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Started By
Message
$700B vs. Modifying an Accounting Standard
Posted on 9/27/08 at 11:09 am
Posted on 9/27/08 at 11:09 am
Could we partially unfreeze the credit markets by changing the Mark to Market accounting standard for banks? While some investors may question the valuation of bank assets, does the borrower really care? By not forcing banks to write down assets to “fire sale” values, their capital position would be strengthened and they would have more money to lend constructively to get the economy moving in the right direction. Could we save a large portion of the $700 billion?
4
Posted on 9/27/08 at 11:28 am to Edge
I've heard people float this idea before, and I can see how it is appealing. However, it sets a terrible precedent, and does absolutely nothing to resolve the situation long-term. You might avoid the continual writedowns, but since no one knows the true value of these securities, I'm not convinced that "fire sale price" isn't fundamental value. Everything since August of 2007 has shown continual deterioration of subprime and alt-a, and now moving into prime, and its accelerating.
So they change it from mark-to-market to what? Book/par? Now you just have an inflated capital position. People would be tearing bankers limb from limb if they had valued this garbage at par or historical cost, only to find out it was worth shite when the bank suddenly went under. M2M rules may have undesirable side affects in situations like this, but I see no better or more transparent alternative.
So they change it from mark-to-market to what? Book/par? Now you just have an inflated capital position. People would be tearing bankers limb from limb if they had valued this garbage at par or historical cost, only to find out it was worth shite when the bank suddenly went under. M2M rules may have undesirable side affects in situations like this, but I see no better or more transparent alternative.
Posted on 9/27/08 at 8:01 pm to Edge
Changing the accounting standard does nothing to solve the inherent weakness of the financials.
Posted on 9/27/08 at 11:37 pm to Tigah in the ATL
quote:
Changing the accounting standard does nothing to solve the inherent weakness of the financials.
Changing the accounting standard does not solve the inherent weakness. However, this mark to market standard exacerbates the weakness. Paulson and Bernanke expect the value of the "toxic" assets to be above the fire sale price. However, the accounting standard requires companies to write down the assets to the current fire sale price. That's the issue.
Posted on 9/28/08 at 11:24 am to Edge
The banks could generate capital to make new loans by selling off assets, including the loans they have written down in value. The banks are refusing to sell those loans for the prices they have written them down to. They have made informed business decisions to keep those loans. I see no reason why the banks should not have to live with the consequences of their decisions.
If we are going to relax capital standards for banks why not do it directly instead of camouflaging it with an accounting change? After all that is what you are asking for.
If we are going to relax capital standards for banks why not do it directly instead of camouflaging it with an accounting change? After all that is what you are asking for.
Posted on 9/28/08 at 1:39 pm to Poodlebrain
quote:
The banks could generate capital to make new loans by selling off assets, including the loans they have written down in value. The banks are refusing to sell those loans for the prices they have written them down to. They have made informed business decisions to keep those loans.
Why sell in a panicked, illiquid market when the Government may come in and buy the assets at a much higher price.
quote:
I see no reason why the banks should not have to live with the consequences of their decisions.
The problems is that the credit markets are freezing up as they "live with the consequences of their decisions."
quote:
If we are going to relax capital standards for banks why not do it directly instead of camouflaging it with an accounting change? After all that is what you are asking for.
I don't care how we do it as long it is done in a manner to unfreeze the extension of credit to qualified borrowers and to avoid placing $700 billion in debt on our books. I think the accounting change is a simplier method.
Posted on 9/28/08 at 1:46 pm to Edge
quote:
However, this mark to market standard exacerbates the weakness.
Look at what you are arguing, you are arguing companies having to actually say what their assets are worth is bad... jesus people, lets just pretend historical cost means absolutely anything and enjoy being ostriches.... whatever we do, we better not actually let investors know what the best gauge of fair value currently is.... let me just guess... that is what corporate transparency is all about.
Posted on 9/28/08 at 1:48 pm to Edge
quote:
I think the accounting change is a simplier method.
Since facts are deemed expendable, lets just suspend financial reporting altogether. Congrats, problem solved.
Posted on 9/28/08 at 1:52 pm to Edge
quote:
However, the accounting standard requires companies to write down the assets to the current fire sale price
Show me where FAS 157 requires this.
Posted on 9/28/08 at 2:28 pm to igoringa
quote:
Look at what you are arguing, you are arguing companies having to actually say what their assets are worth is bad... jesus people, lets just pretend historical cost means absolutely anything and enjoy being ostriches.... whatever we do, we better not actually let investors know what the best gauge of fair value currently is.... let me just guess... that is what corporate transparency is all about.
Let me understand, you are willing to have the Fed spend $700 billion to establish a value for a hard to value asset. So you can take comfort that some precious accounting standard has been preserved. So the accountants can say there was an “arms length” transaction with the Government. This is ridiculous. There must be a better way. Come up with some ideas rather than let yourself be thrown under the bus.
Posted on 9/28/08 at 2:43 pm to Edge
You're just misinterpreting the point. It's not about "preserving an accounting standard," it's about showing the actual value of an asset. It isn't the accounting's fault that an MBS is worth 20 cents on the dollar. Moreover, changing it to reflect historical cost would do nothing to resolve the issue, particularly if your goal is to unfreeze credit markets. Having inflated value on a balance sheet that every one knows is inflated isn't likely to get creditors all of a sudden handing out money again. The premise that changing an accounting standard would "save 700 billion dollars" is absolutely ludicrous.
Posted on 9/28/08 at 3:02 pm to kfizzle85
quote:
You're just misinterpreting the point. It's not about "preserving an accounting standard," it's about showing the actual value of an asset.
What is the "actual" value of an illiquid assets. We don't need the government to bid for the asset so we will know the "actual" value.
quote:
It isn't the accounting's fault that an MBS is worth 20 cents on the dollar. Moreover, changing it to reflect historical cost would do nothing to resolve the issue, particularly if your goal is to unfreeze credit markets.
I'm not saying it's the accounting fault nor am I saying that the assets should be valued at historical costs. (Without repeating, see posts on the political board.) Also as a borrower, I don't care about the balance sheet of the lender.
quote:
The premise that changing an accounting standard would "save 700 billion dollars" is absolutely ludicrous.
Paulson and Bernacke have said that the real difficulty will be to find the "fair" price somewhere between the fire sale value and the hold-to-maturity value. Having the government buy $700 billion of assets to arrive at a "fair" valuation is what is absolutely ludicrous.
This post was edited on 9/28/08 at 5:29 pm
Posted on 9/28/08 at 3:36 pm to Edge
quote:
Paulson and Bernacke have said that the real difficulty will be to find the "fair" price somewhere between the fire sale value and the hold-to-maturity value. Having the government buy $700 billion of assets to arrive at a "fair" valuation is what is absolutely ludicrous.
but,
quote:
What is the "actual" value of an illiquid assets. Let the government bid for the asset so we will know the "actual" value. Please!
?
I have no faith in the government's ability to find a fair price for these assets, and there is nothing to suggest that the "fire sale" price is any less accurate than whatever the govt ends up bidding for them. You can't change the value to "to reflect a value that would likely come from a government-run reverse auction," because if you could do that, there would be no need for the auction to begin with. If you can suggest a way to achieve this, I would reconsider my stance. If anything, moving the valuation of assets to reflect this fictitious price would increase the amount needed to purchase the securities.
Do you want to change the accounting standards to save banks from having to acquire more capital because you feel the valuations are incorrect, or do you want to change the accounting standards because you think it will save money on a bailout; because I can't tell if you're arguing from a political perspective or a financial perspective. For the record, I am not in favor of the bailout in its original form, and I doubt poodlebrain and igoringa are either.
Posted on 9/28/08 at 4:08 pm to Edge
We're trying to improve transparency in financial reporting and improve the reliability of the balance sheet; changing or modifying fas 157 so that banks can "improve" their financials goes completely against that.
This post was edited on 9/28/08 at 4:11 pm
Posted on 9/28/08 at 5:07 pm to kfizzle85
I need to run, but here are some quick thoughts.
Agree.
Disagree. Adding a buyer (the government)who is able to spend hundreds of billions of dollars turns an illiquid market into a relatively liquid market. Prices will increase in this situation as Bernanke has stated.
We need to find a way around a costly sales process. Some form of insurance could set a floor and, possibly, preserve the precious account standard.
From political board - "All I am saying is that there is a better alternative than this $700 billion bailout. The insurance proposal may get us around this mark to market accounting standard which is exacerbating the problem. If the government would insure mortgage back debt at ~65 cents on the dollar, then the financial institution would not have to write down the "toxic assets" to ~20 cents on the dollar (fire sale value). This could help to thaw the credit markets."
I want to thaw the potential credit freeze that would obviously be a serious problem. Paulson, Bernanke, and many others (including me) do not think the fire sale value is a reasonable valuation. This is not a political argument.
Great. Please put forth some ideas that may influence our representatives.
quote:
I have no faith in the government's ability to find a fair price for these assets
Agree.
quote:
there is nothing to suggest that the "fire sale" price is any less accurate than whatever the govt ends up bidding for them.
Disagree. Adding a buyer (the government)who is able to spend hundreds of billions of dollars turns an illiquid market into a relatively liquid market. Prices will increase in this situation as Bernanke has stated.
quote:
You can't change the value to "to reflect a value that would likely come from a government-run reverse auction," because if you could do that, there would be no need for the auction to begin with.
We need to find a way around a costly sales process. Some form of insurance could set a floor and, possibly, preserve the precious account standard.
quote:
If you can suggest a way to achieve this, I would reconsider my stance. If anything, moving the valuation of assets to reflect this fictitious price would increase the amount needed to purchase the securities.
From political board - "All I am saying is that there is a better alternative than this $700 billion bailout. The insurance proposal may get us around this mark to market accounting standard which is exacerbating the problem. If the government would insure mortgage back debt at ~65 cents on the dollar, then the financial institution would not have to write down the "toxic assets" to ~20 cents on the dollar (fire sale value). This could help to thaw the credit markets."
quote:
Do you want to change the accounting standards to save banks from having to acquire more capital because you feel the valuations are incorrect, or do you want to change the accounting standards because you think it will save money on a bailout; because I can't tell if you're arguing from a political perspective or a financial perspective.
I want to thaw the potential credit freeze that would obviously be a serious problem. Paulson, Bernanke, and many others (including me) do not think the fire sale value is a reasonable valuation. This is not a political argument.
quote:
For the record, I am not in favor of the bailout in its original form, and I doubt poodlebrain and igoringa are either.
Great. Please put forth some ideas that may influence our representatives.
This post was edited on 9/28/08 at 5:10 pm
Posted on 9/28/08 at 5:24 pm to Edge
quote:
Why sell in a panicked, illiquid market when the Government may come in and buy the assets at a much higher price.
That is what the banks are counting on. Their losses from bad loans will be made good by the government buying them. If the government doesn't buy the bad loans the banks can generate the capital to make additional loans from the income they derive from the interest received on loans.
If the banks are not collecting interest from the bad loans, then they have made an informed decision that they do not require the income from those assets. In either event the banks are expecting to suffer no consequences for bad decisions they made.
quote:
The problems is that the credit markets are freezing up as they "live with the consequences of their decisions."
And just what is wrong with the limited money available going only to the most credit worthy? Forcing the banks to make corrections to their underwriting policies is a desirable result.
quote:
I don't care how we do it as long it is done in a manner to unfreeze the extension of credit to qualified borrowers and to avoid placing $700 billion in debt on our books. I think the accounting change is a simplier method.
Rather than giving $700 billion of taxpayer money to the folks who made bad decisions I'd rather the government go into the lending business itself. I don't think the crisis in the financial markets is a threat to our economy.
If we remove the mark to market accounting standard won't we revert to the lower of cost or market standard? That will result in no change to the carrying value of bad loans since they will be reported at market value. Why should banks be exempted from the reality of their assets being worth what a willing buyer will pay for them? What arbitrary price will the banks be able to set for the government? Because it will be the banks who set the prices not the government. Because if the government wanted to set the price any bailout would be a take it or leave it offer. And we know that won't be the case.
Suppose the government said we will buy your bad loans for 120% of book value as of 8/31/2008? Would that entice the banks to sell enough assets to provide them capital to make new loans? Would it be cheaper than $700 billion?
Posted on 9/28/08 at 6:07 pm to Poodlebrain
We have some areas of agreement and disagreement. I want to be open-minded.
I asked rhetorically - "Why sell in a panicked, illiquid market when the Government may come in and buy the assets at a much higher price?
Agree.
Probably not. The banks made bad loans and are going to take some hit. Perhaps a 30% haircut versus an 80% haircut at fire sale prices.
Disagree - They will probably take a haircut as mentioned above.
Agree to extent that it goes to "qualified" credit versus the "most credit worthy." Don’t want to shrink credit to qualified borrowers.
Disagree. I'm a fiscal conservative and want to keep the government's role limited to smart regulation.
They should not be exempted with the exception that we don't want to see our entire financial system threaten by illiquid markets and fire sale prices.
I understand your concern of the banks setting the prices and the taxpayers taking it in the shorts. Valuation of these assets are difficult at best so we will get precise imprecision from an expensive exchange process. I'll pick a price - - Give the bank 60 cents on the dollar. Before you propose this to Pelosi, we might want more input from the money talk board. Perhaps, we can even get the lurkers to register and give input.
I said 60% above, but if they were offered 80%, that should be fairly attractive.
However, do you really want the government to buy these assets and go through the workouts, or do you want the government to insure with financial instituitions owning and working out the bad loans?
I asked rhetorically - "Why sell in a panicked, illiquid market when the Government may come in and buy the assets at a much higher price?
quote:
That is what the banks are counting on.
Agree.
quote:
Their losses from bad loans will be made good by the government buying them.
Probably not. The banks made bad loans and are going to take some hit. Perhaps a 30% haircut versus an 80% haircut at fire sale prices.
quote:
In either event the banks are expecting to suffer no consequences for bad decisions they made.
Disagree - They will probably take a haircut as mentioned above.
quote:
And just what is wrong with the limited money available going only to the most credit worthy? Forcing the banks to make corrections to their underwriting policies is a desirable result.
Agree to extent that it goes to "qualified" credit versus the "most credit worthy." Don’t want to shrink credit to qualified borrowers.
quote:
Rather than giving $700 billion of taxpayer money to the folks who made bad decisions I'd rather the government go into the lending business itself. I don't think the crisis in the financial markets is a threat to our economy.
Disagree. I'm a fiscal conservative and want to keep the government's role limited to smart regulation.
quote:
Why should banks be exempted from the reality of their assets being worth what a willing buyer will pay for them?
They should not be exempted with the exception that we don't want to see our entire financial system threaten by illiquid markets and fire sale prices.
quote:
What arbitrary price will the banks be able to set for the government? Because it will be the banks who set the prices not the government. Because if the government wanted to set the price any bailout would be a take it or leave it offer. And we know that won't be the case.
I understand your concern of the banks setting the prices and the taxpayers taking it in the shorts. Valuation of these assets are difficult at best so we will get precise imprecision from an expensive exchange process. I'll pick a price - - Give the bank 60 cents on the dollar. Before you propose this to Pelosi, we might want more input from the money talk board. Perhaps, we can even get the lurkers to register and give input.
quote:
Suppose the government said we will buy your bad loans for 120% of book value as of 8/31/2008? Would that entice the banks to sell enough assets to provide them capital to make new loans? Would it be cheaper than $700 billion?
I said 60% above, but if they were offered 80%, that should be fairly attractive.
However, do you really want the government to buy these assets and go through the workouts, or do you want the government to insure with financial instituitions owning and working out the bad loans?
This post was edited on 9/28/08 at 6:55 pm
Posted on 9/28/08 at 6:45 pm to Edge
quote:
Let me understand, you are willing to have the Fed spend $700 billion to establish a value for a hard to value asset.
Remind me where I said that.... ever? Oh yes I didnt.
quote:
So you can take comfort that some precious accounting standard has been preserved.
Dont confuse understanding a standard to mean I want it preserved... I simply pointed out you heard some talking point about something you do not understand and started spouting off about it. I am still waiting for you to elaborate on the interpretation of 157 you gave.
quote:
So the accountants can say there was an “arms length” transaction with the Government.
What the hell are you talking about?
quote:
This is ridiculous. There must be a better way. Come up with some ideas rather than let yourself be thrown under the bus.
Well a better way is not to remove financial statement transparency... how soon we forget
Posted on 9/28/08 at 6:57 pm to igoringa
I'm not replying to your individual comments.
If you have a proposal, let's hear it.
If you have a proposal, let's hear it.
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