Mark to Market?…We don’t need no stinking rules.
This week, Robert Herz, head of the FASB, told lawmakers that those banks who screamed loudest about fair market accounting practices were the very same banks that collapsed because regulators would not allow them to wipe millions of bad loans off their books.
Mark to Market is an accounting procedure enforced by the SEC right after Enron and WorldCom.Mark to Market requires brokerages and banks to place a fair value on their assets based upon the current fair market price for the instrument. With instruments that are frozen, such as CDO’s and Auction Rate Securities, where assets are sold for pennies on the dollar, the fair market value is low. This requires banks who hold these assets to take a write-down on their balance sheet. With so much money tied up in CDO’s and Auction Rate Securities, the banks cannot lend money. They are required to raise capital to meet regulatory standards. When a bank has written down so many worthless assets that they have more losses on the their books than assets, the bank is no longer considered to be solvent and collapses.
Banks, of coarse, want the Mark to Market rule changed. They want the ability to “hide” what have become known as “toxic assets”, take these assets off their books. The problem with this is simple…transparency. Investors really don’t know what they are investing in. What is the corporation really worth? This was the WorldCom problem. Failing assets were no longer on the books. Investors thought they were investing in a going concern, only to find out that the company wasn’t worth the paper the shares were printed on.
What makes Robert Herz’s testimony so troubling is that the companies that cried wolf the most about transparency are the same companies that are now demanding the be allowed to take their assets off the books. They claim that it is unreasonable to be required to value assets when the assets are frozen. But isn’t that the point? If the assets are frozen, what are they really worth…if anything.
This week we saw the Market reclaim 7000. Did anything change in the economy to cause the Market to go back up, especially by 500 points? On Tuesday, Blackstone Group LP CEO Stephen Schwarzman said that “Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half,” “This is absolutely unprecedented in our lifetime.” U.S. households net worth fell by $11.2 trillion, 18%, to $51.5 trillion by the close of 2008. Four years of gains — wiped out, according to the Federal Reserve. So what drove the Market up? The idea that Mark to Market rules were going to be changed.
Next week will be decisive. We have now reclaimed the S&P500 752 support level. But last week there was very little economic news. Next week won’t be so easy. We’ll see PPI, CPI, Housing Starts and Building Permits, Leading Indicators and on Thursday, the FOMC will be meeting with a rate decision. We’ll see if last week was a bear market rally or the start of a bull market.
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