Mark-to-market is dead
This comes via Marc Chandler of Brown Brothers Harriman and is an even-handed review of what just happened:
As widely expected FASB modified fair value accounting rules. The key seems to be for assets for which there is not a market. The last traded price does not have to be used. Rather other methods, like discounted cash flows can be used. In essence, previously there was a presumption that if there was not market for an instrument, it is distressed. Within a few hours FASB is expected to make another announcement about the treatment of permanently distressed assets. Financial stocks appear to have led the equity rally in recent days, ostensibly partly on the anticipation of today’s FASB announcement. Although it seems clear that the political pressure was brought to bear on FASB helped expedite the decision, this seemed to be the direction that they were moving. Cynics will claim this is a thinly veiled attempt to disguise the seriousness of the financial crisis and losses being faced. On the other hand, there are many who see the mark-to-market as an unreasonable demand for financial instruments with no markets. Regardless though of the merits or de-merits, the net impact could help boost bank earnings, reduce the need for capital injections and may help encourage participation in P-PIP and TALF programs.
Tyler Durden also has some things to say about the changes in mark-to-market rules:
Well, now that banks are all good in perpetuity, there goes the need for the PPIP. Hopefully this at least means that Bill Gross and Larry Fink won’t make billions compliments of U.S. taxpayers. But don’t take my word for it: the head of the world’s largest hedge fund voices these very concerns. In fact, Dalio is so disgusted by the insanity in equity markets, rumor is he has moved out of trading equities entirely.
It all sounds very much like the S&L rule changes, doesn’t it? Oh, and a reminder of what happened then: S&L’s went on to invest and lend recklessly, making the eventual bailout much, much bigger. Everyone in finance could see this coming from a mile away.
See what I had to say about this in October in my post, “S&L crisis chronology and accounting rules.”
Addendum: I have posted an update called “A few comments about mark-to-market” as the Mark-to-market is dead title was rather misleading.