Mark to Market
It was a dumb idea. Now, it’s gone. Expensing stock options should go next.
Remember, I do this to entertain me, not you.
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April 3rd, 2009 at 8:59 am
How about Sarb-Ox?
April 3rd, 2009 at 9:02 am
equally dumb but harder to get rid of.
April 3rd, 2009 at 9:19 am
The mark-to-market idea is not so much a dumb idea as a decent idea whose unintended, and unanticipated, consequences were quite severe and far-reaching. Mark-to-market worked just fine for many years, until the market part of it disappeared. I recall the first week the mortgage securities auctions failed, and how there was a rumble about it in the news. At the time, it was expected to be a few weeks to months of bad auctions then recovery to normal; did not happen that way. Then the unintended consequences started piling up fast and deep.
I can only wonder at the unintended, but already predicted, consequences of the actions taken over the past year by the federal government.
April 3rd, 2009 at 11:45 am
So now we’re doing mark to whatever you want to believe it’s worth accounting. It’s faith-based asset accounting rather than market-based.
I can understand that some assets may be hard to value, but houses? There’s voluminous data on housing values and housing sales. If banks, etc. want to ignore what the market says about the value of houses it’s because they don’t want to admit how shabby their books are.
I admit I may be missing some subtleties in all this, but I don’t understand how make believe accounting is going to make these banks healthier.
April 3rd, 2009 at 12:01 pm
mark to market could be considered equally make believe since, generally, the market may or may not exist. And no transaction has occurred to warrant a gain or loss.
And, depending who and how market value is determined, that could be ‘faith-based’.
And quite a bit of accounting is make believe. Look at, say, goodwill, warranties, or, hell, some depreciation methods. But they are, like mark to market, based on some methodology that is hopefully consistent.
April 3rd, 2009 at 12:24 pm
Thibodeaux beat me to it, SOX needs to go (or be voluntary, so that small corporations that can’t afford it can still go public with some “not SOX compliant” notices.
And Mark-to-Market was fantasy. We don’t base any other value in the financial world on the worst case scenario, so why should be do it for these derivatives? It was an overreaction, like every response with Congress’ fingerprints on it.
April 3rd, 2009 at 3:41 pm
I’m with Les on this one. Heaven forbid we actually assign market values to assets. This asset is worth what I say it’s worth, not the going price!
April 3rd, 2009 at 4:45 pm
That’s a great idea! I mean, I don’t have to sell all this inventory on my books that I valued at cost. I can just mark it up to its going price and PROFIT!! Sweet.
And companies estimate values all the time.
April 3rd, 2009 at 6:14 pm
TGirsch, my assets are not worth what the going price is right now unless I’m planning to sell them right now. Otherwise, they’re worth what the going price will be when I sell them.
April 3rd, 2009 at 7:03 pm
It would help if banks were permitted to re-think their Fair Value elections under FAS 159-some banks early adopted this in Jan 2007 when credit markets were florishing. Under FAS 159, banks had the option to fair value certain assets that were not previously marked to market (it was not a requirement, it was an option). Many hold to maturity assets which were previously accounted for at cost less reserves (i.e. held to maturity loans less loan loss provisions) are now being marked to market and are racking up billions in losses that will never be realized if the the borrowers never go into default – many of these loans are investment grade. Once banks made their elections, there is no turning back – there is no flexibility under US GAAP. I would think that many banks would like to have a 2nd chance to get their elections right…I don’t think any of them foresaw what was coming just 7 months later even in their wildest dreams.
April 3rd, 2009 at 9:25 pm
Wow, that’s the money quote there! You say it, however, like it’s a good thing.
I found this guy’s take on MTM interesting.
April 3rd, 2009 at 9:53 pm
Over in the H&R comments:
Letting the publicly held corporate personhood thingys lie about the value of assets that they hold might temporarily inflate the bubble a bit, but it’s long term folly.
Xrlq, this isn’t a private person valuing a private possession at whatever price they want, (A cornerstone of negotiation of a fair price is that both parties can, if they chose, get up and leave the table).
Go ahead and refinance that home you own (and value at any god-damn price you decide to value it at) and I’m sure that the bank holding the note will insist on a proper appraisal first.
April 3rd, 2009 at 9:57 pm
sed -e ‘s/both parties/either party/g’
April 4th, 2009 at 12:27 pm
Xrlq:
Yeah, well I plan to sell my house about 10 years from now. Should I list its value at what I expect it to be in 2019?
April 4th, 2009 at 12:28 pm
And, as SM alluded, when I go apply for a bank loan and they ask me what my net worth is, I’ll be sure to list the expected future value of my mutual funds rather than their current value. I’m sure they’ll get a big kick out of that.
April 4th, 2009 at 3:12 pm
If you had any way of knowing what the price would be in 2019, why not? That would certainly make more sense than valuing it at the artificially low price you would get if you were trying to sell your house now, which you aren’t. An item’s value is a price both a willing buyer and a willing seller can accept. If your lowest acceptable sales price is higher than the other guy’s highest acceptable purchase price, and neither of you are irrational idiots, then it stands to reason that the asset’s true (but perhaps unascertainable) value lies somewhere in between.
If you really think the proper measure of value is to pretend everyone will willingly sell at any price, then I take it you’ve never paid off a car loan. Why on earth would anyone do that? The car may run great, but at some point (usually early in the game), its Kelly Blue Book value is bound to drop below the loan balance, at which point the only rational thing to do would be to walk away.