Tweet me!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
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- 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
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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.
fasb_mark_to_market_chart.pngfasb_mark_to_market_chart.png
Relevant subscription research:
MS 1Q10 Review- 4Q09 Alt-A and Subprime commentary
- Sovereign Debt Exposure of European Insurers and Reinsurers
- Euro Bank Soveregn Debt Exposure Final - Pro & Institutional
