The latest hyperbole by some uninformed media chimps with too much access to the airwaves is that the stock market meltdown and billions of dollars in bank writedowns could have been avoided if it wasn’t for mark to market or as it is known in geek speak, FAS 157.
What utter drivel, it had nothing to do with huge amounts of leverage and making loans to anything with a pulse, no it was all the fault of mark to market. Puhlease, at least not everyone is buying into this nonsense. A good story appeared on Housing Wire.com putting the changes to MTM into perspective.
If you read the headlines (and most people don’t bother to go much farther beyond the headline than the lead paragraph –- to our collective disgrace), you already think FASB eased the rules for measuring fair value on Thursday. You might believe that it has at last caved in to pressure from banks and Congress, and decided to allow “preparers” and their auditors to use judgment when valuing illiquid assets.
Not so. They are reiterating for the third time that “fair value is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date.”
And for the second time it is “highlighting and expanding on the relevant principles in FAS 157 that should be considered in estimating fair value when there has been a significant decrease in market activity for the asset.”
The idea that massive changes have been made is a huge overstatement. FASB is basically reiterating what it has said all along. A number of comments from both bank insiders and analysts indicate that no material changes have been made, from the WSJ:
Mark-to-Market Changes May Have Muted Impact on Banks
Bank of America Chairman and Chief Executive Ken Lewis, speaking Thursday morning on CNBC, said the issue has been, “at least in our case, maybe a little overblown and not quite as big a deal as some would think.”
Robert B. Albertson, chief strategist at Sandler O’Neill, said, “By the time you look at the substance and consider the potential ambiguity of what [FASB] says .. it may not bring closure” to the dispute over mark-to-market accounting.
The changes could be good for banks, or “dead on arrival,” he added.
Sanford Bernstein analyst John McDonald said in an email to Dow Jones Newswires, “In our view, it’s a modest interpretive change and comes too late in the cycle to materially move the needle for banks.”
Robert Willens, a former Lehman Brothers Holdings Inc. tax and accounting analyst who now runs a corporate tax advisory firm in New York, had estimated that the change could lift earnings by as much as 20%. Several analysts and even some bankers find that estimate aggressive.
Mr. Lewis said on CNBC the change might add “a penny or two” to earnings per share, “but not 20%.”
The CEO said about $700 billion of Bank of America’s approximately $2.4 trillion in assets “are actually marked to market, and marked pretty severely.”
Estimates vary but it seems MTM changes won’t have as big an impact as some would like to believe. Remember, as Jim Chanos pointed out, the vast majority of bank assets such as ordinary loans, are NOT marked to market and that the delinquencies on almost all classes of loans continue to rise. Thus relaxing mark to market will not help stop the rising delinquencies across a wide swathe of bank assets.
The idea that giving bank executives more leeway in how they price their assets when a large part of the current problems is a lack of transparency is laughable.
