If Mark-to-market Is Relaxed Shorts Will Get Killed!

BlueStreek · Mar 7, 2009

It is a no-brainer, should have been done as soon as Obama took office, what morons we have in policy positions given the current dynamics MTM has to go!

total_keops · Mar 7, 2009

I dont see the ralationship between mark to market and the market movement. Would you mind explaining why the market should move up?

Cdntrader · Mar 7, 2009

Quote from total_keops:

I dont see the ralationship between mark to market and the market movement. Would you mind explaining why the market should move up?
More...

http://en.wikipedia.org/wiki/Mark_to_market

Illum · Mar 7, 2009

Rumor floated on what Thursday? Market lifted for a few minutes and sold off. Retail is gone, these games aren't working anymore.

Cdntrader · Mar 7, 2009

Lawmakers Propose Panel That Could Suspend Fair-Value

By Ian Katz

March 6 (Bloomberg) -- Two U.S. lawmakers want to create a regulatory panel that would be able to suspend accounting rules such as the fair-value standard that financial companies have blamed for worsening the global credit crisis.

Representatives Ed Perlmutter and Frank Lucas introduced House legislation yesterday to establish the Federal Accounting Oversight Board, which would âapprove and oversee accounting principles.â It would include the Treasury secretary and the chairmen of the Federal Reserve, the Federal Deposit Insurance Corp., the Public Company Accounting Oversight Board and the Securities and Exchange Commission.

The panel, taking authority the SEC now has, would âgive discretion to the regulators to consider the overall condition of the financial market,â Leslie Oliver, a spokeswoman for Colorado Democrat Perlmutter, said in an interview today. The Financial Accounting Standards Board, the SEC-supervised group that sets U.S. accounting rules, takes a ânarrower approach,â she said. Lucas is an Oklahoma Republican.

Citigroup Inc. and the American Bankers Association say the fair-value rule, which requires companies to write down assets to reflect market value, doesnât work in illiquid markets. Fed Chairman Ben S. Bernanke, who would lead the proposed panel, said on Feb. 25 that fair-value is âa good principleâ that can be improved. Treasury Secretary Timothy Geithner has said the rule enhances the transparency of company balance sheets.

âSystemic Risksâ

âThe current framework for accounting oversight, though well-intentioned, has proved inadequate and must be fundamentally revised,â Edward Yingling, the ABAâs president, said in a statement today. The new panel would âhelp address systemic risks that accounting standards can have on the economy,â he said. The ABA has asked regulators to ease the fair-value rule.

By including the chairmen of regulators other than the SEC, the oversight board would âbroaden the perspectiveâ used to evaluate accounting rules, Oliver said. The board would submit reports to Congress at least once a year.

âThis sounds like someone is not happy with some of the standards we have and maybe this is an indirect end-around to try to get them changed,â Charles Mulford, an accounting professor at the Georgia Institute of Technology in Atlanta, said in an interview today. âI think this would make standard-setting more political, which is a step in the wrong direction. And those regulators have enough to do without overseeing accounting.â

The SEC in a December report rejected calls to suspend fair- value, also known as mark-to-market. The agency said the rule should be improved and âdid not appear to play a meaningful roleâ in bank failures last year.

SEC spokesman John Nester and FASB spokesman Neal McGarity declined to comment on the proposed legislation.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net.
Last Updated: March 6, 2009 12:18 EST

NERVESASTEEL · Mar 7, 2009

Quote from Illum:

Rumor floated on what Thursday? Market lifted for a few minutes and sold off. Retail is gone, these games aren't working anymore.
More...

But Thursday's meeting sounds pretty serious to me.

Iâm a self-professed SKF gang banger. Every time a rumor about this thing surfaces, I get slammed and watch a week of profits disappear in minutes, literally! To date, it hasnât been a problem because Iâve been able to double down once the move exhausts itself and make my money back and then some.

But what if this thing actually gets suspended or modified later this week? Guys like me could keep doubling down only to find ourselves caught in a classic âMelt Upâ.

My simple analysis is that some change will absolutely be required or these toxic assets cannot be re-priced. But the conundrum will still be finding a price that works for both the banks and the private sector. Or maybe the change will simply allow bankâs balance sheets to be improved enough that they can carry on as zombies, avoiding further capital infusions â¦

Can anyone offer some analysis as to what to look for coming out of Thursday's meeting and how to trade it?

total_keops · Mar 7, 2009

Quote from Cdntrader:

http://en.wikipedia.org/wiki/Mark_to_market
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Thanks, I thought it was the mark to market of futures contracts that you where talking about
I see it now, it's on OTC derivatives that would have an impact.

scriabinop23 · Mar 7, 2009

Quote from Cdntrader:

Lawmakers Propose Panel That Could Suspend Fair-Value

The SEC in a December report rejected calls to suspend fair- value, also known as mark-to-market. The agency said the rule should be improved and âdid not appear to play a meaningful roleâ in bank failures last year.
More...

SEC and FASB are beholden to the very powers that want assets on the cheap. The vulture community is very powerful...

From Mauldlin this week:

Let me quote this note from Gary Townsend, which I wholeheartedly agree with:

"The problem, of course, is that the MTM (mark-to-market) results have little to do with the intrinsic value to a bank of a loan or a security that it plans to hold to maturity. In a bank, the decline in a loan's value is offset with a forward-looking provision for loan losses. The decline in the loan prices net of loan loss allowances is not due to credit deterioration; it's the result of the distortions and speculation in the world's financial markets. Mark-to-market accounting isn't improving the transparency of bank accounting. It has reduced it, with enormous and growing damage to our economy and prospects.

"The Financial Accounting Standards Board has said that it will issue new guidance on the application of FAS 157. That's encouraging, but can anyone recall when the FASB has been timely? The damage from this misguided rule is already huge, widespread, and growing daily. Mark-to-market accounting creates a powerful negative feedback loop. Actual or imputed FAS 157-related losses weaken capital ratios and undermine confidence in the financial system generally, which weakens the economy and adds pressure on loan pricing, causing more FAS 157 losses, and around we go.

"This cycle needs to be broken. Mary Schapiro? Tim Geithner? Are you listening?"

And let's add President Obama, Ben Bernanke, Barney Frank, Chris Dodd, and Larry Summers to the list of those who should be listening. I know that some of my readers will have access to these people. See if you can get them to focus on this problem, and let's move on to the next problem -- housing.

As a final note, I know that some regulatory bodies are in fact paying attention to this while others are not. Good on the ones who are listening. As for the others, the adults in charge need to make sure the kids are playing nicely in the sandbox. This is an argument for a significant review and reform of our regulatory system. But right now, we need some immediate action.
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scriabinop23 · Mar 7, 2009

Unintended Consequences

(Let me state at the outset that I am going to oversimplify this story to keep it from getting too long and technical, because I think it will make it far more readable and understandable to the majority of readers.)

Let me note that while I am talking about rules that do not make sense, this in no way should be seen as a criticism of the regulators. It is their job to enforce the rules, not make them. The authorities at the top (including Congress and the administration) should be taking action.

In the beginning there were ratings agencies, and they rated corporate bonds from the very highest of credit quality (AAA) down to junk (CCC).

Now AAA means that the chances of losing money are very, very low. With each level of increased incremental risk comes a lower rating. If a corporate bond was at risk for losing just one dollar, it was rated all the way down to junk. And that was fine. Everybody knew the rules of the game.

But then investment banks asked the agencies to rate a large group of home mortgages in a pool known as a Residential Mortgage Backed Security (RMBS). The investment bank would divide the pool (the RMBS) into various tranches. The highest-rated tranche would be given a rating of AAA. Let's say that the AAA tranche was 92% of the loan pool. The AAA tranche would get the first 92% of all monies coming into the pool before the other investors were paid (again, really oversimplified, but that is the net effect). That would mean that the pool could have 16% of the home loans default and lose 50% of their value before the AAA tranche would lose even one dollar.

We all know now, though, that some of those AAA-rated tranches are in fact going to lose money. And the rating agencies are now writing down the ratings on the former AAA tranches.

I am not talking about the exotic CDOs and CDO squareds, or some of the truly toxic securitized assets which are going to zero. What I am writing about today are plain vanilla mortgages grouped together in securitized pools.

I wrote three weeks ago, "The downgrades by Moody's today of 2,446 different classes of Residential Mortgage Backed Securities will be a real blow. Moody's warned in a report last week that loss assumptions would be increased for RMBS and that downgrades could be expected. Moody's is projecting that alt-A deals originated in the second half of 2007 will experience 25.5% losses of original balance, compared to 23.9% of 1H07 deals, 22.1% for H206 deals, and 17.1% for 1H06 deals. The rating agency in May expected average losses for 2006 and 2007 vintage deals to reach 11.2% and 14.7%, respectively." (The Big Picture)

Fitch and S&P are also piling on with downgrades. Most of them see RMBS's go from AAA all the way down to junk. This has some very bad unintended consequences.

Let's say a bank has a loan portfolio of 1,000 individual mortgages valued at an average $200,000, for a total portfolio value of $200 million. The loan officers were not very good, and it turns out that 18% of the homes went into foreclosure and lost an average of 50%. That means 180 homes went into foreclosure and that the bank lost an average of $100,000 per home, or $18 million overall. The bank was charging 6% interest, so in a few years it would at least have its original investment back, although the losses would eat into capital.

To make those loans of $200 million, the bank would need at least $20 million in capital, and so would need to go raise some money or reduce its loan portfolio by selling the performing loans. The reality is that for a bank to have such a large mortgage book, it would probably be a much larger and better-capitalized bank. If it were not, it would soon be taken over by the FDIC.

Note that the remaining 82% of loans are still performing and are carried on the books at full value (again, oversimplified). There is real value in the remaining loan portfolio.

But what if the bank invested in a RMBS that was rated AAA, and 18% of the loans in the security went bad? Remember, the AAA tranche gets the first 92% of income. The loss to the RMBS is 9% of capital. The losses to the AAA tranche are only 1%. Hardly a catastrophe. Annoying, but something you can deal with. Except for some very nasty rules.

Remember, a bond is downgraded to junk if it loses even $1. Now, let's take it to the real world.

Say a bank buys a $1-million AAA portion of that large RMBS. It can use that AAA debt in its capital base, and can actually lever it up about five times, as the rules only make the bank take a 20% "haircut" on an AAA bond. But if the bond goes to CCC, the bank must now move the entire bond to its "risk-impaired" portfolio. And because most institutions cannot buy junk paper, there are very few buyers out there who will want to buy it -- mostly hedge funds and private capital. The price on that paper might easily drop to $.50 on the dollar because of the potential for a 1% loss.

The accountants, being conservative and living with new mark-to-market rules, make the bank take a $500,000 loss. This directly reduces regulatory capital by $500,000. Banks are required to have a maximum of 8% of risk-impaired assets as compared to solid capital to be considered adequately capitalized. Keeping the asset on the books means they have $1 million of risk-weighted assets. If they have to sell to get the capital required to follow the regulations, they will lose $500,000.

And they lose this on an asset that the rating agencies say might lose $1 ten years from now.

Again, at the risk of oversimplification, if they keep the security that also means that the bank loses roughly $10 million in lending capacity. They have to reduce their loan book or raise more capital.
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Cdntrader · Mar 7, 2009

Quote from NERVESASTEEL:

But Thursday's meeting sounds pretty serious to me.

Iâm a self-professed SKF gang banger. Every time a rumor about this thing surfaces, I get slammed and watch a week of profits disappear in minutes, literally! To date, it hasnât been a problem because Iâve been able to double down once the move exhausts itself and make my money back and then some.

But what if this thing actually gets suspended or modified later this week? Guys like me could keep doubling down only to find ourselves caught in a classic âMelt Upâ.

My simple analysis is that some change will absolutely be required or these toxic assets cannot be re-priced. But the conundrum will still be finding a price that works for both the banks and the private sector. Or maybe the change will simply allow bankâs balance sheets to be improved enough that they can carry on as zombies, avoiding further capital infusions â¦

Can anyone offer some analysis as to what to look for coming out of Thursday's meeting and how to trade it?
More...

I don't see anything immediately happening. The power rests with the SEC.

But who knows desperate times call for desperate measures.

Personally I'm sitting on the sidelines until the smoke clears from the meeting . I don't want to get crushed holding shorts in some massive spike on a rumor - the implications of a suspension of the rule are too big imo.