March 17, 2009

Like it or not, on April 2, 2009, the January 2008 FASB fuel-on-the-fire mark-to-market change will be reversed. Get ready.

I'm for fair-value accounting.

I'm for banks' balance sheets accurately reflecting the value of their held assets.

But how do you value an asset when, like after a nuclear war, there is no active or viable market?

You know I'm not for mark-to-market accounting in frozen, distorted and illiquid markets, where banks had to value assets based on the most recent trade, no matter how stupid or desperate or panicked that trade was. I think the 1/1/08 FASB change was therefore a mistake.

Let's say you wanted to sell your prized Al Hrabosky baseball card (you know, the Mad Hungarian). You think it's worth $100, and that's what's reflected in the Baseball Card Trader's Magazine. So you go to the local baseball card show, and there's ten people there, and they don't want it. But one guy offers you 10 cents, since he paid a crack addict desperate for cash 10 cents for a Al Hrabosky card he found on the street a few months ago.

Based on mark-to-market accounting, your baseball card holdings balance sheet now takes that $100 card and marks it down 99% to 10 cents. You know that if you hold on, you can find a market and a buyer eventually that'll pay you $100, or close to it. So you do. And everything turns out fine.

Eventually that's what's gonna happen with a lot of the assets on banks' books today. They'll hold (if they survive), and things will turn out OK. They'll still lose massive versus what they bought the now-toxic assets for during the bubble, but the assets aren't completely worthless, as mark-to-market is forcing them to state today.

How to value the assets then? Best bet would be an independent auditor - paid by the government and not the bank. Remember what the ratings agencies did when they were paid by the source.

Or better yet just go back to how things were in 2007 and before. If it wasn't broke don't fix it. And no, I don't have an easy answer.

What I do know is that this one recent and minor FASB rule change brought down the world financial system. I doubt two minutes of consideration were given to it at the time. Kind of like the 40-to-1 leverage change stupidity. Or the reversal of the uptick rule.

But on April 2, 2009, the world changes. Like it or not. This rule will be changed, banks' Tier 1 capital will soar, they'll pass the government stress test, the big ones won't fail, the small ones will be acquired, and we'll move on.

This isn't an argument about mark-to-market as much as it's a big f*cking wake-up. Everything changes on 4/2/09. They're changing the rules, and they're gonna rush this through.

Invest wisely.

Backing Off On Mark-To-Market - Controversial accounting rules might be tweaked just in time for earnings and bank stress tests.

Several large Wall Street firms say they're on track for a profitable first quarter. Now they may get another boost, thanks to the Financial Accounting Standards Board.

Under a new proposal, so-called mark-to-market accounting rules would be tweaked, allowing financial companies more leeway in pricing assets rendered near worthless by the lack of buyers in the market. FASB's proposal is now open for comment and will be voted on during the April 2 board meeting, just in time for banks' first-quarter earnings season. FAS 157, the current mark-to-market rule, has been blamed by critics for the enormous destruction of bank capital--and the need for massive government bank rescue programs--over the last year.

While a cash-rich firm might be able to hold their undervalued assets until they recover, forced sales at wobbly outfits drive values down further, triggering more losses. "It had the unanticipated effect of throwing gasoline on the fire," said Sanford C. Bernstein analyst and former Lehman Bros. Chief Financial Officer Brad Hintz. "When this thing was written no one anticipated that markets could become this illiquid."


Anonymous said...

So, it is this silly little accounting rule that is responsible for all of our problems?

It has nothing to do with over consumption, over indebtedness, or over leveraging?

If we just change this silly little rule, all of our problems will go away and we can all go back to partying like it is 2005 again?

Yah Right!

That plus a frontal lobotomy for all citizens might just do the trick.

Excuse me while I barf!

Anonymous said...


I love you man, but sometimes you can be brilliant, while other times you sound like Alan Greenspan. (Sorry for the insult :_)

"How to value the assets then? Best bet would be an independent auditor - paid by the government..."

Since when has anything "paid by the (bankrupt) government" been independent? Anything "paid for by the government" WILL be politicized.

You are proposing that the Fox guarding the hen house, be able to pay an "independent" auditor to count the remaining hens.

Get real! No amount of micro-tweaking will save the system. The system has already crashed. It is time to press CTL-ALT-DEL and reboot the system and get a fresh start at re-building the system from scatch.

Anonymous said...

If you don't have buyers for your junk paper that might be worth more than a fire sale ,than you
are saying that your assets have future value when buyers are available . So , maybe if the banks were allowed to based the value on current comps ,minus default costs and marketing costs
for future defaults ,than maybe a fair value can be determined for accounting purposes . The problem also remains in the fact that nobody really knows just how many defaults will end up occuring and
how many jobs will be lost . If you factor in all the risk factors
of the future value and consider the non-performing nature of such assets ,you might be able to determine a fair future value .

Anonymous said...

"Best bet would be an independent auditor - paid by the government and not the bank"

You didn't notice that the government owns the banks yet? And the ones it doesn't own it has rather large "investments" in.

Independent is impossible.

Anonymous said...


You can't have it both ways.

The way you put it , financial institutions should be allowed to mark to fantasy rather than reality as it suits them.

If banks are allowed to elect when assets are to be marked to market, then why should other business entities be subject to internationally recognizable accounting standards ?

Why can't GM, Ford etc or the local newspaper agent be allowed to mark their assets to fantasy too.
So whats the value of yesterday's newspaper ?
Why can't the newsagent leave it on his books as a long term asset because it will be a collector's item, a hundred years from now.

An asset can be marked to market BUT it does not mean the owner of the asset has to sell that asset at the current market value, if the owner believes it is undervalued.

By the same token, if an asset is undervalued, then the same asset will be revalued to reflect the higher market price.

So why the heck are you moaning about, when a homeowner sees his home as an investment and is worth hundreds of thousands or millions more than you think it is.
The same homeowner has as much right as the bank to mark his investment to fantasy too.

Mark to market is merely assigning an accounting value to reflect the CURRENT value of assets or liabilities on financial statements. If banks have weak balance sheets then they shouldn't be allowed to lend out as much as they have been doing.
Which is what banking prudence is all about.
In short, you (the banks) are uncapitalised and you don't have the resources to make any more loans.
Want to write more loans ?
Ask your shareholders to pony up more funds !
I don't see banks declining to revalue their liabilities lower when their loan stocks fell in price.
In fact, the banks treated it as a profit and earnings (as if they did anything to 'earn it') which gave rise to their justification for the huge bonuses they paid themselves for a job 'well done'
and leaving us with the mess today.

Shame on you if you cannot differentiate the necessity of having international accounting standards to reflect true current values.
Why bother having audits then ?
Why don't we just believe whatever the management says.


moretroops said...

For every embarrassing conspiracy-theory cabal post you make, you have an intelligent insight like this one. That's why I come back.

Afterthought said...

You're endorsing the next bubble.

keith said...

I'm telling you how it is.

Do with that what you may.

Anonymous said...

"Let's say you wanted to sell your prized Al Hrabosky baseball card (you know, the Mad Hungarian).


Based on mark-to-market accounting, your baseball card holdings balance sheet now takes that $100 card and marks it down 99% to 10 cents. You know that if you hold on, you can find a market and a buyer eventually that'll pay you $100, or close to it. "

Keith, for your example to be pertinent to what is going on, you need to add that after you bought the card for 80 (hoping to flip it at 100), pictures of Al and children and sex came to light (in this hypothetical). And the card market is down in general because after all who really needs a piece of cardboard with a picture on it - you can't eat that. And the card magazines are run by card realtors hoping for the market to go back up so the prices aren't updated.

So now you are going around still trying to get the 100 you hoped for since that was your card flipping business plan and you are upset that no one will offer more than 0.50 and that the accountant want you to own up to that.

The mark to market rule was to prevent more Enrons. The banks figured they would get away with ignoring it. Looks like they were right. More made up numbers. More made up "profits" to justify contractually required "bonuses" that will be paid off by the taxpayer once everything hits the fan again.

The point of accounting is to let people know what the real deal is, not to hide stuff that comes back to bite everyone later.

keith said...

I don't know why everyone so far wants to argue the point.

The point is moot.

What you should be focusing on is the effect.

On 4/2/09, and in a rush and likely under severe political pressure, FASB will change M2M, the rule that took down the world financial system.

Get it?

Anonymous said...

And the bigs will have sold before then. People will jump in to the market on it's way back down. Perhaps the recent rally has "priced" that in.

Saul said...

There is no perfect answer to the problem. Mark to Market has issues - as your example shows with the baseball card.

However, mark to fantasy has it's own set of side effects and possible Enron like unintended consequences.

I do agree that it's a "game changer" in terms of short term stock movements, but not long term. No matter how things are marked, some businesses are destined to fail. Unemployment will not turn around... yet.

wallstreetveteran said...

FASB changes has been in the press for over a week now, thus the recent equity rally, much of this is already discounted. Accounting boards had a meeting last Thurs. So many banks now up 40% from lows reflect this asset mark change. INVEST CAREFULLY, THIS IS DISCOUNTED

bank dick said...

Hmm, should a market process or government accountants set asset values? Gosh, I wonder which one would reveal true prices of assets?

Don't be a tool Keith, you know the answer, they know the answer. They just don't like the result -- they can't handle the truth.

shultzie said...

As the token CPA here I will represent my profession in taking full blame for the entirety of the financial crisis...

If noone is buying a particular investment and noone wants a particular investment - it has no value. If an investment is illiquid and I can't get cash for it tomorrow - it has no value.

I'll tell you the effect:
1)Companies are going to use ridiculously slanted models that present value the future cash flows of these instruments.
2)They will use shiny, sunny and unrealistic assumptions upon which they base the model.
3)The auditors will happily sign off on these models.
4)Future cash flows will never meet the assumptions made in the model as more mortgages (Alt-A, Opt-Arm heck - even prime) go belly up.
5)Balance sheets will once again appear strong even though they are holding highly toxic paper. This is exactly where we were three years ago.

How soon after things turn around will the call for a return Mark-to-Market accounting be trumpeted.

supernintendo chalmers said...

oh yeah, right. it was mark to market, not leverage. right, i forgot.


confidence lost, like paradise.

Anonymous said...

I agree. To me it seems much like following the DOW to get an indication of the general health of the stock market - that is to say a bit asinine. DOW components are routinely brought in and ushered out depending upon the direction of the wind and the performance of the individual companies. When you are losing the game, it is helpful to be able to go re-write the rule book and change the field dimensions. This "do-over" on accounting rules seems much the same but I believe that Keith is right in that it will cause a momentary shift in the direction of markets overall. In the long run will it make a difference - maybe and maybe not but it bears watching. Accouting rules are a two edged sword and they can make or break a company or a bank. Then can instill confidence, fear and in this case, I suspect a temporary sense of false hope.

Smug Bastard

Anonymous said...

Then it's time to stop shorting bank stocks.

image009 said...

I have determined the future value of my comment here to be $1, 000,000. So if you are reading this - pay up asshole!

Anonymous said...

This explains Market to Market suspension quite well

Anonymous said...

The same homeowner has as much right as the bank to mark his investment to fantasy too.


Anonymous said...

Silly Keith & Co, can't you see that this fake economic crisis was created to buy assets for pennies on the dollar and pass agenda? An old strategy that has been applied by every powerful crook in history, from the Rothschilds to Rockefellers and JP Morgan.

Nothing will improve until the crooks who engineered this crisis have acquired enough assets to fleece everyone else, including natural resources in emerging countries.

The commercial real estate hasn't even blown yet and you're already talking about mark-to-market changes? Why, do you think that these crooks will be making everything tip-top that quickly to have competition in acquiring cheap assets? They'll force the competition into bankruptcy first, and that doesn't take 6 months and sectors (like tech) with P/Es of 19 during a deep recession. Does that look cheap to you?

See, that's the problem with the book smart crowd that acts like robots. You've gotten to see the big picture, have the gut feeling, compare with the other heists in history, understand how the system is rigged.

You people look like those straight A doctors who never find the problems by gut feeling or intuition because it's not in the medical school book or the symptoms deviate a bit from their robotic way of thinking. Very smart, but very dumb at the same time.

i've had it said...


you're smart enough to know that what the banks are going to do is make wild ass guesses using their rigged financial models to assign a value based on net present value of future cash flows. They will bake in the rosiest assumptions, inflate the value of the assets -- which will still be much lower than what they are worth -- and then sell them to the Feds via TALF or some other program.

Then, when they have unloaded all their assets, they will tank and the american people will be left holding the losses. The banks get a decent amount of money in return for selling us toxic rot and they laugh all the way to the...well, bank.

Mark-to-market should not be removed but it should be modified, and already has been, to include REALISTIC modeling of future cash flows.

"On September 30, 2008, the SEC and the FASB issued a joint clarification regarding the implementation of fair value accounting in cases where a market is disorderly or inactive. This guidance clarifies that forced liquidations are not indicative of fair value, as this is not an "orderly" transaction. Further, it clarifies that estimates of fair value can be made using the expected cash flows from such instruments, provided that the estimates reflect adjustments that a willing buyer would make, such as adjustments for default and liquidity risks.[12]"

So, yes; what's going to happen is that the FASB is going to say "use a financial model" to value the assets...BUT, you have got to take into account all of the realistic economic dynamics re: unemployment, gdp, risk, liquidity, inflation, default rates, etc.

The big question is: will the banks do this?

My bet is that the banksters will throw caution to the wind and bake in the rosiest assumptions they can, unless there is strict oversight on the assumptions used, but I doubt this can be done.

So, they will lie and we will have "mini-bubble 2" which will last for a while...just long enough for them to unload the assets on the govt. at a "fair" price. then, after everything's unloaded, the value will come crashing down because of the erroneous assumptions used: i.e., reality sets in with all the atl-a, option arm, prime loans defaulting.

but this time, the banks won't be lending money for mortgages at all -- or not nearly like they did before - so they won't get hurt in the second crash. however, the American people will get creamed because we will now hold all the toxic assets.

So, Keith is right: this rule is going to change. It may mean something additional for the market -- although a lot of it has been baked in now - in the short run. You still may be able to make some money from bank and related financial services stocks; maybe even some real estate stocks. but it won't be like before because the big bubble machine has been stopped...for now.

at the end of the day, the Feds are going to bailout the banksters by buying overpriced assets, forgiving borrower principle, and subsidizing mortgages so they are no more than 31% of gross income. That's where all of this is going.

Just goes to show: crime does pay.

Anonymous said...

isn't 99% markdown from $100 a dollar, not 10 cents?

jim said...

So, predictions, what does this mean? Market up, down? Ive read it twice and im still confused. Can the banks now keep lying?

Anonymous said...

Now that sane accounting is on it's way, it is a race between 5% NIM spreads vs charge-offs. I'm betting on the big banks, but this battle is far from over.

Anton Chiguhr

You've got to hand it to the hedgies and PE thieves, they wanted to buy US real estate for 5¢ on the dollar instead of 50¢ - 70¢. Can't blame them for wanting a deal, but do I blame them for trying to destroy America, by making a bad situation worse.

Angry Leprechaun said...

Market manipulation. When are we going to learn that there is always consequences, that the field is never level, special interest will be served, and that institutions that would never have survived are going to.

Slave Libor said...


I think London is getting to you. Your "significant judgment" in valuing baseball cards isn't worth a hoot if the rest of the planet isn't like minded. It's just a baseball card, paper and ink, and IMHO $0.10 is a pretty steep bid considering the replacement cost to make another one.

Which forces you to retort (let's say it together); "but, they're not making baseball cards anymore!"

Anonymous said...

S&A's Quote of The Day:

"These days man knows the price of everything, but the value of nothing.”

Oscar Wilde

Anonymous said...

hey, if the reinstate the uptick rule then they should have it the other way. make it so you can only buy on the down tick.

Anonymous said...

problem is that companies will abuse not having to mark to market. they will mark to fantasy or whatever they need to cook the books.

Anonymous said...

my lehman stock certificates are very illiquid right now. Perhaps I shouldn't have to mark to market.

Anonymous said...


I get what you are trying to say with the baseball card example but the problem is that the card only has value because people believe it does.

The same goes for a lot of this illiquid crap the financial firms hold.

It only have value if you hold it for 30 years and then it still may be a money loser.

Anonymous said...

Ah yes the Mighty Karnak will hold the envolope up to his forhead while the banker makes the guess.

The new mark to market rules.

Just what we need.

Anonymous said...

The rule won't be erased. It may be tweeked at best.

Any savy investor will know this will not make bad loans go away.

This is a "nothing burger".

Just more delay tactics.

Anonymous said...

Ok,,,, so "mark-to-market" works just fine on the way up,,, but now that the assets are down, the banks get to simply change the rules to "mark-to-fantasy".

In other words, we have spent trillions of taxpayer dollars bailing the banksters out from under these toxic assets, which will now magically become valuable by the mere change in a simple accounting rules???

As taxpayers, we have been raped, mauled and spat upon...Nothing will ever be the same.

Anonymous said...

Very insightful post. I like the analogy.

I'm beginning to think that even if you're wrong in the post and mark to market causes assets to be overvalued, so what if we have somewhat ficticious accounting to keep the party going. I really don't want to live through Great Depression II. The economy is and always has been a house of cards.

Anonymous said...


I'll say this once and then, I'll say it again.

Nothing is worth more than what someone else is willing to pay for it!

Nothing is worth more than what someone else is willing to pay for it!


friday said...

great post. more of these less of the conspiracy.

like the baseball card analogy. a few important differences. in this case he baseball card is paying cashflow and the MBS market is $9 trillion.

So part of the value is in the cashflow and a small change in the rule has a big ripple efect accross $9T.