This is another example of stupid politicians meddling into intricate accounting rules to try to solve the ‘problem’.

It’s laughable that Wall Street fat cats can successfully persuade those Washington politicians that an accounting rule based on reality has actually caused this mess.

Market-to-market is a sound concept. The argument that there will be some ‘intrinsic value’ in the future for those toxic assets is simply a myth. We don’t know what the ‘intrinsic value’ is, and nobody knows. The idea that you hold those assets long enough, they will automatically go back to their ‘intrinsic value’ is simply idiotic.

…and I’m learning how to use terms I’ve never used before, but…

Seems to me that certainty about present prices for long-term assets (if that’s an apt term for real estate and other assets that the holder intends to keep long-term) doesn’t matter nearly as much as the long-term value of such assets when assessing a firm’s financial standing and strength. I certainly see some value, especially these days when once-strong companies are forced to sell off such assets right now, in noting the MTM values of long-term assets, but that seems to be the opposite problem: assuming these companies are not strong. Such assumptions would seem to feed, rather than fight, the crisis in confidence that underlies much of the trouble.

Suspending MTM rules — which were not part of the market until recently — likely will prevent much of that self-fulfilling pessimistic prognostication.

I also may be totally off-base (I’m treading in waters I’ve barely dipped a toe into before) but that’s part of hte understanding I’m coming to on all this.

it seems that the MTM “problem” is as follows: you own a bunch of assets, and I own some similar assets. You have (for some unrelated reason) gotten into a financial jam — maybe you are more heavily invested in MBS than I am — and your creditors have forced a “margin call” on you.

So, you have to have a fire sale to raise capital by tomorrow morning. You obviously are going to sell your least-performing assets — but, because you MUST sell, and MUST raise money NOW, you are a classic distressed seller. You get a very low price on those assets.

Me, I’m in no immediate trouble. I have no need to sell anything or raise any capital. Sure, I’ve got some MBS in my portfolio, but not enough to put me in distress under normal circumstances (e.g. I am NOT a distressed seller and don’t have to take firesale prices).

But under MTM rules, just because YOU had to hold a fire sale, I have to assume that my MBS assets are ALSO only worth pennies on the dollar — even though I don’t need to sell them overnight.

And that’s the rub: BECAUSE I had to mark down my assets to your distressed price, now MY creditors are looking at my balance sheet and saying: you have to raise capital…and so the contagion spreads. I’m now in trouble, but through no fault of my own. I have to hold a firesale — but only because MTM forced me to devalue my assets based on YOUR firesale!

The suspension is only useful for allowing banks to fudge their balance sheet and modify their asset to loan ratios. Use by anyone other than a bank doesn’t seem to be all that useful in this mess.

But then I am learning a lot of things this week too, so maybe someone with more expertise can educate us.

We withdraw it at our peril.
The first rule of medicine is ‘do no harm’.
I think the more Congress screws around with this, the less likely the first rule will be followed.

We’ve been through this before.
I’ve a couple of references that put forth the statement that:

“Historical Cost Accounting
Historical accounting replaced fair value accounting during the 1930s post Great Depression period. This was replaced since the values had been overstated by certain companies. The principles of historical cost accounting came into being post Wall Street Crash which took place in 1929 along with the assumption of stable currency. ” see: Inflation Accounting

Also Risk Management

Note slide titled “Background II” on page 5 of the above referenced PDF.

I’m having trouble finding the source information from which these observations were gathered. I welcome any help that can be provided.

We’ve been through this before.
I’ve a couple of references that put forth the statement that:

“Historical Cost Accounting
Historical accounting replaced fair value accounting during the 1930s post Great Depression period. This was replaced since the values had been overstated by certain companies. The principles of historical cost accounting came into being post Wall Street Crash which took place in 1929 along with the assumption of stable currency. ” see: Inflation Accounting

Also Risk Management

Note slide titled “Background II” on page 5 of the above referenced PDF.

I’m having trouble finding the source information from which these observations were gathered. I welcome any help that can be provided.

I don’t have but a minute. I have to teach in 4 minutes, so if this does not make sense I will clarify later. MTM is probably the accelerant to this crisis. The problem is, once again, Washington’s knee jerk reaction to Enron, Worldcom. etc in passing Sarbanes Oxley. MTM is part of it. The problem is specifically FAS 157 & 159 that was intended to clarify what MTM actually meant. However, it did not. In an effort to not face the penalties of incorrectly reporting assets CFOs & accountants have been using too conservative of estimates in valueing assets. Mainly, because of the lack of clarity. However, this issue is deeper and I will return to the subject after class. See the link below and it explains fairly well what is going on. I will end with this question, “how do you place a market value on an asset that is illiquid (trades infrequently)?”

http://www.forbes.com/home/2008/09/29/mark-to-market-oped-cxng0929gingrich.html

My take on MTM suspension is this: Suspending MTM gives better transparency because it forces a deeper look into the assets in question. With MTM, there is absolutely no point in trying to determine the real value of the MBS or whatever “toxic” asset you own because the only number you are allowed to put on the scoreboard is the last sale made regardless of circumstances. So why bother when the only way out is to say, “don’t know, ergo zero.”

We have similar things in the IT field—particularly when it comes to security plans. Every new exploit or exposure that comes down the pike results in a new rule or set of rules for determining the risk of operating a system. After writing your n-thousandth mitigation/exception plan, you get to the point where you throw-up your hands, you find something else to do, and you get replaced by somebody who is willing to say, “Nope. Can’t do it. The rules make it impossible.”

You guys are missing the point. It’s already been done.

SEC and FASB put out interpretive guidance yesterday. They gave more leeway for managements to use “Mark-to-Model” rather than “Mark-to-Market”, when there is no active market for those assets. This will releive a ton of pressure on banks.

The stupid thing about MTM accounting is it forced banks to write down their assets to the lowest fire-sale price for similar assets, even if they didn’t plan or need to sell.

This was be like forcing homeowners to value their net worth based on the foreclosed value of a house a mile away. If the net worth dropped enough, the homeowner would have credit and debit cards shut off, and forced to immediately repay their car loan.

Guerc, CPA

Something must be done.

This is something.

What do you mean it’s making things worse?

“Your ability to plan for investment is obviously affected. You kind of don’t know what your cost of capital six months from now is going to be,” he said. “We’ll just be very guarded, cautious in terms of where we invest, very guarded and cautious in terms of hiring and capital spending. We’ll see where this situation goes.”

Wow, you mean these times are forcing companies to be… financially prudent? That in an economic downturn you might have to… tighten your belt?

You’ll forgive me if I don’t cry for AT&T’s troubles since they’ve been reaping easy credit from Lehman Bros for years and not saving for a downturn.

Man, I made a bad investment the other day. Is someone going to bail me out with money that doesn’t belong to him or me?

I don’t have but a minute. I have to teach in 4 minutes, so if this does not make sense I will clarify later. MTM is probably the accelerant to this crisis. The problem is, once again, Washington’s knee jerk reaction to Enron, Worldcom. etc in passing Sarbanes Oxley. MTM is part of it. The problem is specifically FAS 157 & 159 that was intended to clarify what MTM actually meant. However, it did not. In an effort to not face the penalties of incorrectly reporting assets CFOs & accountants have been using too conservative of estimates in valueing assets. Mainly, because of the lack of clarity. However, this issue is deeper and I will return to the subject after class. See the link below and it explains fairly well what is going on. I will end with this question, “how do you place a market value on an asset that is illiquid (trades infrequently)?”

http://www.forbes.com/home/2008/09/29/mark-to-market-oped-cxng0929gingrich.html

It seems to me that MTM has its uses and proper place. Frequently traded types of assets would be one of those places. Infrequently traded assets are not. What’s the MTM of the Mona Lisa? It’s unique, irreplaceable, and not for sale anyway. So that’s a question that doesn’t make much sense. Right now MBSes are sort of the reverse, but that doesn’t mean the same principles apply.

To use a slightly different example, some years ago I was at a grocery store when there was an area wide power outage and they didn’t have backup generators. They weren’t taking checks, and obviously the atms and their credit card processing units were down. They were selling fresh meat for 30% of the face value if you paid them cash. Does that mean the value of all meat everywhere in the US should have been marked down to 30% of face value? That doesn’t make sense, but it is what MTM seems to require. Common sense says, you have to exclude the price of meat at that store when determining the inherent value of steak. The problem is how to do this consistently. I don’t think there is a law or rule that gets us there.

Somehow or another, we need to get back to the point where people like mbecker98, who (based on the posts I’ve seen from him) would have the good sense not to loan me money, instead of the people running places like Citibank, Capital One, and Bank of America, who keep sending me credit card offers based on mythical models of how much I can pay them.

The ruling being blamed on today’s crisis is a herring. As C.B. stated above, it probably accelerates things but is not the root cause of our credit crisis. The fact that we have people leveraged on top of leveraging has made it impossible to assess the value of companies/banks.

It is our system of credit by the Federal Reserve that has led us to this point. You cannot expect to borrow forever and then not ever have to prove your solvency. Eventually the market call comes so those firms overly leveraged will fail. No matter whose fault it is like the Fed’s or Congress or CEOs or shareholders. It was risky and they goofed.

Like many others in today’s current climate, you seem to have a very cynical outlook on how business is actually transacted. Every company started out at one time with an entrepreneurial dream. My experience is that businesses are run with integrity, the larger the business and the longer it has operated, the greater the chance to instill that ethos.
MTM on a three year rolling average is not that far off as a true indication of product value. A three year rolling average gives both, small mom and pops, and corporate behemoths, the ability to smooth out the peaks and valleys. Thus giving the smaller company the ability to survive aggression by larger corporations and the ability to demonstrate market knowledge, and in doing so, perhaps increasing the likelihood of attracting angel investors or stockholders. (then, and only then, can they become the large liberal corporations that you deem most companies to be.?)