Marketing "Mark To Market"

One of the most important accounrting regulations the SEC imposed late last year was a return to companies having to value their assets at an actual price, not what companies thought the asset should be worth. The accounting practice, known as "mark to market" was imposed last November.

Needless to say, Wall Street hates it. It made banks have to assign a price to arcane assets like securitized mortgage bundles and CDOs and other debt instruments based on what price those instruments were currently trading at.

"Fair value" was defined by the SEC as selling price at the time, not "what the person selling it wanted the value to be." This was done in the wake of the Enron accounting scandals...and in typical Bush administration fashion took nearly five years to be implemented.

Now, since banks wanted to hold on to these instruments and not sell them, those who DID have to sell them sold them as a last resort at low low prices and if you bought them, that was what the arcane little securities product was worth. Banks hated selling them, but they were greedy enough to buy them and hope they went up in value, because they WERE buying low.

Problem is, the housing market went and died. This drove the value of these things down to "near freakin worthless" because, well, they WERE nearly freakin worthless. They kept losing value, too as the housing market continued to crash.

The banking lobby had a brilliant idea. "Change what fair value means so we can lie to the world about what these damn things are worth!" On the eve of the industry bailout, when everyone hates Wall Street. Seems like a losing proposition, right?

You'd be wrong.

In a meeting last week, lobbyists for the American Bankers Association and the Financial Services Roundtable urged the Securities and Exchange Commission to suspend or relax the accounting provision. A similar advocacy effort continues on Capitol Hill, where lawmakers are reconsidering efforts to aid the financial industry after the House yesterday failed to pass a recovery plan. That bill also would have forced a re-evaluation of the "mark to market" accounting rules.

The three-page joint statement today from the SEC and the Financial Accounting Standards Board does not do away with fair value accounting provisions altogether.

But it gives companies more leeway to employ estimates and their own judgment in many cases when they deem the market to be "disorderly" or seized by liquidity problems. It also gives companies room to determine whether the impaired value of their assets is no longer temporary, a conclusion that could trigger massive write-downs.

Regulators reminded companies today that in exchange for using more estimates and judgment, the need to disclose their methods to investors is all the more important. SEC officials sent letters reminding businesses of their obligations twice already this year, in March and September, after expressing concern that many financial institutions were using opaque measurements.

In other words, now financial companies can happily "estimate" how much these things are worth.

Which is how we got into this mess to begin with, because up until last November, banks were happily "estimating" how much these things were worth well in their favor, which is why banks had so many of these damn mortgage products in the first place.

Before the credit markets were locked up because nobody knew what these mortgage things were worth. NOW the credit markets will be locked up because everyone will assume other banks are lying about how strong the assets on their books really are.

That's a great improvement of course because if banks can lie about these assets, they have to keep less cash on hand to meet funding requirements, because more of a bank's assets can be counted as securitized mortgage products (which the bank is estimating).

So, less cash is needed, because everyone's lying about the reasons they can now have less cash on hand, even though the banks know they are lying and know they actually need that liquid cash even more than they did before, because NOW they can get caught with their pants down should they need to really need to buy something with that cash or sell anything vital...like those nifty phantom estimated assets that even LESS people are going to want to buy because NOW not only is the housing market STILL dropping but everyone now knows you're lying about how much the damn things are worth on top of it. After all, the people who you would want to sell these to are also lying about the value of their OWN securitized mortgage products they already have.

Sure, that'll make people want to loan that liquid cash out to people instead of hoarding it!

Brilliant!

Morons. We really do deserve this f'ckin crash.