Why Washington Suspending Mark-to-Market Accounting Could Make You Rich!*
The Former FDIC chairman blames these accounting laws for destroying the banks.
Steve Forbes has argued that they are “the most destructive policies” contributing to the financial crisis.
So then what the heck does mark-to-market even mean? According to that same Steve Forbes article, “The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.” This means that when the market prices of securities go down, the institutions must write down that the securities are worth less.
Therefore, as the market has collapsed for all of these securities backed by debt and mortgages, the banks have had to write down massive losses because there is almost essentially no market to trade in. The above mentioned economic commentators have suggested that this practice of accounting is destroying the banks and should be dismissed because there is no market. They argue that, if the banks no longer have to mark their assets to the market, they do not have to show large losses and can wait until the market stabilizes again to sell them, thus avoiding all these bankruptcies.
Well, now that sounds all fine and dandy, right? Except, if the securities are no longer marked-to-market, what are they marked to? How is the price of anything determined outside of a market? They could possibly mark down the assets as being worth their original value at the time of purchase or the SEC suggest this as an alternative:
“Can management’s internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?
Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.”
This means that the management of the banks can essentially determine the value of the assets that they decide upon, using their own estimates.
So what does any of this have to do with your house? Simple – your house and property value are primarily based on the market. The housing bubble was able to expand so dramatically in part because houses became overvalued, leading to more houses in the area being adjusted upward in price and so on. An upward vicious cycle that eventually had to pop. Now, when the banks that took these mortgages and the securities bundled with them, they bought into a housing market that was overvalued. When all of that value dropped, people could not pay and we end up where we are today.
Thus, I can only conclude that if it is fair for a bank to suspend mark-to-market accounting, couldn’t we also, as homeowners, suspend the downward falling price of our homes? There is technically almost no difference:
The housing market is under such duress that a homeowner can claim that there is almost no market at all. (My own aunt was recently featured in the local paper because her house has been on the market for over a year with almost no interest.)
A homeowner will actually be more damaged than the banks if they are forced to sell at “fire-sale” prices because for most people this is the bulk of their wealth.
Many people who are underwater with their mortgages are still “profitable”. They still have jobs and are able to bring in a steady income. (and according to Vikram Pandit this is profit)
Not being able to pay a mortgage that is currently worth more than their own home value has decimated many homeowners, leaving them with poorer “downgraded” credit.
The value of homes, if allowed to be suspended from mark-to-marketing, may recover in a few years and then everyone would still be able to live in their homes without declaring bankruptcy.
Yet we cannot do this, because someone would have to pay the mortgages and someone would have to make up for all the debt, even if the debtors themselves did not declare bankruptcy. Someone always must pay. Thus far it has been the taxpayer for these banks and soon it will be the taxpayer again to help with these subprime mortgages. Mark-to-market practices are essential to any truly capitalistic society. I cannot go out and start a business selling my pet rocks, lose all my money and then declare this unfair because at one point, I knew those damn rocks had a fairly good value. Sure, that was in the seventies, but that market could come back any day now and it is totally unfair that my warehouse full of rocks with painted faces is declared worthless… The same illogical thinking applies to Steve Forbes and those who agree with him.
I hope at this point everyone can begin to see the absurdity and audacity these banks and politicians have to declare mark-to-market accounting unfair. They invested in a product, the market collapsed and now it is their responsibility to get rid of those assets as best they can or declare bankruptcy. So if and when these outlandish politicians stand up and declare mark-to-market no longer necessary, I hope you are all ready to yell back that you are no longer going to pay your property taxes or mortgages on your distressed assets.
If the same rules were applied to homeowners, they could make up the own value of their homes based on what they think is fair and then borrow against that. That house you are stuck in that used to be worth $400k and is only worth $250k now; why not mark it down as a million and call it a day? You are rich! No mark-to-market for banks, no mark-to-market for the people. At least your house will always be useful for someone to live in, no matter how bad the markets get. The same can never be said about these overcomplicated, overly secretive CDO’s, CMO’s and whatever other crappy alphabet soup securities that these banks made the poor decision to invest in.
In the great words of John Stossel – Give me a break!
*The chance that the government allows homeowners to determine the value of their own homes is approximately zero