Saturday, 05 June 2010 06:04

Developing Implications on Loan Accounting Law: Mark to Market, Mark to Model, or Mark to Market Crash?

Relevant commentary from BoomBustBlog and sources throughout the Web on the accounting change that added 80% to the S&P since March 2009!!!

Warning Shots from the IASB: FT

  • The IASB came under fire in the fall/winter of 2009 in regards to mark to market rules
  • Banks wanted continued relaxation of valuing models in order to “smooth out volatility swings in asset prices”
  • IASB and FASB plan to converge on mark to market ruling by 2011, both have stated a desire for more transparent financial statements, but have been politically compromised by bankers and commercial lenders

FASB Plan Would Force Banks to Report Loan Fair Value: BusinessWeek

  • FASB is seeking to approve a proposal that would force banks to mark loans at market value by 2013, potentially having billions of dollars at risk for writedowns
  • In April 2009, FASB gave significant leeway to banks in regards to pricing and modeling loan values, banking consultants are very opposed to a reversal of the measures
  • Pension obligations and leases will be exempt from new measures

Another Perspective from Dealbook: Dealbook

  • Commercial and Retail banks have more at risk than investment banks
  • Banks with less than $1 billion in assets would be permitted to wait until 2017 for changes in rules
  • Banks have benefited from mark to model accounting measures in order to avoid swings in loan values
  • Direct Quote: “To mitigate the effect of large swings in market value for loans, the accounting board will allow banks to split the loss on some assets into two categories: one that would affect the bank’s earnings and another that would affect the bank’s book value.”

Why the Hassle from Bankers? Naked Capitalism

  • Development of changes to FASB 157 created three types of asset price valuations:
    • Level 1: Mark to Market
    • Level 2: Assets are fairly illiquid and “hard” to value according to market price, so usage of similar products and “observable inputs” generate a market price
    • Level 3: Priced using “unobservable inputs” (i.e. unicorns, Buffalo Bills Super Bowl rings, eye of newt, etc)
    • The SEC reported in SHAS 157 that if market prices are not favorable, ignore them (but if prices are rising like mad in bubblicious mania, by all means mark everything to market)
    • FASB 157 has changed names to Topic 820, where the idea is being considered to force those using level 3 valuations to state how much is valued at that level as a percentage of total assets, and disclosure of uncertainty in generating related observations
    • Don’t get excited about what level 2 means, anything using a market variable can be classified as a level 2 price valuation, including historic prices

The Current Status Quo - Mark to Mayhem: FT Alphaville

  • After suspension of mark to market in 2009, FASB standards may change as indicated by this table from Jason Goldberg at Barclays


  • Author makes a point of “no one cares about mark to market until assets fall in price”
  • Discrepancy in fair value to carrying value is as high as 15% to the downside

IASB 39 – A Little Simpler: FT Alphaville

  • IASB will attempt to modify valuation methods to two possible options, mark to market and price at amortized cost
  • No consensus on effects of assets that will face mark to market
  • Determining fair value vs. amortized cost is as simple as the attached picture


Related Video: 11:24 Bailout 4: Mark-to-model vs. mark-to-market

Related articles:  Is the Threat to the Banks Over? Implied Volatility Says So

On that note, it would be a good time to revisit the FASB argument: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules . Remember, the change of these rules to the status of straight silliness what kicked off one of the greatest bear market rallies in the history of US publicly traded stocks. Now, nearly everything financial (as it relates to M2M) is overvalued.


Relevant subscription research:

file icon STI 4Q09_Review 01/28/2010

Last modified on Saturday, 05 June 2010 06:40


  • Comment Link Law Firm Marketing Tuesday, 26 April 2011 23:30 posted by Law Firm Marketing

    @Claudine, yours is a funny definition for an auditor but I must say there's a truth to it.

  • Comment Link Claudine Mainville Thursday, 10 June 2010 19:09 posted by Claudine Mainville

    What is an auditor? Someone who arrives after the battle and bayonets the wounded. hehe

  • Comment Link NDbadger Tuesday, 08 June 2010 12:47 posted by NDbadger

    yes, of course, the reserves need to be adequate.

  • Comment Link Reggie Middleton Tuesday, 08 June 2010 00:33 posted by Reggie Middleton

    As long as those reserves are adequate to keep the company solvent in the case the loans had to be liquidated in a market where they will get 50 cents on the dollar, then I am in agreement with you.

  • Comment Link NDbadger Monday, 07 June 2010 21:40 posted by NDbadger

    I know most people on this web page will disagree, but I tend to think mark to market is bull shit too. Before the financial crisis, fair value of loan books were all above carrying value. Those "fair" value numbers were clearly wrong. Now they are all below carrying value. They may be wrong too. I generally prefer letting the banks cary at cost with reserves set aside and then reporting "fair values", whatever they are in the footnotes for investors to see and draw their own conclusions.

    But I know this is not a majority view on this website.

  • Comment Link Obio Sunday, 06 June 2010 13:36 posted by Obio

    There is "mark to market" and there is "bullsh*t". There aren't any other options. Pick one.

    But know this: The market always wins in the end.

  • Comment Link gjk313 Saturday, 05 June 2010 18:34 posted by gjk313

    This is very interesting. Brian Wesbury of FTportfolios may be the biggest bull on the street (or in the world), he has stated repeatedly that mark-to-market accounting was the biggest contributor to the "panic" of 2008-2009, so it makes sense that the elimination of mark-to-market would be the catalyst for the 70%+gain in the market since 3/9/09. 2013 is a pretty long time though but the proposed re-change will be another disaster for the banks.

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