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The American Bankers Association wants the commission to wave aside liquidity risks in mark-to-market accounting.
David M. Katz, CFO.com | US
October 13, 2008
I thought the standards were there to protect the investor...didn't quite workout that way huh? Don't just blame the current mess on greed..you can also blame it on shortsighted oversight! Certainly it can be argued that there was and is greed in the system..but the system is designed for investors to make money...so 'greed' is a foregone conclusion...I still agree with Gordon Gekko "Greed is good" FASB doesn't seem to know that Newton's Third Law applies to markets as well as many aspects of reality...for every action there is an equal and opposite....We have seen the Butterfly Effect of that rule change run wild thru Wall St, change a little accounting rule and whoops there go the global equity and credit markets...
Posted by Wayne Silverman | October 29, 2008 10:17 pm
There are comments here that the Standards don't work. There is no accounting for greed. The Standards work but when you take too high of a risk you are liable for a loss, which is what has happened. Business should be run under a sound investment stratagy, those who took the high risk / high reward road are now realizing there gamble is not going to pay-off.
Posted by Ted Ayles | October 16, 2008 12:50 pm
There is another alternative that might be exploited by the banks, i.e. not recording losses due to mark-to-market valuation adjustments through their current income statements, but through other comprehensive income. This can be achieved by classifying the assets currently held as "trading" to "available-for-sale" (AFS) or "held-to-maturity" (HTM) assets. The AFS category would be helpful as it would allow the banks to sell the assets back in the market when the market moves up. U.S. GAAP allows this reclassification under "rare" circumstances. If the assets were to be reclassified from trading category, the banks would have to consider taking "other than impairment losses" (OTTI) on their portfolio of assets through their income statements, however, the timing for the same would not be as immediate as the losses recorded under fair value accounting. The bottom line is that some of the mark-to-market losses would be deferred and not be recorded through current P/L. It is interesting to note that on Oct 13, this exemption to reclassify the assets was also allowed under IFRS (back dating to July 1, 2008 valuations)- so we might see some of the European banks also making this reclassifications in the coming days. (see the link http://www.iasb.org/News/Press+Releases/IASB+amendments+permit+reclassification+of+financial+instruments.htm). Further, yesterday, SEC staff has requested FASB to issue more guidance on how to determine impairment.
Posted by Sunil Thukral | October 16, 2008 11:43 am
So, in conclusion of my previous comment, and to play the devil's advocate, maybe the standards should be waived. They should be waived, NOT because liquidity risk does not matter - it does - but because the catastrophe has happened despite the standards, which were therefore useless in the first place. NOW we have a credit crisis, and any medicine that can help the patient get back on his feet should be taken. Or should it? One of the reasons, I think, that the Japanese crisis lasted for 20 years, is that the banks were allowed to keep valuing their real estate backed assets as if nothing had happened. (That, and the fact that real estate is a long-lived and non-transportable asset) What are the alternatives? Maybe we should take a page from the sovereign debt handbook and just inflate away these debts - in a global economic context, it sure beats deflation ...
Posted by martin bosshard | October 16, 2008 08:14 am
What these standards should have accomplished in the first place, is to prevent banks to accumulate such a mass of illiquid (and impossible to value) assets. The problem with liquidity risk is that it is a binary rather than a continuous risk - history has shown that over and over again. Once a market starts going pear-shaped, liquidity dries up even on normally liquid assets. The fact that the standards did not prevent anyone to amass such an amazing pile of junk should tell us that some of the very concepts of risk assessment need to be overhauled. Stuff that can get so seriously toxic has to carry a very punitive valuation standard right out of the box, precisely to prevent anyone to hold a lot of them, without showing a huge loss up-front. Unfortunately, VaR is not a valid risk measure for this (and many other) type of asset. The problem is that nobody will listen to the risk managers when the traders are booking "gains" hand over fist ... None of this is solved by changing a few words or paragraphs in an accounting standard. The problem goes much deeper and involves many more things, some of them subtle, some less so. Some of the areas involved have to do with compensation, social (Wall St.) norms, and let's not forget egos. One example: I have known situations where traders traded above their limits, and still did not get fired, because they made a profit. Once this becomes the accepted norm, risk limits go right out the window. This cannot be fixed by accounting standards. It has to be fixed by strict enforcement of policies for example. This then becomes an issue that is more social in nature and needs to be addressed by fostering the right corporate culture.
Posted by martin bosshard | October 16, 2008 07:51 am
When we finally figure it out, these financial vehicles that have the subprime mortgages attached to them are worth exactly zero. They were made to establish the net income of the businesses that purchased them as a hedge and had an extremely high risk to them. So since the bottom has been blown away with the defaults of the ARM subprime mortgages there market value, since no one wants to purchase them, is Zero. Those with these vehicles should return them to those who sold the items or face fraudulent charges for selling something with zero value.
Posted by Bob Kinsler | October 15, 2008 10:54 pm
Yes, mark to myth is so much friendlier for banks, that should definitely be the way it is done.
Posted by Roland Cycan | October 14, 2008 09:26 am
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