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Change The Rules of The Game

Posted by Larry Doyle on March 13, 2009 8:07 AM |

Well, when you do not like how a game is going, change the rules.

The primary reason for the market rally yesterday was a Congressional hearing pressuring FASB (Financial Accounting Standards Board) to revise its rule known as the “mark-to-market.”  Thank you FL for providing a heads up on this hearing.

In layman’s terms, the mark-to-market is the equivalent of inventory valuation.  Nobody likes when inventory declines in value but if that is the reality, then so be it. Would your banker laugh at you if you told him you weren’t going to properly mark inventory? Do you think he’d continue to offer you a line of credit? Are we supposed to invest in banks without a credible mark-to-market?

I have VERY mixed feelings about changing this rule. I do think there are merits in never having imposed this rule for certain less liquid assets, such as commercial real estate. However, the pressure banks are applying on Congress and Congress, in turn, on FASB is for a suspension of the mark-to-market on so called super-senior classes of CDOs.

Make no mistake, if this rule is changed it will provide capital relief because the “inventory will not have to be marked down.” However, it comes at the price of a lack of transparency and full understanding as to a bank’s true capital position. I recall writing in my very first piece on October 14th:  

if the government accedes to the pressure being applied to suspend the mark to market accounting principle, I would expect that move would only prolong the underperformance of the economy . . . I view a suspension of the mark to market as the equivalent of an agreement to officially allow one to “cook their books”

I hold the same opinion today.  We will see a lot more on this topic over the next few weeks as FASB Pledges Mark-to-Market Guidance Soon.

LD






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