FASB accounting rules and mark-to-market have been subject to intense scrutiny in recent weeks to modify the rules to help banks. Changes were made but it is not clear whether the reduced transparency will end up helping the mortgage markets.
Congress in turn put the heat on the Financial Accounting Standards Board, a group of five Ã¼ber-accountants based in Connecticut who write all the rules. After months of pressure, including threats to take away its authority, the FASB caved and voted to loosen the rule.
One of the key reasons investors aren’t buying troubled mortgage backed securities (toxic assets) is because there hasn’t been a way to establish prices – there has been little activity. In fact it is a lot like appraising home values today in a market with very limited or no sales activity.
As an appraiser, I was thinking of making an argument to a lender that “because there is no data I’ll appraise the property based on the last time it sold or as of a year ago when there were comps – it’ll be up to me.” Yeah, right.
Last October, just after the credit markets seized, I wrote about the concept of Mark-to-market in my [Mark To Market] To Buy A Fat Pig where I made the case that there may be no value at a certain moment in time. Immediately following 9/11 when there were no sales and some brokers are saying the market fell 25%. How can this be measured if there were no sales?
I’m very much conflicted on this issue – nuts and bolts vs. macro.
Banks are crippled by their balance sheets because of mark-to-market accounting devaluing toxic assets – so they want to relax the rule because they need to lend to make money. However, it’s a shell game since their balance sheets are propped up and the value of the asset is determined by the lenders themselves. Balance sheets will hold less integrity as a result of this change.
Ok, let me summarize: There is no market for these assets, but they will be worth something at some time in the future so they can’t be written down for pennies on the dollar today. It sounds like politics are making the balance sheet transparency opaque.
Last week’s relaxation of FASB 157 as the Mortgage Bankers Association, and Congress lobbied for, will basically allow banks to pick and choose what these assets are worth in order to manage (protect) their balance sheets but will provide for more disclosures.
The new guidelines give financial institutions leeway in determining whether an asset is able to be sold or not. If they determine it can’t be sold, then they are not required to write down a loss on their books – though they are required to take a “credit loss,” a change to the original proposal. The rules change has been a top priority of the financial industry and doesn’t make everyone happy:
“Political and special-interest pressures placed on [FASB] to change fair-value-accounting standards are unacceptable and very troubling,” the Investors Working Group said in a statement issued after its inaugural meeting yesterday.
At first glance, it seems logical to do anything to ease the credit contraction. However, how do we get investors of MBS and other financial instruments back into the mortgage market when this is more of a smoke and mirrors manipulation of accounting rules? Here’s a commenter’s views in response to Knowledge @ Wharton’s Are ‘Mark-to-market’ Accounting Rules on the Mark?:
I believe that the express purpose of the bundled mortgage backed securities was to allow banks to hide the bad risk with the good risk to allow them to carry a more positive balance sheet. To relax the rules would make it impossible for private investors to buy up these toxic assets. The sooner these assets are marked to the real market, the sooner investors will come in and buy them. When that happens, I believe we will begin to see a turn around in the housing market. This is what I do for a living . Allowing the Banks to carry these loans in the hopes that someday the value will return.. is just ridiculous. Stop protecting the banks.. enough!
It seems to be the political pressure placed on FASB will extend the credit crunch further because the banks now have no incentive to remove these assets off the books and may essentially neuter the US Treasury’s plan to dispose of toxic assets or as their new name: “legacy assets.”
This move by Congress to press FASB to relax the rules and place authority in the hands of the banks again seems to be counter productive and relies primarily on a promise they made to Congress that “we need to be able to relax this rule so we can begin lending again.” I think I have heard this just before the last 2 stimulus bills were passed? – Congress was promised by the banks to lend yet after they received the funds, they didn’t.
In fairness, banks are trying to survive and it seems as though the Federal government is trying to circumvent the free market to help them do that. I’m not sure this is such a good idea.