Doing Away With Mark-to-Market Will Solve Everything…They Think

Look out, because we are headed for a lost decade…at least. They are messing with mark-to-market rules globally.  Now, it will be a reclassification race to see who can write up their assets right to the edge of the law without looking too obvious.

This will just push out losses for a long time and will make actual losses look larger than they really are because ultimately these ‘assets’ are worth what they are worth.  Additionally, when a written-up asset goes bad the actual loss will be much greater than if written from the marked-to-market value.

Hey, does this mean that if I owe $750k on a $450k house the bank will now refinance my $750k loan balance if I promise to live their for 30-years?

With respect to mortgage loans, they are not ‘held to maturity’ investments. Mortgage securities made up of mortgage loans are not either. People move, die, lose their job, become ill, change jobs etc.  During the height of the housing boom the average time a person lived in a home in CA was 4.6 years. During more normal economic times, it is closer to seven years. During times of economic stress that time line can move out a bit but nowhere near to loan ‘loan maturity’ on a mortgage loan.

What lead the globe into the massive financial system breakdown was the lack of transparency, mis-marked assets and financial institutions outright lying about their condition every chance they get. Now, they think the solution is to endorse the marking-to-myth to an even greater degree.  I can’t even count the number of unintended consequences this will cause. Why would you ever want to own a bank stock or their debt if not backed by the Treasury?

On the flip side, I really don’t think many US banks ever marked their asset prices to market anyway. Perhaps they marked-to-market the assets that the ratings agencies have already attacked but not assets such as whole mortgage loans still rated at higher levels.

For example, Wells Fargo has $84 billion in second mortgage loans on balance sheet where a large percentage are underwater due to house prices falling so far. Despite marks already taken on similar portfolios that changed hands through the failure of Wamu and Wachovia, Wells still holds these at face value and carries a very light loan loss reserve. Given most remain very unrealistic about the value of their assets, this entire mark-to-market change could be a non-starter at least for US banks.

At the bottom of this page is my Level 2 grid from some of our nation’s leading banks. This sure looks like banks have been doing their best at avoid market marks all this time.

EU Banks Get Leeway on Making Writedowns

October 20, 2008 by Sara Schaefer Munoz

LONDON - European banks could soon find it much easier to avoid write-downs thanks to changes in accounting rules being pushed through by European policy makers.

In moves that analysts say could boost earnings but make it harder to discern the financial health of banks, the European Union and international accounting standard-setters are loosening so-called mark-to-market accounting rules, which require banks to value investments at the price they would get if they sold them immediately.

The changes will allow banks to reclassify some assets as long-term investments, a shift that will grant them a great deal more leeway in deciding what those assets are worth - and how much they have lost in the latest bout of financial turmoil.

The new accounting rules are “one of the many weapons being deployed to fix the banking crisis,” Belgian Finance Minister Didier Reynders said in an interview.

Analysts say it is difficult to estimate how much banks could reclassify among their hundreds of billions of dollars in loans and other investments. Yet not having to value some assets at the current market price “could have a material impact on earnings,” said Morgan Stanley analyst Michael Helsby.

The rule changes touch on an issue that has become highly controversial amid the global financial crisis. Bankers have complained that mark-to-market rules are making their finances look worse than they are by forcing them to value their assets at market prices at a time when markets aren’t working. But loosening the rules could allow them to hide serious problems.

The new rules will bring European accounting standards more in line with those in the U.S., where reclassification of assets to and from trading books is permitted in rare circumstances. In Europe, which lacks an overarching regulator like the U.S. Securities and Exchange Commission, banks could have an easier time bending these rules to their advantage, analysts say.

“Given the current weak accounting enforcement in EU countries, any proposal permitting certain exceptions in ‘rare’ circumstances is open to abuse,” wrote J.P. Morgan analyst Sarah Deans in a recent report. Ms. Deans points out that the International Accounting Standards Board, a body that sets standards for more than 100 countries, has indicated that the current financial crisis could be considered a rare circumstance.

The IASB made some changes last week, allowing banks to reclassify assets such as loans and receivables. The IASB said it expedited its decision following requests from EU officials, who wanted to see the measure put in place quickly.

EU officials say that by month’s end, the IASB changes could be broadened to include complex derivatives, a type of investment on which banks have already suffered tens of billions of dollars in write-downs.

Ms. Deans and other analysts say the reclassifying of assets reduces consistency and transparency of financial statements between banks and among countries, which may ultimately dent investor confidence. That’s in part because banks have some flexibility to value assets if they are not marked to market. By assigning unduly high values to assets, banks would simply be postponing losses, rather than alleviating them.

The three major U.K.-based banks, HSBC Holdings PLC, Barclays PLC and Royal Bank of Scotland Group PLC, declined to comment on the rule or whether they planned to reclassify any assets. The banks all reported significant write-downs in the first half of 2008, largely due to the falling value of assets in their trading portfolios.

HSBC reported a first-half write-down of $3.9 billion, RBS a write-down of £5.9 billion($10.24 billion) and Barclays, £1.9 billion. Barclays has written down less than many of its peers since the credit turmoil began, in part because it has classified some corporate-buyout loans as long-term investments, or “held-to-maturity.”

-John W. Miller in Brussels contributed to this article.

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