Article

2008-10-15 Home Front Economy

Truer Values Are Needed at the Banks (The debate over mark-to-market)

Archived material is restricted to Rantburg regulars and members. If you need access email fred.pruitt=at=gmail.com with your nick to be added to the members list. There is no charge to join Rantburg as a member.

Posted by Zhang Fei 2008-10-15 11:01|| || Front Page|| [1 views ] Top

#1 It seems to me that there is a similarity between the issues with Mark to Market and depreciation or appreciation of different assets. Mark to Market is the proverbial hammer. "To a man with a hammer all the world is a nail".

Different types of assets need different valuation tools and this one seems clumsy at best.

The following is cribbed from the EU Referendum site please go there for the whole thing.

http://eureferendum.blogspot.com/2008/10/simple-explanation.html

Talking to a farmer the other day, I was trying to explain the concept of "mark to market", and hit on this wheeze. Imagine, I said, it is 19 March 1996 and you have just bought 150 head of store cattle at £200 each that you are going to fatten up and sell in a few months. How much are those cattle worth?

Simple arithmetic tells you that you have an investment worth £30,000.

But this is 19 March 1996, which means the next day is 20 March 1996. On that day, health minister Stephen Dorrell stood up in parliament and announced a tentative link between the killer disease CJD and Mad Cow Disease (BSE). The meat market didn't go into free fall it evaporated. I don't think a single beast was sold that day.

So how much are your cattle worth, I ask my farmer. £30,000, he says - he had no intention of selling them. But if you had sold them on the market that day, how much? Er there was no market. In that case, I declared feeling very pleased with myself - their value was zero. That's "mark to market". You have to value on a "fire sale" basis, according to what your cattle your assets will fetch on the day.

Now, imagine you are a bank. This is your "toxic debt" your 150 head, nominally worth £30,000. On the basis of that holding, you have been allowed for the purpose of this example to borrow a maximum of ten times that amount, which you are allowed to lend, i.e., £300,000. This is called "leverage"........

....You are now too highly leveraged. You are, in fact, insolvent. No commercial bank will lend you any money. ... Or you could go to the government for a "bail-out", in which case they'll "nationalise" your farm and put their own manager in. Whatever else happens, you certainly cannot lend any more money.....

Posted by AlanC 2008-10-15 11:46|| 2008-10-15 11:46|| Front Page Top

#2 If an asset is calimed that it cannot be valued (i.e. it's Level 3) then it needs to be listed and described transparently on the books.

IMHO the accounts need to be split into 3 (1 for each level of assets) and any movement between levels accounted for.

Posted by Bright Pebbles 2008-10-15 15:50|| 2008-10-15 15:50|| Front Page Top

#3 And should fixed rate loans be appreciated on balance sheets when interest rates fall?

Posted by Nimble Spemble 2008-10-15 15:58|| 2008-10-15 15:58|| Front Page Top

#4 The cattle example/analogy is wrong. No cattle sold = no market price = not possible to mark to market on that day and the last available price would be used instead, ie the price they were bought for.

Mark to market is wholly a good thing despite valuation issues with illiquid assets.

Posted by phil_b 2008-10-15 16:54|| 2008-10-15 16:54|| Front Page Top

#5 Mark to market is dumb for non-tradable assets like mortgages. But securitized mortgages are dumb too.

Posted by Nimble Spemble 2008-10-15 17:28|| 2008-10-15 17:28|| Front Page Top

23:55 Claiter Speaking for Boskone9131
23:54 bigjim-ky
23:53 bigjim-ky
23:45 JosephMendiola
23:42 OldSpook
23:39 Barbara Skolaut
23:39 JosephMendiola
23:37 bigjim-ky
23:37 Barbara Skolaut
23:36 bigjim-ky
23:34 Barbara Skolaut
23:33 JosephMendiola
23:33 OldSpook
23:31 JosephMendiola
23:29 JosephMendiola
23:24 Unaimp Borgia7324
23:20 JosephMendiola
23:19 Woozle Spusomble6806
23:17 Hupith Wittlesbach6903
23:15 Woodrow Angart2122
23:13 bigjim-ky
23:13 Thrusong Sproing3473
22:53 bigjim-ky
22:42 Betty