Discussion in 'Trading' started by Cdntrader, Mar 27, 2009.
What Matters More To The Market? Mark-to-Market rule change, or Toxic Asset Plan.
It doesn't matter no more, your late to the party.
Are you sure?
"Companies would be able to apply the revised rule to their first-quarter financial statements, FASB Chairman Robert Herz said today during a meeting at the U.S. accounting rulemakerâs Norwalk, Connecticut, headquarters. The board is set to vote on the proposal April 2, after a 15-day public comment period."
Mark-To-Market Changes May Trump Toxic Asset Plan
By Jody Shenn
March 27 (Bloomberg) -- Banks and insurers are unlikely to sell many mortgage securities as a result of U.S. Treasury Secretary Timothy Geithnerâs plan to bolster bids for the bonds to revive lending, in part because of a likely accounting change, Amherst Securities Group LP analysts said.
Under current rules, financial companies can typically avoid writing down many devalued investments until they see the bonds likely returning less than they paid. The assets must then generally be marked down to current prices.
The Financial Accounting Standards Board, pushed by lawmakers including Rep. Barney Frank to change rules to ease the credit crunch, said on March 16 it may allow the securities to be marked down only by expected losses, not to current prices, which partly reflect buyers seeking high returns. Frank, a Massachusetts Democrat, is chairman of the House Financial Services Committee.
The proposal âis quite importantâ in judging how much Geithnerâs program will be used, Amherst mortgage-bond analysts in New York led by Laurie Goodman wrote in a report yesterday.
âIf the security is not already written down, the bank has no incentive to sell,â they wrote. âYes, they might be written down at some point, but postponing these losses allows time to build reserves through earnings.â
Under Geithnerâs plan, announced March 23, banks and other mortgage-bond owners may be able to sell holdings at higher prices as the Treasury invests in public-private funds and offers loans along with the Federal Reserve to buyers. The initiative is part of worldwide government efforts to boost lending and thaw credit markets to thwart a global recession.
Off-loading mortgage bonds to government-financed buyers will be âmost likely dominated by hedge-fund selling, with perhaps some selling by banks carrying legacy assets in their trading portfolios at market values,â Amherst analysts wrote.
Current and former investment banks such as Goldman Sachs Group Inc. and Morgan Stanley are more likely to carry bonds in âtradingâ designations, which are regularly marked to market, according to their financial reports. Commercial banks and insurers such as Bank of America Corp. and MetLife Inc. usually hold them in âavailable-for-saleâ portfolios, where value declines donât affect earnings unless losses are expected.
FASB, the U.S. accounting rulemaker, is set to vote on the proposal on the treatment of âother-than-temporary impairmentsâ on April 2, after a comment period.
Amherst is a securities firm specializing in trading and advising investors on home-loan debt. Goodman is the former head of fixed-income research at UBS Securities LLC. Her team was top ranked for ânon-agencyâ mortgage debt in a 2008 poll of investors by Institutional Investor magazine.
Analysts including those at Amherst say banks may be less likely to sell loans through a companion U.S. program also introduced this week for unsecuritized real-estate debt because of accounting rules for loans, which are typically carried at face value and reserved against when banks expect losses.
To contact the reporter on this story: Jody Shenn in New York at firstname.lastname@example.org.
Last Updated: March 27, 2009 12:33 EDT
Bank fix-it plans may collide
By RACHEL BECK, AP Business Writer â Sat Mar 28, 12:00 am ET
NEW YORK â Two plans to attack the credit crisis are careening into each other.
The Obama administration is trying to re-ignite lending by enticing private lenders to buy the toxic assets that have been stuck on the balance sheets of banks.
But the plan could be undercut by another initiative: relaxing accounting rules that determine how the assets are valued. That might boost the prices of those assets, making it harder to sell them.
"Imagine if we do all this and nothing changes for the better, and the banks still don't lend," said Roger Ehrenberg, who runs his own investment firm and writes a blog called Information Arbitrage.
For months, the government has struggled with how to deal with mortgage loans gone bad and other risky securities. The market for such assets has collapsed, which means the banks can't sell them off to investors.
At the same time, financial companies are required under the "mark-to-market" accounting rules to adjust the assets' values to reflect current market conditions. In other words, a pool of residential mortgages that a year ago was worth $100 million might today be worth $50 million. The bank holding that pool must reflect the loss on its books, even if it's just a paper loss.
That's one big reason banks have taken massive writedowns over the past two years. Those writedowns, in turn, have put a strain on their capital â the measure of how much money is on hand. Because banks are required to have certain minimum capital requirements, they have curbed lending to businesses and consumers to conserve their capital.
But now there is a glimmer of hope that a solution is on the way.
The goal of the Obama plan is to help create a market for securities nobody seems to want. The first step is to place a value on them because few people are really sure what they're worth.
Unveiled Monday, the plan will take up to $100 billion from the government's existing $700 billion financial-bailout pot. It will then pair that with private investments and loans from the Federal Deposit Insurance Corp. and the Federal Reserve to generate $500 billion in purchasing power.
Banks would unload their troubled assets and securities to investors. Investors, in turn, hope to eventually turn a profit.
But another plan to deal with the toxic assets could negate the government's effort.
For months now, banks and their lobbyists have called on lawmakers and regulators to suspend the mark-to-market rules. They claim the rules force banks to report huge paper losses, even on assets they don't plan to sell. The losses are artificial, they say. This has exaggerated the current crisis.
Supporters of mark-to-market argue that the rules provide investors with a clear picture of a company's finances at that moment. Without the rules, investors wouldn't be able to measure the impact of the housing and credit collapse. And besides, if the value of the assets increase, the companies will take big gains in the future.
But changes look more likely. Earlier this month lawmakers threatened to enact laws that would alter mark-to-market accounting if there was no quick fix from the Financial Accounting Standards Board, or FASB, which sets U.S. accounting rules.
"Relief is needed now and action must be taken immediately to help bring certainty to the markets," Republican Rep. Spencer Bachus of Alabama said during a session of the House Financial Services subcommittee.
On March 17, the FASB proposed changes that would give companies more leeway when valuing assets. One would allow for "significant judgment" on the part of bank managers to determine if a market isn't functioning. Executives then would have discretion over setting the value of the security.
The FASB is expected to decide on this toned-down version of mark-to-market as soon as April 2. If approved â which many in the industry believe is likely â companies could apply new valuation requirements in the current quarter, which for most companies will end in late April.
The fear is that companies will use this leeway to boost the value of the loans on their books to "unrealistic levels," said Robert Willens, an expert on tax and accounting issues for Wall Street clients.
"The FASB's relaxation of these rules might come at the most inopportune time," he said.
In the short run, banks would benefit by raising the value of these assets. But don't expect it to be a cure-all
Higher values could drive prospective private investors away. Investors don't want to overpay, even if they do have help from the government.
If that results in assets remaining on the banks' books, they may still be resistant to lend. That's because they will worry about how such assets could perform in the future, Ehrenberg said.
Investors have been hopeful that a fix to this crisis is near. We aren't there yet.
Rachel Beck is the national business columnist for The Associated Press.
This should prop up bank shares for a while but I dont think the market will be fooled for long. LEH went under after everyone realized their commercial real estate marks were off big
Really bizarre: The words "emperor" and "clothes" keep popping into my head for no apparent reason...
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