Felix, part of the trouble here has been where banks attempt to hedge their credit risk in the CDS market, where they are required to mark the CDS to market but not the loan it was supposed to be hedging. There has at various times in the last several years — they seem to change these rules from time to time — been an option to designate certain positions as hedges, in which case they don’t have to be marked to market. This naturally opens up some room for shenanigans, but so does treating economically equivalent (or very similar) positions differently.

There’s a continuum of different degrees of liquidity and transparency in market prices. I know that DE Shaw and Goldman have both owned wind farms at various times in the last five years; those are hard to get market prices for. If you’re hedging them with more liquid instruments, those are easier to get prices for, but the whole point is that the value of those instruments should correlate negatively with the value of the illiquid asset; your net worth is less volatile than would be suggested by marking the liquid assets to market and not the illiquid ones. This leads you, eventually, to more of a mark-to-model, where your model assumes that things that correlate negatively will continue to do so. So the only definite conclusion I can give is that you’re not going to find a system that’s perfect; hopefully you can formulate a system with enough of these problems in mind that it doesn’t make any of them too bad.

It will show up on the balance sheet, but not the income statement. Basically, (most) changes in the fair value of loans held to maturity will show up in other comprehensive income, but not the profit and loss. What’s interesting is that they’ve very deliberately taken a different approach to IASB, which takes that information out of the face of the balance sheet entirely, requiring it to be disclosed in footnotes. Convergence is looking increasingly distant at this point.

Either you want transparency or you don’t.

It cannot be that you be transparent when things are great and not when they suck.

How long do you want this extend and pretend to continue?

Wall street banksters (with the able and agile connivance of the Fed and Treasury) walk away with undeserved bonus …

If transparency begets bank runs .. so be it after all it also means they deserve to go bankrupt

Schemers in the Fed and Treasury should be hosed!!

I don’t get the logic behind your view:

“In general, I’m all in favor of transparency in the reports of public companies in general, and banks in particular. So if banks are forced to reveal the true value of their assets, that’s good. But it’s not good if it just results in effective bank runs, where banks with low-value loans found themselves shut out of the repo markets, for example.”

What?

You should elaborate upon your views. They’re unclear.

Why should MtM accounting be suspended?

Collect your profits in the good years and when your crazy overleveraged bet blows up then sue the sell-side for “mis-selling” the product you thought paid well above the risk-free rate but was risk-free….

As for the buyside, you are absolutely right. It is not they are necessarily incompetent but rather they are incentized to take risks with your money because weirdly they seem to be able to disclaim away any fiduciary responsibility for running your money.

Disclosing MtM figures of long-term loans will have the same effect regardless of whether they lie somewhere in the footnotes or they are directly incorporated in the income and/or B/S statements. The trick is getting the capital requirements correct to mitigate some of the potential drawbacks of full disclosure.

FYI, “availability of credit” is a misnomer these days, when small businesses are concerned .
We are in the same “credit crunch” situation, we were three years ago.
And BTW, we already know the big banks are insolvent, don’t we? This is why they had to change the accounting rules.

Felix, I know you are well-intentioned in your concern about us poor common retail investors. But we are not all complete idiots and we do not need to be protected from ourselves all the time or even from the scoundrels on Wall Street. Surviving as an individual investor is a process of survival of the fittest. You either learn to fend for yourself in the markets or you get out and turn it over to someone else. Most of us who have been at it for a while have learned to stick to the turf each of us as an individual is comfortable with. None of us learn that without having the opportunity to lose some money first.

If I were you I would worry a lot more about those institutions that are managing big piles of money for ordinary people. Too many of those institutions are not as smart as they think and are big fat easy prey for the market predators.

The banks have become the enemy. You suggest they would start dumping the loans as they lose value. I suggest they would make fewer low quality loans. That’s good for everyone.

Felix: The next time you get a margin call from your broker, tell them it’s not important to mark to the market, and according to your internal figures, there is no need for a margin call. See where that gets you.

Regards