute this rule for a year or two to let the market work out this problem I think this would help immensely.
The biggest flaw with mark to market is that it ignores the very real value behind these illiquid assets.
October 1st, 2008 at 1:13 pm
I used to be a finance professional working for a (very successful)
hedge fund. I say this because the game in these comments seems to
be ad hominem attack.
1) There’s no rational reason that Matt’s interesting quote from
someone who unquestionably has expertise should have provoked this hostility.
2) If you think that the “fire-sale” assets are undervalued, please explain
why the smart money isn’t eager to buy them.
3) If we move away from mark-to-market, company accounts will become useless,
and the market will seize up, at least as an effeicient mechanism for capital
allocation. This happened in Japan leading to a 10-year recession.
I used to have a colleague who said that Japanese banks make money ‘by definition’.
October 1st, 2008 at 1:16 pm
The credit market is frozen because of lack of trust, which in turn is due to utter lack of transparency as which banks have how much worthless crap on their balance sheets- making it impossible to determine who’s really solvent and who isn’t.
So perhaps those having so much fun lambasting Matt could answer a simple question: how does making it EVEN HARDER to figure out which banks are actually solvent- by almost certainly overvaluing toxic assets and thus disguising troubled balance sheets- help the problem??
The long-term arguments for and against various accounting methods are one issue. The psychological effect of making this particular change at this particular time is quite a different one.
October 1st, 2008 at 1:22 pm
Richard Cownie is right. Matt, ignore the goofballs.
The change was put in place to avoid Enron-type issues and the problem is that they did not go far enough and force banks to report off-balance sheet risks and require capital adequacy reserve set-asides to offset off-balance sheet risks.
Doing this is perhaps the worst idea imaginable. It will allow zombie banks to continue to operate based on pretend balance sheets. We should be putting measures in place to support the strong banks as the Europeans are doing today (although I think the timing is mostly coincidence).
Strong banks mean a strong economy Propping up weak banks by means of accounting subterfuge will lead to a long period of stagflation.
Don’t believe me? Just ask the Japanese. They propped up their bad banks and suffered through 10 years of zero or negative growth.
October 1st, 2008 at 1:26 pm
Hey, we’re Americans. We never learn from other people’s mistakes! We have to make them ourselves. (And then we still don’t learn…)
October 1st, 2008 at 1:26 pm
” And that’s what proponents (mostly on the right, but also some on the left) of ending mark-to-market want to do. They want to say that you can value your assets not at what you could sell them for, but at what you paid for them.”
This is just not true. They want to say that you can value them at what you believe they’re worth in a healthy market, given the projected cash flows, discount rates, etc. No one is saying that if you own a package of mortgages that include some that have defaulted, or are likely to default, that you should be able to value that package at the price you bought it. Clearly, it’s worth less than it once was. What people are saying is that you shouldn’t necessarily have to value it at 20 cents on the dollar (the “market price” in this distressed, panicked market) when, in the long run, it’s almost certainly worth 50 cents on the dollar.
I don’t think this change is going to make a huge difference — people are still going to be skeptical of what banks have on their balance sheets. But Matt’s just pulling definitions out of thin air and using them to mount attacks on whatever anyone does to try to solve the ongoing crisis.
October 1st, 2008 at 1:37 pm
Jeffrey said (and others have said much the same):
It would be nice to think that these securities, on the average, will turn out to be worth at least 80% of their value. But if this is the case — and I am not the first on this thread to ask the question — why are the smart people not elbowing each other out of the way to buy them up at a huge discount from that value?
I am not trying to score a debating point. I am trying to understand.
October 1st, 2008 at 1:55 pm
“why are the smart people not elbowing each other out of the way to buy them up at a huge discount from that value?”
Because the buyer can’t tell the good ones from the bad at this point. Some of them are really bad, lots of them aren’t. With time and research you can sort them out. But without time, it doesn’t make sense to value all the good ones and the bad ones at the price of the lowest bad one.
October 1st, 2008 at 1:57 pm
Messing with the accounting system also exposes one to a basic
scam. You buy and sell simultaneously the same basket of securities.
One goes up in value, the other down. You cash out the profitable
leg and “value” the other at your favorite number. Hey presto! Profits
on which you take your bonus in cash. A variant on this blew up
Kidder Peabody a decade or so ago.
Nah, nobody on Wall St. is so unethical as to try and pull this…
October 1st, 2008 at 2:04 pm
It’s weird how this cuts across ideological lines. I guess some of us on the left are suspicious of mark-to-market accounting because we see in it an echo of Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . .purge the rottenness out of the system.”
A second interesting issue is Matt’s contempt and suspicion of free, easy ways to solve the problem. But for recessions and financial panics, there often *are* relatively cheap and easy ways to alleviate the problem. Krugman wrote a great essay on this theme, about the “Hangover Theory” of boom and bust.
http://www.slate.com/id/9593
October 1st, 2008 at 2:07 pm
Not convinced. If you know the average value is 80% of the face value, and you can buy a large enough random slice for 60%, you couldn’t possibly not make a lot of money in the long run. (And AFAIK determining what is a large enough sample is a matter of simple probability theory.)
My conclusion is that nobody is really sure that the average value is as high as 80%, and that you are advocating that we all play lets-pretend.
October 1st, 2008 at 2:24 pm
The problem is that you can’t buy a “random slice”. You can only buy what the seller offers. It’s basic lemon theory – sellers aren’t going to sell good MBSs at 80%, so the only MBSs on the market will be bad MBSs. And that leads buyers to further reduce the prices they are willing to pay, and so on, until there is no market at all.
October 1st, 2008 at 2:49 pm
Now I’m really getting confused. If some of these securities are known to be worth their face value, and some are known to be less, why is accounting for them at their actual value a problem?
October 1st, 2008 at 3:07 pm
“What should happen is these mortgaged backed securities (and others of their kind) should be allowed to have a floor value based on the real assets that back the mortgages (or even 70-80% of that value). Even if you only institute this rule for a year or two to let the market work out this problem I think this would help immensely.”
I’m sympathetic to the idea that the aggregate value of the
revenue stream from MBS’s is probably going to be around 70-80%
of the original aggregate price. Because defaulting on a mortgage is really painful for the homeowner in many ways.
However, there are several big problems:
a) The subprime and Alt-A mortgages issued in 2004-2007 had
insanely lax rules, and even those lax rules were often
fraudulently ignored. These loans are really terrible,
and no-one has any sound way to predict what’s going to
happen to them, because nothing so stupid has ever existed
before in the history of finance.
b) The various tranches of payments from mortgages got sliced
up and rebundled into securities in such complex and
unstandardized ways that the value of one particular
security is not going to be much help in valuing another
subtly different bundle.
c) In light of a) and b) – roughly, the knowledge that many
loans are really terrible, and the lack of transparency
that makes it really hard to tell whether a particular
security is terrible or ok – we have the classic conditions
for a market where everything gets priced as a lemon.
d) Any present valuation of the future income stream from a
security involves a bet about future house prices, future
wage growth, and future inflation (to discount the future
payments). That’s pretty tricky.
Now allowing the owners of these securities to make their
own guesses about what they’re worth is really asking for
trouble. Especially when many institutions seem to have taken
on such high leverage that they can’t afford any substantial
write-down.
October 1st, 2008 at 3:34 pm
If some of these securities are known to be worth their face value, and some are known to be less
Didn’t say that. The seller has some information that indicated that some securities are relatively good, some are moderately good, and some are less good. Since the buyer doesn’t know which ones are “less good”, the seller is going to offer for sale the “less good” securities. A smart buyer knows this, and adjusts its offer price down. This leads to sellers trying to sell only moderately good securities to exit the market. Which leads buys to lower their offers even more. And, eventually, there is a market failure because buyers simply do not know what they are buying.
October 1st, 2008 at 4:20 pm
“Not convinced. If you know the average value is 80% of the face value, and you can buy a large enough random slice for 60%, you couldn’t possibly not make a lot of money in the long run. (And AFAIK determining what is a large enough sample is a matter of simple probability theory.)”
The problem is that ‘large enough’ is too large. Also where precisely are you going to get the money for it with the credit market essentially frozen?
October 1st, 2008 at 4:24 pm
Whoops, and ‘in the long run’ is problematized by mark-to-market accounting. Your asset values may suck for a while. And you won’t be able to count in the expected value.
Also as to:
“Messing with the accounting system also exposes one to a basic
scam.”
Please remember that mark-to-market wasn’t widely implemented until November 2007. So we messed with the accounting system in late 2007. We are now going back to the default accounting system that was in place from 1950-2007.
October 1st, 2008 at 5:11 pm
We are now going back to the default accounting system that was in place from 1950-2007.
Which produces what number, and how? (Again, I’m not trying to play gotcha. I’m trying to achieve some level of understanding.)
October 1st, 2008 at 5:12 pm
But didn’t the 56-07 accounting system kind of, you know, fail spectacularly?
October 1st, 2008 at 5:40 pm
“But didn’t the 56-07 accounting system kind of, you know, fail spectacularly?”
Compared to what exactly? A hypothetically perfect accounting system or the 07-08 accounting system which replaced it? Because those seem like rather different questions.
BTW a large part of the Enron scandal used optional mark-to-market accounting on the other side of the bubble. On the way up it was able to dramatically over-value the assets by valuing them all at the high priced last-auction value.
October 1st, 2008 at 5:44 pm
Fair point, Sebastian. I guess we have our choice of suck with these rules, then. It doesn’t seem possible to get a fair value when the market’s either bubbling or popping.
October 1st, 2008 at 5:47 pm
Where I’m sitting I don’t have the bandwidth for video. What is Blinder actually proposing? Sticking with mark-to-market?
October 1st, 2008 at 6:23 pm
roac: We are now going back to the default accounting system that was in place from 1950-2007.
Maybe. I don’t think anybody knows how the new rules
will actually work. Optimistically it won’t work worse
than Enron. But capital markets can’t work properly if
nobody believes the accounting statements, and after what
has happened we are supposed to believe valuations that
the banks self-generate? No chance. So how can the banks
possibly raise private capital? Mark to market may be
rough justice, but it isn’t easy to game.
October 2nd, 2008 at 12:40 am
“Optimistically it won’t work worse
than Enron.”
Enron experimentally used mark to market.
October 2nd, 2008 at 1:03 am
Pretty much every article I’ve read about mark-to-market is inaccurate. You don’t have to mark illiquid securities to market, because there is no market – they go under level 3 assets, which is bank-code for “mark to levels that don’t look too bad in the quarterly report and pray that fundamentals improve”.
You also don’t have to mark your good MBSs to the prices of bad MBSs – MTM applies to securities that are literally the same or so similar that they might as well be the same, not securities that are in the same broad category. If I’m looking at my stock portfolio of Wells Fargo and Bank of America, I don’t have to mark my value to the prices of Wachovia and Washington Mutual. The same logic applies to MBSs; if a bank is holding a AAA senior first mortgage 2000-vintage MBS with a LTV of 60 and almost no defaults, they don’t have to mark it down to 22 cents on the dollar. They only have to mark their assets down to 22 cents on the dollar if they’re holding the same securities that somebody else sold. Those securities tend to be subprime second mortgages from 2007 that speculators used to make down payments and have already begun to default on. There’s a good reason they sell for 22 cents on the dollar. If you think otherwise, go buy some and hold them to maturity. If you’re unleveraged and don’t need the liquidity, you can ignore market prices for an indefinite amount of time.
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