Better Late Than Never
publication date: Apr 1, 2009
Update 4/2/09: Better late than never. The Financial Accounting Standards Board (FASB) has finally approved needed changes to relax rigid mark-to-market accounting rules. Anticipation of this long overdue change has in part propelled the stock market in late March and may do so for some time.
Update 3/19/09: There is finally some heartening news on the mark-to-market accounting problems I've discussed since last fall. The Financial Accounting Standards Board (FASB) will now allow cash-flow accounting rather than mark-to-market accounting which forced financial institutions to use fire sale pricing to value illiquid assets. Warren Buffet has also weighed in on the matter although as this WSJ piece highlights, CNBC's sound-bite editing has misrepresented Buffet's position.
Economist Larry Kudlow says that this, "...will go a long way toward solving the banking and toxic-asset problem. Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar...Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning. Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe. Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash - i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis."
Also, there is now a bi-partisan bill in the Senate which seeks to reinstate the uptick rule.
Steve Forbes is the Editor in Chief of Forbes Magazine. In this excellent editorial in the Wall Street Journal, Forbes highlights two flawed strategies from recent years which are still not getting the scrutiny they deserve despite the change in leadership in the Oval Office. On October 31st, 2008, I first wrote about the role which short sellers may have played in the steep stock market decline.
The mark-to-market accounting issue raised by Forbes sounds complicated but he does a fine job of concisely explaining the stupidity of the application of it to financial institutions holding sub-prime mortgages. The House Financial Services subcommittee is finally going to look into these rules at hearings on March 12th. Unfortunately, Paul Kanjorski, who heads this subcommittee, has no money invested in the stock market according to Congressionally mandated financial disclosures. (As I previously reported, House Financial Services Committee Chairman Barney Frank also has no money in the stock market.)