Accounting change won’t save banking

By J Saft
March 13, 2009

James Saft Great Debate —James Saft is a Reuters columnist. The opinions expressed are his own. –

By all means reform accounting, but for pity’s sake take your time and keep your expectations low.

Suspending mark-to-market accounting immediately as a means of levitating banks out of peril simply won’t work. While transparency may or may not be the foundation of banking, trust undoubtedly is.

“Adjusting” or suspending fair value accounting, even if you swear up and down that this time it’s even more fair will erode rather than build trust and repel rather than attract capital.

The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, led by Congressman Paul Kanjorski of Pennsylvania today is holding a hearing on mark-to-market and already the industry knives are out.

A group of 31 industry groups and financial institutions, including the American Bankers Association, Mortgage Bankers Association and U.S. Chamber of Commerce, have petitioned the committee to take “immediate action” to stop the “spiral of accounting-driven financial losses,” according to the Los Angeles Times.

They argue that current rules, which force banks to carry some securities on their books at levels that reflect current market prices, mean they have to recognize losses that “do not have a basis in economic reality”.

That’s as may be, but so far market prices have arguably been a better directional indicator of the future performance of collateral than some hopeful internally generated marks. Is mark-to-market perfect? No. Might reform, in the fullness of time, adjust some of its pro-cyclical effects? Yes. Will doing that in the midst of a crisis have the desired effect? No.

This whole effort fundamentally misunderstands the situation facing banking.

The problem facing the banking industry is not just solvency on some accounting or regulatory basis, it is solvency on, for want of a better phrase, a solvency basis. Thus banks are unwilling to do business with one another and investors unwilling to lend banks money or invest in them. They do not reliably know who is bust and who is not.

Some may possibly be tarred unfairly by mark-to-market, but allowing everyone to step back from market discipline will make investors less willing to commit capital to banks and banks less willing to do business with one another.

Regulators and accountants may turn a blind eye, but given the current set of economic circumstances people with money on the line won’t find internally generated prices for assets more inspiring of confidence than market derived ones. Quite the opposite.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –


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The idea that banks can scrap the discipline of ‘mark to market’ is insane and poses a clear and present danger not only to the financial system but also to the broader economies- it is precisely because the banks lost their collective grip on reality that we find ourselves in the situation that we are in- allowing them to effectively ‘self certify’ the market values of their toxic paper will end in compounded disaster on an unimaginable scale- any trader can tell you that as soon as you cease marking to market you are denying the reality to yourself of your trades and your P&L. Such a collective irresponsible action would elevate the calumny of the banking community to new heights that would create dangerous precedents. We would be complicitly indulging in inflating the world of financial make believe to unprecendented boundaries to our peril.

Posted by Andrew Marks | Report as abusive

“They do not reliably know who is bust and who is not.”
Hhm, but maybe they do know that they are all bust?

Posted by Robynne | Report as abusive

“people with money on the line won’t find internally generated prices for assets more inspiring of confidence than market derived ones. Quite the opposite”

“Will doing that in the midst of a crisis have the desired effect? No”

Good point.

Posted by Arun | Report as abusive

Blaming mark-to-marked for their problems is a diversion by the financial industry. The problem is the excessive and reckless leverage taken on by the irresponible and border line criminal management that stuffed their pockets with profits when the market was going up, but now that everything collapsed the institutions that they “managed” are wiped out and what do they blame? Some accounting standard which is actually correct. If they are so adamant that their “assets” have “value” they should be able to find a buyer. Who needs real estate on the Moon? Nobody, but it arguably has value too.

Posted by Sam | Report as abusive

One consistently sane voice in the midst of confusion, deceit and utter stupidity.
Keep up the good work

Posted by Nikos | Report as abusive

the problem with trust now is that the mtm gains were consumed, and for the mtm losses now, can the committee defer it?

Posted by NAB | Report as abusive

I think creative accounting practices put us into the present banking situation. I am sure changing to creative evaluations practices will make the whole situation worse. James, blaming accounting for financial losses is like blaming the referee because your team played poorly for a season.
Now, your team is going to play better if the referee looks the other way?
I fully agree covering up the true value of assets will not make things better keep up the good work.

Posted by Craig Coal | Report as abusive

It’s a little surprising to hear bankers complain about accounting rules. They can’t exist without them. Money is the biggest work of art of all.

We all want to believe that what we hold as assets are worth more than reality is sometimes willing to pay for them. If no one can buy what you want to sell than those assets have a lower value. No one can argue with that. The bankers may want to argue that they know what they hold is more valuable than the market at the time can support but if everyone believed that all the time, there would be no variation in stock prices on the exchanges.

Bankers and stock traders live on that fundamental vagueness of value often to their advantage.

In the modern economy, assets have only book keeping value. A particularly cruel illustration can be drawn from the property in low-income neighborhoods especially during the days of red lining (and many bankers would bring them back if they could). Property that could be nearly identical to property in neighborhoods not red lined could be worth far less because no one with higher incomes was willing to invest in them nor could those living in them ever get sufficient capital to repair or improve them.

Another example can be drawn from the turn of the last century in Newport, RI and Fifth Avenue in New York. The introduction of the income tax left countless very high quality mansions and town houses fit for nothing but the wreckers. The millions (they would have cost mega millions today to reproduce) were reduced to splinters and rubble within a decade. Some were destroyed before the plaster was dry.

Assets have no inherent value – they are dependent on what others think they are worth or can afford. Right now bankers sit on a stock of housing in about the same way as one’s neighbors sit at the tables at their weekend garage sales.

But I agree with Mr. Saft that really what they need is very reliable accounting rules that somehow make the abstraction of money as consistent and commonly understood as one’s native tongue. So much of the problem with the economy now is that they were using terminology and accounting “inventions” and practices that many of them didn’t understand either.

They were trying to speak Esperanto when every one was still thinking in English – so to speak.

What they need also is a set of accounting rules that are not state based but uniform across borders. That is highly unlikely. The Chinese know that with sufficent control the state can dictate “value”.

Posted by Paul Rosa | Report as abusive

Can’t we simply replace high flyin’ bankers with some ghetto drug dealers? They know their accounting, their business and they don’t believe in credit…they just might do a better job.

Posted by Dan | Report as abusive

If no one will buy my asset yet it reliably generates a cash flow, does that make it worthless? Mark to market would say yes. The problem with much of these unmarketable assets is their “mystery meat” quality. Disclosure of their true identity would go a long way towards establishing a reasonable value with or without impairment on the balance sheet. If identification is impossible then there is likely no market for such a grab bag and a value of zero, or close it it, seems warranted.

Posted by Barry Northrop | Report as abusive

Blaming accounting rules for the banks’ current state is like shooting the doctor that tells me I’ve got cancer. Accounting rules are devised to provide as accurate and objective information as possible regarding the status of an entity. True, they are not perfect but that is true of so many other things like assuming that markets would regulate themselves and get us out of harm’s way (which did not happen)
What amazes me is that the same people that profited from using the markets as sources of seemingly endless gains now shun the markets’ very same messasge. After all, what the accounting rule says is take market values in appraising assets so in ignoring the rule they’re shunning the very market they so passionately defended earlier.
In the end, the question boils down to what constitutes “real” change. I would argue that whenever an economic event impacts an individual’s decisions on spending, saving, and working, those should be considered as real events. For instance, if an individual sees that his house is worth more and consequently saves less/spends more/ works less then such event should be acknowledged. Likewise (and we are seeing this nowadays) when individual see the value of their assets sink and spend less/save more/(attempt to) work more then such value loss is “real”
So, if banks find out that its assets being worth more change banks and investors’ behavior -the former are less willing to borrow and lend, and the latter find unattractive to own bank assets- such event is real and must be acknowledged. All other discussion is nonsense

Posted by ecogabriel | Report as abusive

Intelligent investors will never mistake a pigs ear for a silk purse no matter what happens to the accounting rules. Any changes will just make us even more distrustful of the regulators and the bankers

Posted by anton kleinschmidt | Report as abusive

Not being a banker or an economist, this sort of discussion is a bit over my head. But I read Mr. Saft anyway because it is helpful in understanding the current panic.

On the same Reuters page the headline article was the concern from the Chinese about their holdings regarding deficit spending. I’ve often wondered when they will simply take us over in what wil be the most bloodless and softest takeover ever seen.

And your contributor who wrote about drug dealers running the financial scene is bizaare and very interesting. It would make a good movie project, and very au courant. I am a Producer and a Performer for 40 years and I can smell interesting material.

Forgive me for not commenting on your good work. I read you consistently. All the best.

Posted by Andrew Franks | Report as abusive

It is important to note that the losses will still have to be recongnized under cost accounting aswell as fair value accounting. Even if mark-to-market accounting is being suspended, losses are still recognized.

Posted by Dario | Report as abusive

When I was working briefly for a lender, I asked about the accounts that never seemed to get paid and whether it was practice to write down the values. I was told that in practice they just kept refinancing the accounts to make them appear up-to-date and paid up on the books. So the bad assets never get written off. The operations and assets of the lender were later purchased by a Canadian bank. I hate to say it, but the books can be made to say anything. Do you want a steady income stream? No problem. Or maybe choppy growth would be more realistic. Fine, anything is possible.

Posted by Don | Report as abusive

Months and months go by; assets go unsold. Banks seem to be in need of good, hard working, honest salesmen. They should be able to find the cost/benefit of things of value.

In the 1930s, T. J. Watson, IBM founder, was asked by friends , ‘Why are you hiring? Don’t you know we are in a depression?’ He quipped, ‘Some men drink. Others gamble. I hire salesmen.’

(single quote marks used to indicate I quote only the jest of what was said, if you want an exact quote, look in quotation books)

Posted by skinner | Report as abusive

I think Don has it right. In an essentially corrupt system, anything is possible. Our respect for law was flushed when the top leadership not only expressed contempt for the Constitution (“just a piece of paper”) but actually engaged in crimes against humanity without impeachment while handing their corrupt corporate pals no-bid contracts to get the job done. When the top leadership is corrupt, you get the real trickle down economics. Call it trickle down corruption.

Posted by Jonathan Cole | Report as abusive

Spot on.

Note that while it might make sense as you suggest to reach, in time, some accommodation in accounting rules where mark to market was allowed some latitude for extraordinary market conditions, very nearly all see through the banker’s charming little dance of the innumerable veils slowly revealing yet concealing the presumed horrors beneath.

Note, too, that this push on their part coincides with a week of extraordinary positive spin to reassure markets, which spin has proven sufficient to produce a thus-far-comfy bear rally.

Wouldn’t it be bizarre if some part of the political/financial establishment attempted to truly confron the extent of the crisis?

Let’s all hold our collective breath and wait for that to happen.

Posted by Big Al | Report as abusive

Mark-to-market has been around quite long. No problem. Suddenly a gang of financial and big biz elites want it suspended, or stop. Because they want to keep their fake assets on the books. These assets are created by them to be fake, market then mark them to be fake. They even refuse to trade the fakes between them.

And now they want the government to change the accounting rules to fake the fakes. After what these guys have done to the economy.

The audacity of the mafia mindset is infinite.

Change the MTM rules the the following WILL happen: Absolutely nobody in the world will place one iota of credibility on the SEC and the financial institutions. Obama might as well shut down these guys and start all over.

Posted by TomK | Report as abusive

Here’s Cassandra again

Posted by Luca | Report as abusive

Its not the accounting rules — its the political rules which are at fault. Contrary to what politicians have been pushing — that is, everyone should have a house, in fact some people just dont qualify which is why we are in this mess. For a change, as mortgages mature, owners should be made to reapply and qualify honestly. They must provide documented income proof such as their IRS filings, and must prove they have the available cash flow to make the payments. Thats it. Its very simple. Cant do that? Then you never should have had title to house, you never can support a house purchase, so hand over the keys, auction it off to someone who can afford it at fair market value and lets get on with our lives. This whole toxic asset consternation, and massive bailouts, make for some great drama, but are totally unnecessary.

Posted by Altima | Report as abusive

The accounting is fine the problem is with the regulation. The primary purpose of financial statements is for the use of investors. A secondary use is that regulators are using financial data to set the rules under which regulated financial entities like banks operate. Balance sheets should reflect value – what a 3rd party will pay for an asset. That’s what MTM accounting does. That’s valuable information for an investor. There is a separate cash flow statement available to investors who want to take into account the fact that these securities are still generating lots of cash. Investors should be able to look beyond the first page of the financial statements in evaluating whether to buy and at what price. By providing both balance sheet information based on MTM (what a 3rd party would pay today – on the balance sheet date – for the asset) and a statement of cash flow, companies provide the public investor with all the information they need to make an informed decision. The problem is that capital ratio limits are based on the amount of tier one capital and the formulae used by regulators are oversimplified. When their is no market for the securities in question it leads balance sheet write downs which in turn result in regulatory restrictions on lending and the need for huge capital infusions. It is perfectly reasonable for regulators to amend the rules and allow banks to lend based on more complex formulae that considers not only balance sheet value but also cash flow forecasts. They can do this without changing MTM accounting.

Posted by Jeff | Report as abusive

We need to discuss the repercussion of what is not intended to be done as well.

Posted by Pradeep | Report as abusive

Suspending mark-to-market accounting will alleviate the banking crisis and help to restore confidence. The banks will still have to take their losses, but they can write them down over time instead of being forced into insolvency right now.

This will also buy everyone some time to deal with all of the problems in the financial system. The credit default swap problem needs to be addressed. There are just too many of them, and the underlying assets have been insured multiple times over by speculators. The speculators should be wiped out.

Posted by kambo | Report as abusive

Mtm is a minor technical issue in the landscape of nuclear winter in the banking industry. Yes eliminating it would be a big deal, but that doesn’t seem to be on the table. Mtm is not the “Cause” of the banking problems, but it is relevant. Historically it was in force during the previous great depression (GD1) then suspended and recently reinstated in modified form around 2007. (Interesting to note how many minor SEC/acctg changes occurred around this time – uptick rule, mtm, and others – I wonder who lobbied for all that change?)

Anyway, a more rational application of mtm will do two things – help improve bank assets/cap ratios, signal that the gov is willing to make reg changes in moderation to help, instead of just throwing money at the banks. Having different flavors of mtm for different assets makes a lot of sense, using moving averages might be a good idea to help prevent asset melt downs when markets become illiquid.

If you think the ripple effects of the Lehman collapse were bad that is just a pebble in the pond compared to letting the whole US banking system go under.

Re the China debt. Why do you think the US is not engaged in Africa, etc. where the Chinese are sowing up long term political, energy and mineral relationships? Huge national debt is the most effective political leverage on the planet. The US has used it for decades particularly in So Amer and Mid East to gain UN votes, military bases, and all sorts of strategic cooperation/capitulation. Too bad Al Queda doesn’t owe us money. China will call our debt, but not financially.

Posted by Duncan | Report as abusive

How are accountants supposed to draw up a balance sheet if they do not have current valuation of assets?

Shares are also down and may recover to previous highs in 5-10 years time so does that mean that some way can be found to sell our shares at “maturity” value and get our money back?

The money elite want to save their own assess by amending the “rules of the game” when they are losing the game but when they are winning the rules are treated like edicts of God.

A pillar of the religion of capitalist financial accounting, mark-to-market, is intended to keep the system in check. If this goes then the house will surely fall.

Posted by Gregory | Report as abusive

Sorry, I did not mention that the reason for the discussion on mark-to-market is that at some point the attempt will be made to use public money to buy “toxic assets” from financial institutions.

Banks can’t sell these assets at market value because then they would be near or in insolvency. So the plan is to “revise” mark-to-market” and get the taxpayers to pay a futuristic price for the assets. Given the rising levels of government debt, these purchases would be financed by additional debt.

This is Robin Hood reversed, the government taking money from the poor to give to the rich.

The answer is where the US government does not want to go which is to allow market forces to dictate the outcomes of which businesses and banks are strong enough to survive and if necessary take over institutions that are “too big to allow to fall”.

If this is done then the taxpayer investment can be recovered later by reselling the companies when the economy has been stabilised. This will reduce the fiscal deficit and future tax burden.

Posted by Gregory | Report as abusive

Hey Mr. Expert! didn’t you say BAC and C was going to be nationalized for sure. How come both of these banks are profitable and kicking alright within a few weeks of criminal manipulation of these stocks.

Who pays these expert to write this nonsense?

Posted by jokey | Report as abusive

Mr. Saft is one of the VERY few people who actually “gets it”. Even more central than his idea that this move will further erode confidence in banks is the extremely simple idea that the exact OPPOSITE is what is needed to solve this crisis. That is, not only should mark-to-market be left in place, it should be damn well enforced, and the U.S. citizens should not be FORCED to loan money to hardcore loser criminals by congressmen who allocated it against the overwhelming will of the people. If this were done, all the cry-baby banks would have to face reality, like all other Americans do every single day, and shut their doors if need be. Those that survive will flourish incredibly due to the once-and-for-all removal of all the rottenness that has been festering and supported by our criminal government.

Excellent article, Mr. Saft. It’s a real shame that there aren’t but 4 people like you in the media today. Most of the media come closer to people like “jokey”, above, who haven’t even the first clue and are damn sure of themselves anyhow.

Posted by W.J. | Report as abusive

To arrive at a valuation of toxic mortgage assets and
if they will be repaid, why not use zillow to arrive
at the approximate value of the asset and a credit
report on the borrower to determine if they have the
ability to pay. All can be done by computer.

Posted by James Stamson | Report as abusive

James Stamson –

That is exactly what mark to market is. And more. The investor decides what it is worth, via any method he/she wishes, as opposed to the seller just pretending it’s worth something that no buyer will pay. What better measure of an asset’s value than WHAT YOU CAN ACTUALLY SELL IT FOR? These frauds in the banks try to deceive you by telling you things like “the asset has no value even though the debtor is making all the payments”. If you really believe that is the case, then tell me: why aren’t investors banging down the door to buy these “undervalued” assets? ALL of those things (expected future earnings, etc.) are factored into the current market price.

It is so phenomenally simple, and so incredibly disgusting that so many people are that far gone, or haven’t the integrity to admit reality simply because they are on the wrong end of the stick. No matter what they do, they WILL lose.

Posted by W.J. | Report as abusive

Didnt James Saft say C and BAC would be nationalized and that we would see a swing of bank failures….I have yet to see anything close to that happening. Why do you seem to be so negative against banking James? It’s almost as if you want the system to collapse.

Posted by John Thorpy | Report as abusive

Has anybody is this discussion ever tried to sell a house? Your property is worth exactly what the buyer is willing to pay for it, after all fees and taxes have been paid, what is the number on the check, its all that matters. All else is speculation and double-talk. Credit rating agencies are a complete scam, FICO scores are a bad joke, your credit is good when the cash is on the table, and not until the cash is plainly visible for all to see. They used to say that money talks and BS walks, now they say cash is king, but its the same thing, put your money where your mouth is.

Posted by Bill | Report as abusive

At this point, given that Summers and Geithner seem to be calling the shots, and that Obama, while an intelligent man and a superb politician in my opinion seems, with his limited financial knowledge and experience, to be swayed by their arguments, we have seen a marked shift in strategy this week, with the administration and the financial establishment (which includes most financial reporting, sad to say, Jon Stewart being on the mark in my opinion, and the WSJ for many years cheerleaders no less than CNBC, really) stressing the positive to the max, referring to operating profits riding the back of free loans from Treasury as if these suggested a turnaround in fundamentals, talking their book at every opportunity, I have very very little confidence that the so-called ‘stress tests’ which are clearly not so very stressful as to their ‘worst-case’ scenarios will be a meaningful assessment.
There continues to be near total opacity as to these ‘assets’ fully six months or more after the meltdown commenced in earnest. There continues to be temporizing and ‘dithering’ as it has rightly been put – and I do mean ‘put’.
None of this inspires confidence. It seems to me that, unfortunately, for all the talk of pulling together, we are seeing numerous signs of strain in the establishment combined with an attempt to return to ‘business as usual’. It will in my opinion ultimately fail, with the result that the situation will unfold in exceedingly unpleasant fashion. I suppose it’s fairly close to ‘every person for themself’ time. Then again, in most crises we see the worst rather than the best of human nature – unless it’s a novel or a movie.

Posted by Arc Tenebrous | Report as abusive

Market to market was used in the 1930’s and done away with later in the decade by FDR. It came back in 2007. Does anyone see a correllation? We haven’t had anything resembling a depression until now. Getting rid of MTM will not solve the problem but anyone who thinks that real estate is not going to go back up in the future has their head in the sand. Their not making more land, and unless there is a nuclear disaster their will always be buyers of distressed property with the forsight to make money.

Posted by MJJP | Report as abusive

Posted by Barry Northrop

If no one will buy my asset yet it reliably generates a cash flow, does that make it worthless? Mark to market would say yes.
And rightly so. The reason no one buys your asset is that everyone is either not sure or even certain that these cash-flows will ebb and disappear. Since no one is capable of exactly when the cash-flows of your asset will cease they value the risk as large, hence will not buy it. Thus even though your asset still provides income, it has to be written down just as an old machine that produces an item to be sold has to be written down.
In addition, many of those “assets” on the books are in reality not worth anything at all.
That means that the problem is not with the accounting rule, but with the banks strategy of putting to many of these risky things on their books. They gambled and lost – and now expect us to help them cover that up.
The purpose of an accounting rule is not to make a company look good, it is to deliver a true-and-fair view of the value of the company. If you don’t like what you see changing the rule will not change reality – as smashing the mirror when you look into it and don’t like what you see will not change your looks.

Posted by Robynne | Report as abusive

Whose “toxic” assets are they? Calling them “legacy” assets and accounting gimmicks will not solve the problem. It is within EVERY banks power to spin-off such “assets” into a separate company, and sell them off, or let the market value them based on full open and honest accounting of their current state and future values. The Banks have to “manage” their own way out of the mess they have created. Who understands this mess better?

However, repeated calls for “clarity” are nothing more than a disguised call for CHARITY from tax payers. The banks should simply spin them off into a BAD bank they own!

Posted by V Ray | Report as abusive

[…] 09/03/14 “The problem is that officials in China appear to be addicted to European luxury brands.”Accounting change won’t save bankingChina’s Premier Wen Jiabao on IMF funding and fiscal guarantees to which Yves Smith reacts.McKinsey […]

Posted by Daily Must Reads 09/03/14 – FimeFocus.Com | Report as abusive

The FT 3/13/09 graphs the ratio of avg CEO pay to labor pay since 1965. This almost exactly lays over a graph of the dow. since then the growth of ceo pay have been a long function (not linear) from 30 to 300 times the AVG worker. Floyd norris of the NYT points out that only 50% of americans own stocks and bonds. The great majority of those are just small amounts. At the same time real wages for most americans have been falling for 30 years. Lets call these washington initiatives exactly what they are. Give aways of the american tax dollar to support the lost wealth of the already wealthy. First it was TARP, then TALF. Now they want to change the accounting rules to rig the game even more. The vast majority of these spent funds will not help the average american and hence the economy. What they are is a way of ensuring the losses of the investment capital of the wealthy are minimized with government (tax payer funds). Washington and Wall street are using taxpayer money to line their own pockets and selling it to us suckers as something to help us. I can assure you the power brokers in washington own a lot more stock than most americans, as does wall street, and the wealthy. I have written my congressman, the president, christopher dodd, and Barney frank about this and encourage you do so too. After all these people have taken from us already, don’t let them take any more!!!! Our government should be supporting the people, not the market!!!!

Posted by dcb | Report as abusive

The banks spent your dollar that you deposited with them on worthless loans. It’s your money that isn’t worth what you deposited with them. They don’t want you to know that they don’t have your money if you wanted it back. That is what everyone is working so hard to hide. The money you think is in your account isn’t there!!!

Posted by dcb | Report as abusive

And needless to say of course, the banks liberally marked their assets to market during boom times and based their bonuses on bogus performance. Let’s claw back those salaries, too, while we’re at it.

Posted by eric20008 | Report as abusive old-Wealth-Gap5dec06.htm

The most comprehensive study of personal wealth ever undertaken also reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total. In contrast, the bottom half of the world adult population owned barely 1% of global wealth.

Who do you think is really being helped with all this market support? The tax payers are paying the wealth the money back they lost!!!

Posted by dbc | Report as abusive

Why not extend the suspension of mark-to-market to the average man in the street as well.

If someone thinks their property is worth $500,000 because that’s what they paid for it then let them remortgage upto $500,000 .. even though its only worth $300,000 now … after all, its just an accounting entry so the banks tell us .. that person doesn’t have to sell the house just like the banks don’t have to sell their assets. They can just wait for the market price of the house to rise again, just like the banks want to wait for the market prices of their assets to rise again.

Try it out with your bank manager .. see what the response is.

Somehow I feel it is one rule for them and another rule for the man in the street.

Posted by Russ | Report as abusive

James Saft you’re off the wall. Of course M 2 M will help the banks and a lot of other companies. M 2 M is not a real accounting method where there is no market. And as short sellers drive down the stock prices, companies are forced out of business because loans often require a capital % much as individuals get a loan based on LTV. The M 2 M drives down their value and then shorts drive down the stock value. Next the lenders call the loans much like people buying stocks on margin. It is ridiculous. First either eliminate M 2 M or revise it greatly, or create a real market of value. Second eliminate all naked shorts and return to the uptick rule before stocks can be shorted.

Posted by Jim | Report as abusive

I know what should be done to assist all investors. Allow them to sell their capital loss carry-overs to those who have capital gains derived from “publicly tradid eqities.” This would inject capital into the market and ….allow those with gains to reduce their tax on current capital gains. I would do this with “homeowner” losses also.

This will allow the closing of this chapter of deregulation sooner and prevent carry over to our children of this mess. Start the progrom from 9/11/2001 and allow it to extend through 2011. After that if the capital loss sale has not been liquidated it is lost.

Posted by Thomas Shafovaloff | Report as abusive


There is no market because the institutions are unwilling to drop to a clearing price. If they are willing to let the assets go for a low enough price there will be buyers willing to take a chance. The very fact that ‘there is no market’ is their acknowledgement that they insist the assets are worth more than the market price.


Posted by Super Snark Is Not a Boojum | Report as abusive

The problem is not only the assets which are in the books and how they must be valued but the biggest problem are the toxic assets which are not in the books. The so called off sheet unnumbered dark deep pools of toxic liquidities in the shadow banking system. These black hole derivatives are the real cause of this Global economical crises.

Problem is do we really want to know? Since these are rarely mentioned maybe we should just forget about them. I mean who wants the honest truth about a quadrillion debt which would immediately show the complete insanity of the whole unregulated system so why bother.

But if we decide to forget about them the people can’t be terrorized with them in the cunning Kikeboe balance sheet game which the banks like to play to get even more taxpayers money. One day the banks have huge debts and desperately ask for taxpayers money the next day the make profit? Am I that smart or are the people that stupid?

Posted by Youri Carma | Report as abusive

The (Mark to Market) theory of accounting reporting has the inherent failure that the value of the assets does not reasonably represent useful lives.
This distorts a year by year system of accounting.
Moreso, the valuation of a mortgage debt by the value of the property distorts this further. The value of any debt, mortgage or otherwise, is in the determination and ability of the debtor, who is probably more cabable than we commentators.
James de Courcy Wheeler FCA

Posted by william ireland james de courcy wheeler | Report as abusive

Youri Carma:

I think we have abundant evidence as to how stupid the political and financial establishment judge the public to be. The various proposals to save established interests at public expense and by sleight of hand while tossing the occasional bone or bit of scrap to the broader public makes that fairly clear. Indeed, who are the decision makers here? The same folks who wrought catastrophe but who now claim either it was ‘impossible’ to foresee and/or that they have ‘learned’. It is a very cynical game in that they know it isn’t believable, but they also know it doesn’t matter that it’s not believable–because they’re making the decisions, and, of course, they are making them in their own best interest. The public gets to grumble, sound of on blogs, and write angry emails. So what? It changes nothing.
Clear proof of how stupid and manipulable they judge the public to be–and thus far, public outrage proving impotent, they’re quite right.

Posted by Atomik the Weasel | Report as abusive

I believe in the argument that in recent years market pricing of more exotic credit products has become too dependent on the opinions of the major rating agencies. There has not been enough regard for economic reality. Doubtless for the most exotic products God knows what the economic reality is!

Posted by Ian Calvert | Report as abusive

Jim, what’s up? You say James is off the wall?

Come back to this site and explain to us how you propose to abandon MTM and introduce a “real market of value”?

Also, explain to us why MTM has been just fine for valuing assets up to now but suddenly it is not fine anymore?

Also, explain to us why the rules of the game should suddenly be amended in mid game. Investors take positions in the markets based on the rules so the game is always won by the most savvy investors that operate on the basis of the rules of the game. What you are suggesting is that the rules be changed because one side of the investors equation is losing the game (the side that usually controls the game).

Jim, the whole point of this debate is that tax payers dont want to be suckered into giving more of their tax dollars to bail out people who made the wrong decisions by paying them more than what the “toxic assets” are worth. You do know that the government is trying to figure out a way to do this , dont you?

Please respond to this and we can have a debate. Is that ok with you?

Posted by Gregory | Report as abusive

James is quite correct. When it all comes down to it, the banks owe way more money than they can cover. The only real “crisis” here is, now that the banquet is over no one wants to get stuck with the check.

Never mind that banks were always the first to say that government should stay out of the markets. Now that they’re broke they want the government (tax payers) to lend them some cash. When you and l can’t pay our debts, we have to file bankruptcy and have only the most basic of protections under the law. So if we make bad choices we have to eat it.

But the banks don’t want to eat it. They don’t want fold as they should. This is going to hurt one way or the other. But better to get it over with now and let the weak banks die. If that be all of them then so be it. This is only a system of exchange after all. And we can always come up with a better system. Or God forbid, maybe have some common sense when making choices next time.

Posted by Benny Acosta | Report as abusive

the banks need to learn from their mistakes they have done in the past. i say they should have never been given any money at all. if you run a large buisiness or cant manage your money the government will bail you out, but if you are just struggling to pay your bills, you just out of luck. seems like no one in washington has a clue!

Posted by keith | Report as abusive

10 out of ten Mr. Saft. And the german demand of regulation is another (I better not type the word here).
To what benefit shall that be. It will take months if not years to put together an internationaly accepted codex. This crisis will hit Germany the hardest and world-champion-exporter must for once cooperate with and help the U.S. or Germany will sink amongst the waves.

Posted by Hans | Report as abusive

In response to Gregory about James Saft being off the wall and M 2 M should be abandoned, I can only say that I have real estate that is worth much more now than I can sell it for. I and many others take it off the market until prices stabilize. When people cannot get a loan and when foreclosures are swamping the market, prices are driven down below what they are actually worth. And people say, why should I buy now because the properties may go down more. But M 2 M is worse. M 2 M requires that business write down assets to a worthless value because no one is willing to buy them. And people aren’t willing to buy them because such assets are buried in large quantities of derivatives and the assets are obscure. If I were a bank, I would not sell assets on which I was collecting income for less than the income I was receiving if I were reasonably sure to collect. In like manner, if I have a rental and people are paying the rent and most of my mortgage payment and the current market price of my house is less than what I can sell it for, I would be better off to wait to sell until normal times return. Times of distress are not a normal market. Similarly stock prices are not realistic now. If one can hold on, things will improve. A forced seller will lose a lot of money. In the past, I have tried to sell a house during a bad market at a reasonable price and it would not sell. But when the good times returned, I sold the house for a decent profit. Please respond Greg, and I will debate with you.

Posted by Jim | Report as abusive

With respect, my perspective is that the market price is the market price. If one feels that the current market price will increase in the future and that one is right to hold out for that future price that may or may not prove a sound judgement, but it is what is referred to as speculation–a judgement.

The current price is the current price.

The problem with abandoning mark-to-market is that it allows for infinite possibilities of error and delusion, the notion that ‘I’m right, the market is wrong’. It was the poor judgement of these institutions that these markets could not possibly become illiquid or decline substantially let alone catastrophically in value, and we are now to trust in their judgement, their speculation, that they project future values more accurately than others in the market as reflected in the dearth of offers at the prices they, in their infinite wisdom and judgement, consider ‘reasonable’?

Posted by atomikweasel | Report as abusive

I haven’t really heard an explanation about the derivatives component of this mess. It’s a deep issue when people start questioning book values and when declines in value should be expensed rather than remaining capitalized. I doubt the accounting profession would consider the reverse – realizing income on increases to market value. The volatility of the markets would make this type of accounting a real headache. I can see however how somebody might try to capitalize a derivatives contract to market value. For me, insurance costs should be expensed over the life of the policy in terms of the contract buyer. The writer on the other hand if she is naked, she should buy some shorts.

Posted by Don | Report as abusive

I know this is a bit broad with respect to the immediate topic, but I have a question. Does anyone, essentially irrespective of their political orientation, have *any* confidence in Summers and Geithner at this point?

Talk about a random walk!

Posted by atomikweasel | Report as abusive

As a CPA I can only say that any change to this most basic precept of Accounting Law, Fair Market Value, is total blasphemy that will blur and twist financial reality to absurd distortion and make the government advocates of delusionary economics; the disease it is supposedly trying to cure.

Posted by RALPH JARMON | Report as abusive

The mark-to-market rules came as a result of abuses in the past by hidden Losses or Reserves. Understanding the issue and blaming the current mayhem on mark-to-market rules is rather weak attempt on a solution.
The increase in market values over the past 5 years came to drastic halt and fall should reasonably be weighed by unreasonable expectation in further wealth creation. The huge corrections, both in advance and emerging countries must be reinforced by political strength to re-build and repair the damages. Naturally, those that had voilated laws to perpetuate their own greed and wealth in suspicious manner must be bought to justice whereever juristidictions.

Posted by Lee PH | Report as abusive

Whatever happened to the old accounting basis of prudence?

If all banks wrote their balance sheets down to “lower of cost or net realisable value” then what James wrote – “They do not reliably know who is bust and who is not.” would disappear.

Posted by Colin | Report as abusive

Plenty of reasonable arguments against relaxing the current standards have been presented here. The banks argue that they are being hurt by the applicable standards and that the value of the assets is higher than what the books say. That may be correct but that’s not point. The point is that markets don’t think so, the perception is what counts not the reality. Well they’ve accepted the rules and played them like the rest of us. Now they don’t like it any more? That’s bizzare soup opera. They are the main culprit in the current scenario and they have contributed to the distortions now prevalent and these are to be forgotten?. Common this is not a legal proceeding, the jury can’t be told to forget the last remark. Furthermore they’ve allways had number of instruments at their disposal allowing them to manage the unforseen (hedging, insurance etc). They’ve bee paid handsomely to do just that (extracting the meat from the bones) yet failed at managing the resources by the then applicable rules and they have now the nerve to ask everybody to look the other way? If politicians take away that principle based approach than what chance does the society’s other principles stand (legal, moral, accountability, freedom..) – all in the name of a paper profit ?

Posted by Franz Kafka | Report as abusive

In good times, they loved M2M because it inflated assets and share prices shot up. And the government also collected more taxes.

Now, M2M is making them too bad and they want to change the rules mid game?

They say the markets are irrational and do not truly price their assets. Why didn’t they say the same thing when the markets were at all-time high?

Posted by ron_paulite | Report as abusive

In good times, they loved M2M because it inflated assets and share prices shot up. And the government also collected more taxes.

Now, M2M is making them look bad and they want to change the rules mid game?

They say the markets are irrational and do not truly price their assets. Why didn’t they say the same thing when the markets were at all-time high?

Posted by ron_paulite | Report as abusive

One of the key concepts of mtm missing from this discussion is the assumption of a normal “orderly” market. Mtm works going up because supply and demand are by definition, functioning. Mtm is equally applicable in a normal orderly down market where yes, all the banks their their beatings.
But when the market collapses, what are you marking to? Liquidation prices? That is a self-fulfilling death spiral. Reg change/relief from accounting practices not intended to function in the absence of a market is necessary for the survival of the financial sector in America and elsewhere. All the stakeholders involved are feeling the pain – all for bonus clawbacks here.
This is not an argument for avoiding the consequences of stupid risk taking. Stupid risks were taken, reputations and fortunes are crumbling. But we don’t want the whole ship (which all of us are in like it or not) to go down as well. Why should someone looking to buy a house or a car now be forbidden because the banks won’t lend? Why should non-bank businesses small and large be refused normal credit lines for making payroll and basic investments in inventory and operations?
When a patient has a bad heart, we don’t cut off their head, we get their heart pumping again and put them on a restricted diet. Mtm reform must be a component of the restart plan – but only as it pertains to extraordinary market conditions for certain types of assets.

Posted by Duncan | Report as abusive