FAS 157-e: Accounting Change Could Undermine Treasury's Toxic Asset Plan

A vote is scheduled Thursday on a proposed accounting rule change that could undermine the Treasury's toxic asset plan, the Wall Street Journal reported.

The proposal, FAS 157-e, put forward by the Financial Accounting Standards Board, would give banks more discretion over mark-to-market accounting.

Mark-to-market accounting requires that banks mark illiquid assets to their market values--often much lower than their intrinsic values--leading to large write-downs. Banks argue this is unfair because they are not necessarily planning to sell the assets, and that the market value is temporary.

Proponents of mark-to-market accounting say that the rule is critical for transparency. That bank balance sheets are complicated enough, and to allow banks to have more freedom in the value they assign these hard-to-trade assets will only make their finances harder to understand.

According to the WSJ, if banks have more discretion to value these illiquid assets, more institutions will likely want to keep them on their books. But the emphasis of the Treasury's toxic asset plan is to rid the bank of these assets.

"There is no clear definition of what a toxic asset is," said Christopher Hoeffel, president of the Commercial Mortgage Securities Association. "Some bankers are saying, 'I don't want to sell these assets, because the loan might still be good -- and if I hold it to maturity, I might get my money back.'"

That seems to run counter to the Treasury plan, which could spend up to $1 trillion to remove impaired assets from banks' balance sheets. There is strong Wall Street support for Treasury's program, with some investors advocating a complete cleanup of assets via the Treasury program.

On Tuesday, Arianna interviewed House Financial Services Chairman Barney Frank on CNBC's Squawk Box on the accounting rule. She called the proposal to allow more bank discretion "watering down."

WATCH:

Comments

[Sekou Murphy]

12:20 PM on 04/10/2009

This is INSANE to suspend mark to market. All it does is lull people into a false sense that the financial statements report the reality.

If people were concerned about a banks ability to loan due to low capital, why not have the regulators change the regulations to allow banks to lend with lower capital requirements??? I know it might not be as easy, but it makes the most sense.

See more analysis at

http://phrenzie.com/2009/04/02/are-you-kidding-fasb-suspends-mark-to-market/

[BeyondGoodAndEvil]

11:06 AM on 04/02/2009

This is tantamount to accounting fraud.

Read my take here:
http://freerangetalk.com/?p=4510

[themodernleader]

11:07 PM on 04/01/2009

Ein Chicago. Read what others write about mark to market versus the fraudulent mark to model accounting. Organizations that must hide precious information have toxic or criminal information to hide. The more American organizations at all levels hide information from the ordinary people the more we become a closed society. An opaque organization is a totalitarian organization. The local school boards and other governments will not reveal information without court orders. They have despicable, corrupt decision making to hide. And in the future, you will not say what is on your mind because you will not trust anyone including your spouse or your children or siblings. Neither you are I will be writing our half-baked opinions on this blog. That is the outcome of opaque leadership.

[EinChicago]

10:34 AM on 04/02/2009

Hogwash. You're excusing stiupidity. Plain and simple. Yes, mark to market is dumb enough for even an idiot to understand, but it is still wrong. Anyone with a functioning brain knows that.

The purpose of audits is to determine a fair value, not to make the lowest common denominator feel better about themselves.

An asset which is paying on a per month basis more than the market price for that asset because of the handicap to a balance sheet that comes along with it is not really worth less than a monthly payout.

It's asinine to assume so. You may feel smarter, but you're not. the makrtet just dumbed down to your standards.

[BeyondGoodAndEvil]

11:23 AM on 04/02/2009

Fair value is not to be determined by what the banks think. We've already seen what a monumental disaster they've created. Fair value is just a lame way of saying, hey, these assets are really worth more than the market is willing to pay, so we'll decide what that figure is. Live in a free market economy, die by a free market economy - Not by shady accounting measures designed to keep the bubble inflated.

[Kache]

10:41 PM on 04/02/2009

Thermo - do us all a favor and ask Scotty to beam you back up, you are embarrassing Captain Kirk and the good crew.

There is no bank anywhere at any time under any rules that is going to open it's books to you or any other yahoo who waltzes in the door screaming about transparency. And you wouldn't have clue how to read the books if you saw them. Get over yourself already.

That's what bank regulators do. And you know what, they do know how to read mark to model, they've been doing it all of their careers, mark to market for mortgages is only 2 years old. THev question isd - what model? We haven't even seen the rules for the model that regulators will use, that comes in 3 weeks. And they certainly are not going to be the ones we had 2 years ago.

[AngryOhioan]

09:24 PM on 04/01/2009

The WSJ is reporting that the treasury has crafted rules which will only allow a handful of companies to bid on the assets. The process is rigged to overvalue the assets. Also concerns about which particular assets the banks sell are overblown because people take the 'toxic' assets metaphor too literally. If the banks sell better assets at a high prices, that helps them just as much if not more. Keep in mind the program is only selling assets that were originally rated AAA. They raise cash, and they can put off losses until later. The only difference between selling at a loss now and writing the assets down later is the timing. Deferring losses is always the first choice.

[PhilipTaylor]

08:34 PM on 04/01/2009

Wall Street’s MONEY Strangle Hold on Congress:

House Member = $1.86 Million/4 years = $1,860,000 every 4 Years
Senate Member = $7.50 Million/4 years = $7,500,000 every 4 Years

Of course, Wall Street Related Committee Members get FAR MORE!
(see analysis below)
_________________________________________

FACT: Wall Street paid $5,000,000,000 over ten years to Congress Members

So $2,500,000,000 to the 538 in the HOUSE and $2,500,000,000 to the 100 in The SENATE!

Avg House Member = $4,646,840/10 years = $464,684/year = $1,858,736/4 Years

Avg Senate Member = $25,000,000/10 years = 2,500,000/year = $7,500,000/4 Years

House Member = $1.86 Million/4 years
Senate Member = $7.5 Million/4 years

Of course, Wall Street Related Committee Members get FAR MORE!

Barney, Like the rest of Congress he has been bought!
Barney is cozy with both Geithner and Bernanke as shown when they are off camera on CSPAN!
_______________________________________________

AND Main Street America HAS ZERO SAY IN CONGRESS!

That is what is WRONG with America! Limit Total Lobby Money for each Congress Member to $5,000 per year and force them to go on-line with their citizens to raise Money they serve to remove this corruption of Our Representative Form of Government!

It is ALL WALL STREET BIG BANKS, FED, and CONSOLIDATED CORPORATIONS!

[FrozenNorthObserver]

02:30 AM on 04/03/2009

always follow the money. The only thing of value that the banksters have is the govt they have bought and its paying off like gangbusters.

[outnow]

07:12 PM on 04/01/2009

Deleveraging is no fun in a downward spiral. Mark-to-market is harsh in a liar-loan world. If I sell my real estate, I will lose money, so why are the banks any different. Banks are supposed to be prudent. Instead the banks are allowed to gamble and take the liabilities off their balance sheets so they can lend even more. So is there a softer, easier way for banks. Mark-to-market will, hopefully, gradually replace the liars' approach to mitigate the harshness of the accounting rule. Eventually, we must get honest about bank assets. When will that take place? When there is a general market for toxic assets? With down markets ahead for real estate, especially the collapse in commercial and prime loans on residential, this will never happen.

Barney Frank is just another paper-hanger.

[Kache]

11:11 PM on 04/02/2009

"I I sell my real estate, I will lose money, so why are the banks any different."

Let's pu that in a real world context - "f you are foolish enough to sel your real estate in this market, you deserve to lose money". Just because you might be foolish enough to do that doesn't mean your bank should have to write down the value of every comparable on their books - but mark to market requies them to do exactly that. Yourfoolishness becomes the reason why your neighbor gets laid off when your bank cannot finance his employer's payroll because some silly rule let your foolishness infect the whole town.

[Robert Cantor]

06:56 PM on 04/01/2009

FAS 157-e changes mark-to-market accounting so 'Banks' will unload the really bad assets - this will fatten up the value of the less 'bad' assets. This will maximize loss to the taxpayer (underwriting the toxic asset plan) and maximize gain to the asset holder, the banks.

[CaptainVideo]

05:16 PM on 04/01/2009

Marking long-term assets, that are still performing, to market is a recepie for driving financial institutions into bankruptcy and causing a financial meltdown because it creates a vicious downward spiral. If there is a temporary dip in the market value for these assets and the financial institutions have to mark them down, capital requirements will force them to start selling them at the reduced price to meet the capital requirements. This will drive their price down even more, so the financial institutions have to mark them down even more, which requires them to sell more to meet capital requirements. This drives their price down even more etc. etc. etc. Each sale produces additional losses. This goes on until the financial institutions are bankrupt, and the market has melted down, which is what we have seen.

Long-term assets that are performing, that is, the interest is being paid on time, should be valued at purchase price regardless of their current TEMPORARY market value. But banks should not have the discretions to determine which assest qualify for such treatment. This should be determined by regulators or the procedure is likely to lead to fraud.

[Ironquill]

05:41 PM on 04/01/2009

I agree with the jist of your remarks.

Bernanke has said that rules which are egregiously procyclical need to be examined, why doesn't that make sense, esp. with regard to accounting rules such as mark to market?

Banks have come under a ton of regulatory pressure--which is what will keep any accounting rule change from getting out of hand in the near term. Banks are going to end up fewer and smaller, this is the whole thrust of the broad measures, including the stress test, being put into effect.

[observer151]

05:09 PM on 04/01/2009

Here's what ought to happen - Part 4

15) Consider some sort of mandatory breakup/spinoff to shareholders of financial services companies when any company gets 'too big to fail'. Say the threshold is set as some percentage of GDP or as 150% of the size of the average of positions 3,4,and 5 in a given industry (nationally or perhaps internationally ranked) - break the leader up and spin it off like ATT was in the 1980's. Then look at #2 to see if it needs to be broken up. Eg. a company like Citi could be broken into a retail bank, a commercial bank, an investment bank, an insurance company.

[observer151]

05:09 PM on 04/01/2009

Here's what ought to happen - Part 3

14) For any Federally-regulated or publicly-traded company, or company receiving TARP funding, pay cuts to be handled similar to the following when any pay cuts anywhere in the organization are made - percentages are from base pay levels, and start at the C-level first:
a) C-level executives - 50%
b) E-level executives - 40%
c) Other high-level executives - 30%
d) Other management staff - 20%
e) Anyone else making > $80k annually - 10%
f) Those making between $40-80K annually - 5%
g) Anyone under $45k annually - no cuts

When times are good again, the cuts are repaid as deferred wages starting with category f) and then working back up to category a). Only those in categories d), e, f) when the pay cuts commenced get the deferred wages paid back with interest at the average of the 3 month T-bill rate for the period the wages were cut. Any fired/laid-off employees get the deferred wages paid upon termination.

[observer151]

05:08 PM on 04/01/2009

Here's what ought to happen - Part 2

8) Ban all CDS products unless appropriate reserve capital is held to back them up.

9) Reinstate uptick rule on short sales.

10) Increase commodity & financial products margin requirements by 400% on all futures contracts for speculators vs. legit hedgers. Double special margin requirements beyond that in periods of excessive volatility for speculative accounts.

11) Use multidisciplinary teams of auditors from SEC, CFTC, FDIC, NIAC, et. al. to descend on financial institutions en-mass, to ferret out all the dirt from under the carpet all at once. No team member can audit the same institution more than 3 years in a row.

12) Max. period any external auditor can serve a financial institution is 5 consecutive years, then a new auditor must be appointed.

13) For any Federally-regulated or publicly-traded company, or company receiving TARP funding, Executive variable compensation (bonuses) mandated to be based on trailing 4-year profitability (defined as fully diluted ROE). Perhaps based something like this to help foster better long-term decision making:
40% based on 4 FY years ago
30% based on 3 FY years ago
20% based on 2 FY years ago
10% based on last FY

[observer151]

05:07 PM on 04/01/2009

Here's what ought to happen - Part 1

1) Repeal Gramm, et. al. 1999.

2) Reintroduce Glass-Steagall

3) All banks/lending institutions must hold 30% of all mortgages & credit card receivables (by volume & value) they originate on their books - no securitization permitted for these.

4) No 3rd party servicers for mortgages - originators must be responsible for servicing and are responsible for up to 30% of the losses if the assets are securitized - gets rid of NINA and other non-qualified borrowers.

5) Bust up Citi and BofA and reconstitute them as a group of non-affiliated slightly geographically overlapping 200 branch credit unions. This will keep credit local and foster competition. Credit unions have an infinitely better loan loss history vs. commercial banks, and are much more reasonable to deal with. Add a 10-year moratorium on any of these credit unions from merging, and any merger must be outside their geographic area.

6) Keep Mark-to-Market. With sounder lending practices, it keeps internal abuse of asset values to a minimum vs. mark-to-model.

7) Mandate greater monthly disclosure of the details on the underlying assets in any securitized product or derivative therof.

[Obamalicious]

04:26 PM on 04/01/2009

How did he ever get elected? And re-elected........ Who are the people voting for this goofy fraud? What district is Barney in?

[useyournoggin]

04:16 PM on 04/01/2009

Whoa!

"Mark-to-market accounting requires that banks mark illiquid assets to their market values--often much lower than their intrinsic values--leading to large write-downs."

Someone has been drinking the Wall Street koolaid.

These securities are worth what someone is willing to pay for them -- that's it. That's their value.

Hiding the amount of losses by watering down mark-to-market rules will only prolong the pain -- that's essentially what happened in Japan.

[sonofsamphm1c]

04:36 PM on 04/01/2009

That simply is not true. It's a prescription for national suicide.

The Mark to Market changes are not watering them down; they are addressing a horrendous defect in the rule - a defect that did tremendous unnecessary damage.

There are millions of Americans who would still have their jobs if Mark to Market had been properly schemed in the first place. Damage - horrendous damage.

And you want it to do more.

[Carolab]

04:48 PM on 04/01/2009

No--THAT is simply not true. This is a prescription to fleece us for more than these assets are worth and hide the fact that these banks are insolvent and should be taken into receivership and broken up.

You are drinking the Kool-Aid.

[useyournoggin]

06:05 PM on 04/01/2009

I think that if you review the collapse of the asset bubble in Japan, you'll find that you're wrong.

Authorities waited years to institute mark-to-market accounting after the bubble collapsed. In the interim, no on had any confidence in Japanese banks because their balance sheets were so opaque.

The lack of mark-to-market accounting rules undermined confidence -- how can you buy shares in a bank if you don't know the true value of the bank's assets? How do you accept a bank as a counterparty if you can't assess its ability to repay you?

All this served to delay Japan's economic recovery. We should not make the same mistake.

An asset is worth what someone is willing to pay for it. It's basic market economics.

[vippy]

03:44 PM on 04/01/2009

I wonder just who will buy those TOXIC ASSETS?

[Obamalicious]

04:31 PM on 04/01/2009

They will be discounted so low that many investment firms will scoop them up to gain a profit.

[Obamalicious]

04:45 PM on 04/01/2009

Didn't you get the memo? The administration is now calling them "legacy assets"....