Mark-to-Market Game

I am not an accounting student and it really took me a while to understand this as the Financial Accounting Standards Board (FASB) caved on the mark-to-market accounting front.

The key problem isn’t that there is no market for these bad securities, but it is the prices that are artificially low. The issue is that the industry doesn’t want to acknowledge that today’s prices are the real prices. Sellers refused to admit to reality, hoping against hope that they won’t have to sell at the true market prices. I truly believe there are buyers like vulture funds, hedge funds, private equity investors etc are eagerly to scoop up these crappy papers ..but at the right price.

Lobbyists argue that because many of these assets are still spinning off principal and interest payments, they should be carry them at full value or close to it – not supposedly distressed ‘false’ market prices, but look at the performance of the asset markets underlying the toxic paper – they are getting worse. FHA loans delinquency rates are rising, Fannie Mae and Freddic Mac 90+ day late payment rates are surging. All this tells us that while some of these securities may be spinning off income now, the likelihood they will continue to do so in future is going down. They certainly don’t prove the real value of these securities should be much higher.

Also, the delinquency rate on $700bn in securitized commercial real estate loans has more than doubled in just the past six months. So what does that say about the value of CMBS – Commercial Mortgage Backed Securities?

Investors take a different view that more flexibility with the rules would let big banks hide the real value of their toxic assets cosmetically and increase their capital levels. I am afraid that this change will result in fewer impairments being recognized and I don’t think that it will help the investor confidence in the balance sheet.

I find it rather interesting that the responsibility of this game is still very much on the FASB rather than having the regulators to take this on.