The House of Representatives gave final approval on Friday to the $700 billion bailout for the financial system, reversing course to authorize what may be the most expensive government intervention in history.
At 1:21 p.m., applause and cheers echoed through the House chamber as the number of “aye” votes crossed the threshold needed for passage with just seconds remaining in the official 15-minute voting period. The vote was 263 to 171.
And in a sign of the urgency surrounding the package, Congressional staff rushed the newly printed legislation into a news conference where Democratic leaders gathered after the vote and Speaker Nancy Pelosi, Democrat of California, signed it, at exactly 2 p.m.
Within an hour, the legislation had been conveyed to the White House and signed by President Bush. Standing in the Rose Garden shortly before signing the document, the president thanked Congressional leaders of both parties by name and said they had achieved something “essential to helping America’s economy weather the financial crisis.”
If the change to the ‘mark-to-market’ accounting rule is part of this, then it’s another enormous give-away to Wall Street. As Warren Buffet (among others) has pointed out, it allows firms to book their toxic ‘assets’ at whatever number they wish, rather than forcing them to use the market value of the trash.
Little Cabbage [#1]: Out of sight, out of mind. Feel better already?
OTOH, mark-to-market requires perfectly solvent institutions to write down the value of their portfolio just because some other institution, which might be insolvent for some completely unrelated reason, holds a fire sale of assets. This exacerbates the problem we’re seeing now.
There’s no reason that the bank I send my monthly mortgage payment to should have to write down the value of my loan when I’m making monthly payments on it just because my neighbor defaults on his. As long as an asset is performing, it’s worth what it always was.
IF the asset is performing. That’s the problem: the banks/institutions want the taxpayer to pick up the NONperforming ‘assets’ (read: toxic waste, i.e., foreclosed, empty homes, especially those in slum areas) and pay top dollar to them for them.
Mark-to-market accounting requires the market value of the ‘asset’ to be reflected: not the value five years ago, or 10 years ago, or some pie-in-the-sky ‘after the recovery’, but NOW, the day it is sold. It is worth ONLY what the market will pay for it TODAY. To drop mark-to-market allows further sleight-of-hand so that an institution can cover its failures. It’s a good thing for Wall St manipulators, and lousy for the rest of us. (And Warren Buffett agrees and has been preaching this line for quite a while). He’s right (again).
“Mark-to-market requires perfectly solvent institutions to write down the value of their portfolio just because some other institution, which might be insolvent for some completely unrelated reason, holds a fire sale of assets” —Jeffersonian [#3]
Nonsense! The case you describe—“just because some other institution … holds a fire sale of assets”—does not fit any definition of fair value. Indeed, it comes close to being the antithesis of fair value.
The benchmark for “fair value” is the sort of price you would expect to find “in an orderly transaction between market participants [in] the principal or most advantageous market for the asset or liability.”
http://www.fasb.org/st/summary/stsum157.shtml
“There’s no reason that the bank I send my monthly mortgage payment to should have to write down the value of my loan when I’m making monthly payments on it just because my neighbor defaults on his” —Jeffersonian [#3]
Sounds like another misconception.
What’s the evidence that banks must carry loans at fair value?
[blockquote]IF the asset is performing. That’s the problem: the banks/institutions want the taxpayer to pick up the NONperforming ‘assets’ (read: toxic waste, i.e., foreclosed, empty homes, especially those in slum areas) and pay top dollar to them for them. [/blockquote]
If the asset is non-performing, I’d agree with you. But M2M requires that even performing assets be marked down if current transactions indicate its market value MAY have dropped. That’s a recipe for precisely the snowball we’ve seen lately.
#5/6:
[blockquote]Financial Accounting Standard 157, which U.S. regulatory agencies put into effect last November, requires accountants to look at market “inputs” from sales of similar financial assets even if there isn’t an active trading market. That means that less-leveraged banks holding mortgages that haven’t been impaired often have to adjust their books based on another bank’s sale — even if they plan to hold their loans to maturity. Yale finance Prof. Gary Gorton wrote in a paper presented last month at the Federal Reserve’s summer symposium: “With no liquidity and no market prices, the accounting practice of ‘marking-to-market’ became highly problematic and resulted in massive write-downs based on fire-sale prices and estimates.”
These write-downs, based on accounting standards, can jeopardize balance sheets and solvency — much like a spreading contagion. In effect, a single bank’s fire sale can decrease the “regulatory capital” (or the total dollar value of assets that government regulations require banks and other financial institutions to keep as a reserve to immediately make good on their obligations to depositors and other creditors) of others. So “partly as a result of GAAP capital declines, banks are selling . . . billions of dollars of assets — to ‘clean up their balance sheets,'” notes Mr. Gorton, creating a “downward spiral of prices, marking down — selling — marking down again.”[/blockquote]
[url=http://online.wsj.com/article/SB122186515562158671.html]LINK[/url]
Jeffersonian [#8]: I quoted the Financial Accounting Standards Board itself in #5. You respond by quoting an opinion article from a right-wing think tank. That’s not enough to make it so.
Gary Gorton’s paper does not attack the FASB rule. He points out that the rule (after a considerable period for debate and transition) took effect during what he calls the “Financial Panic of 2007,” during which key data became scarce, particularly for the sort of synthetic indices on which firms like AIG based their financial legerdemain.
[blockquote]No one fully understood how exposed the MBS were to the rising foreclosures. The market for them dried up. No one traded them. The market became effectively “illiquid.” American accounting standards, however, [b]required firms to use “mark-to-market” to value their assets. This means that you value your assets based on what you could sell them for today. Because no one would trade MBSes, most had to be “marked” at something close to zero.[/b]
This threw off banks’ capital requirements. Under U.S. regulations, banks have to have a certain percentage of assets to back up the loans they make. Lots of banks and financial institutions had MBS assets on their books. With these moving to zero, they didn’t have enough capital on hand for the loans that were outstanding. They rushed to raise capital, which raised fears about their solvency and compounded into a self-fulfilling prophecy.[/blockquote]
[url=http://www.reason.com/news/show/129158.html]LINK[/url]
Your argument are without merit, I. Without active trading of MBSs, there is no standard upon which someone can base a mark-to-market price of somethng well above zero, even on a performing asset. Any value not close to zero would be purely fictitious using this rule. Quote the rule however you like….this is how it is being applied, and it’s making things far worse.