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MAKING CENTS OUT OF THE NEWS
Blog #24
(June 24th, 2010)
Proposed “Mark To Market” Legislation NOT On The Mark!
By Tom McAllister, CFP®
Hindsight is 20/20, they say, referring to the ease with which we tend to criticize others’ past decisions. Repeating those past mistakes given the benefit of a rear view mirror, on the other hand, can be referred to as nothing less than insanity.
The 2008 near-meltdown of our country’s financial system in the fall of 2008 was, in large measure, precipitated by the Financial Accounting Standards Board instituting in 2007 a mandatory “Mark To Market” rule on mortgages carried by financial institutions. (I wrote about this is Blog #10 -08) The FASB now proposes a similar rule change regarding all bank loans, not just mortgages!
The 2007 Mark to the Market rule forced financial institutions to value long term mortgages as if those mortgages were held in day-trading accounts. (Prior to that time, dating back to the Great Depression, an asset was held at book value, unless it was sold or became impaired through the borrower’s falling behind in the payments). Auditors and regulators were compelled by the rule to “write down” real estate assets to levels that did not come close to reflecting current cash flows.
As an all-too real example of the effects of Mark to the Market compliance, Merrill Lynch sold a huge block of mortgage securities for 28 cents on the dollar of book value, just prior to being rescued by a forced merger with Bank of America. Merrill stockholders were nearly wiped out, even though the vast majority of these mortgages were current in payments and had a much higher actual value!
When the 2007 Mark to Market Rule was rescinded by Congress in March 2009, the terrible bear market in both stocks and non-government bonds ended overnight! The “toxic assets” which had been made so much of in the media and which had caused so much angst, disappeared.
Now this same FASB seems hell-bent on bringing “Mark to the Market” accounting back with a vengeance. This time all loans, not just mortgages, will be subject to so-called “fair value” rules.
Banks make loans based on certain standards, some regulatory, some industry standards, and some based on the credit history and bank judgment of the borrower. An “arms length” potential buyer of these loans lacks personal knowledge of the credit of the borrower, and often of the value of any collateral backing the loan. (How can I, in Carmel, IN, know what the immediate forced sale value is of a bulldozer at a remote mining operation in Nevada or NW Canada?) Should Mark to Market be instated, the only winners in the sorry arrangement would be accountants and assessors, whose fees would increase for evaluating individual loans to meet the new FASB regulations.
So far, objections to this abysmal legislative proposal have been remarkably scarce. I urge every investor or business owner to contact House members and Senators, in hopes that astute members of the Congress will see this proposal for what it is: an “oil spill” of artificial government job creation, damage to the economy, and risk of renewed market turmoil at the first hint of an economic downturn.
Mark to the Market is NOT, and never was, “on the mark” for citizens’ economic welfare!
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