Monday, March 16, 2009


The FASB has finally indicated a willingness to consider some relief on the mark-to-market accounting for some bank assets according to CNBC. The FASB is planning to hold hearings to get input on relaxing the mark-to-market accounting rules. The Board is apparently looking at two questions that should be considered in valuing the relevant assets.

Is there an active market for the asset? Is the market for the asset distressed? Even though the majority of the assets held by financial institutions are not subject to mark-to-market, I believe this is an important step to stopping the continued downward spiral. As I have posted before, the market value applied must be a fair market value. This means a willing seller and a willing buyer. The current market does not have willing sellers. The world is going through the greatest margin call ever. The values are much closer to liquidation value than market value.

I know the opponents to relaxing the accounting, such as the SEC, argue that transparency is more important and relaxing the accounting will result in marking to model. Something Enron did which became known as Marking to Enron. Yes, it will result in marking to model. Specifically, it will result in valuing the expected cash flows as opposed to what a few scarce buyers will pay. See this article from Bloomberg.

I am a big advocate of transparency. But the issue is 'what is the most appropriate value?'. It is not 'what is most transparent?' If the mark-to-market rules are relaxed for Q1, look for the Q1 reported profits of financial institutions to jump markedly. It should also result in the softening of worldwide negative sentiment as the downward selling pressure lessens.

Accounting usually makes people's heads spin, but this concept and its application is important and will impact us all.

Cheers, Mike

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