Comments on: Marking bank loans to market A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: dWj Tue, 01 Jun 2010 13:26:25 +0000 @MarkWolfinger: Yes, at least some banks will respond internally to internal valuations.

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.

By: GingerYellow Tue, 01 Jun 2010 09:49:02 +0000 “My feeling is that so long this is just an extra reporting requirement, and it doesn’t show up on the income statement or the balance sheet, we’re probably fine”

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.

By: HBC Mon, 31 May 2010 17:18:08 +0000 In practice, what you’re about to see is the TBTF banks doing partial surveys of their loan landscape and hawking the bits they no longer want to Treasury. You will never see the entire topography any more than will the banks’ shareholders and of course, there’s always the taxpayer, who gets to see least of all. Least of all that all, of the taxpayer’s own money. It’s all going to the banks, doing work that even the most dissolute of gods would be ashamed to contemplate.

By: killben Mon, 31 May 2010 08:44:53 +0000 Felix,

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!!

By: dedalus Mon, 31 May 2010 08:24:25 +0000 Felix,

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.”


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

Why should MtM accounting be suspended?

By: Danny_Black Sun, 30 May 2010 11:06:20 +0000 wpw, you forgot the commonly used secret option number 3:

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.

By: yrautca Sat, 29 May 2010 13:22:58 +0000 Marking to market is also a big problem for insurers since their business model is very long-term. Mark to market “profits” don’t really make much sense in that context. However, one cannot argue against the transparency and risk management benefits of MtM.

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.

By: Woltmann Sat, 29 May 2010 11:16:20 +0000 I think it’s generally accepted that most of the major financial institutons were and still are insolvet as of the meltdown. It would just be fun to get them to admit it in writing!

By: yr2009 Fri, 28 May 2010 22:42:05 +0000 “If implemented, the proposal would greatly undermine the availability of credit…”

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.

By: wpw Fri, 28 May 2010 20:43:29 +0000 So what if shareholders panic! It that worries management so much then they should manage their business more carefully. All this would be much less of an issue if more banks had managed their loan books better. Keeping the common shareholder in the dark does not solve the problem of bad bank management, or that even some good banks get in trouble because their well-managed loan books get degraded in value by the problems of others. All it does is keep some intelligent investors in the dark.

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.