Contradiction of PPIP and Mark.-to-market

The FASB’s amendment to mark-to-market accounting rules looks set to be approved today — giving US banks more flexibility to value their assets.

Time to buy banks then? Not quite.

While FAS 157-e, if approved, will allow banks to gauge whether prices for their assets were made during an inactive market and were therefore distressed transactions. If a market is found to be distressed, companies won’t have to use the depressed prices to value the assets on their books. Financial institutions can start using their own models to value their assets. It’s basically a license to increase the amount of Level 3 assets — those whose prices are based on ‘unobservable inputs’ — on banks’ balance sheets.

The bull case for banks then is this - FASB 157 has so far been too restrictive, forcing banks to value their assets at distressed levels and take subsequent (unecessary) writedowns. Revisions to mark-to-market rules will give financial institutions greater leeway to hold assets on their balance sheets at ‘more realistic prices’ — in other words they’ll be able to hold on until risk-taking returns and they can sell their assets for a ‘decent’ amount.

But there’s a hitch. Tim Backshall of Credit Derivatives Research put it well in a research note, via Reuters:

The hopes of the FASB mark-to-market snafu this week are in our view ‘crazy’ - we still know the ’stuff’ is on the balance sheets and if the financials are actually allowed to adjust capital based on unreal marks then who will ever buy financials again - how can you trust them? … And what is the point of (the Public Private Investment Plan) if that is the case?”

That’s a very good point — there’s an inherent contradiction between FAS 157-e and the PPIP.

http://v2.ftalphaville.ft.com/blog/2009/04/02/54386/m2m-change-time-to-buy-banks/

 

FASB AGREES OBJECTIVE OF MARK-TO-MARKET ACCOUNTING IS STILL WHAT WOULD BE RECEIVED IN AN ORDERLY TRANSACTION IN THE CURRENT INACTIVE MARKET.

FASB SAYS AN ‘ORDERLY’ TRANSACTION DOES NOT INCLUDE FORCED LIQUIDATION OR DISTRESSED SALE.

FASB AGREES TO REMOVE PRESUMPTION IN MARK-TO-MARKET ACCOUNTING RULE THAT ALL TRANSACTIONS IN AN INACTIVE MARKET ARE DISTRESSED UNLESS PROVEN OTHERWISE.

FASB SAYS NEW MARK-TO-MARKET ACCOUNTING GUIDANCE SHOULD BE PROSPECTIVE NOT RETROACTIVE.

FASB SAYS NEW GUIDANCE WILL BE EFFECTIVE FOR 2009 SECOND QUARTER, WITH EARLY APPLICATION PERMITTED FOR THE FIRST QUARTER.

 

This is like bank saying "Ok, this asset is worth something, but I am not sure what, so I say it is worth more because I hope house appreciation happens" So it is a bet on house appreciation?

 

Be careful here.
The proposal that was being bantied about a couple of months ago and underwent a comment period is NOT the same proposal that got approved this week.

Moreover, the "threshold" for Level-III assets is rather high, so it's not so certain as to how many securities on Banks balance sheet will qualify for the mark-to-model.

Again, re-read the new FASB rules on this.

 

Forget PPIP which off load all losses to taxpayers.

I rather they have "mark to myth" than PPIP. If investors are stupid enough to buy into the valuation of Level X "mark to myth" asset, let it happens.