Mark to Market To Be Reviewed March 12 – Bigger than TARP
So you thought TARP was big? Sure it was big, $700 Billion, but did it move the market big? To the downside, yes, however mark to market could bring the dead cat bounce we’ve all been waiting for when the House Financial Services Subcommittee reviews the mark-to-market rule on March 12.
The mark to market accounting rule is critically important to both the banking industry and to many other companies that hold a variety of assets that have lost value in recent months. Obviously the financial sector has plenty of undervalued mortgages and even companies like Target are left holding the bag on their written down portfolio of real estate.
Mark to market requires companies to mark their current assets to their “present market value.” Doing so is difficult because not all assets are liquid and not all assets have a market value that is suitable to a firm.
For example: Let’s say I own a lemonade stand and the rights to place my lemonade stand in Central Park in New York City. Now I’ve never lived in New York, nor been there, but I have played Lemonade Tycoon so this gives me a bit of experience. Anyway, let’s say that it costs me $100,000 for the lifetime rights to have my stand there. I fork over $100,000 for the rights, set up shop, and make $1,000 in profit each and every day.
Now I only paid $100,000 for the rights, and other people can buy the same rights from the city for $100,000. So the market value is of course $100,000, but to me the value of this location is near priceless. I’m making $1,000 per day with my location, so if I value my business at a PE of 3 (like many nonpublic businesses) my business is worth over $1,000,000 and I would never sell the rights for less than that amount. Why would I ever mark to market?
This is essentially what has happened to banks and is happening to real estate heavy retailers like Target. The mark to market rule is ridiculous, because it assumes that all people and businesses value the same assets in the same way. A retail location to Target might be worth far more than its present value in the real estate market. So rather than sit on a paper loss, the corporation has to comply with mark-to-market and ASSUME a loss on the property against the profits. If they make $5 Billion and their real estate portfolio falls in value by $3 Billion, they have to report they’ve only made $2 Billion. All paper losses, under mark to market, have to be written off as a loss.
I cannot predict how Congress will vote, I never can, and these subcommittees make it that much more difficult. Were this rule to be overturned I’d be a buyer on the financial firms, big time, at least until they have to show the real numbers at the end of their fiscal year.
Hey Jordan, this was a great, informative article. I would like to exchange links with you for the users of my Investing Blog.
I have reason to believe that AIG is withholding profits in order to illicit bailout investments. Approximately 9 months from now, AIG will unveil these profits under the guise of stimulation caused by the bailout money. In truth, AIG is using this additional money for kickbacks for top executives and investment in expansion.
In truth, the banking crises is not as bad as it appears. Lehman Brothers was the only very weak cog in the system. In fact, many banks are artificially reporting losses in the hopes that it will generate media attention for them that will later pay off. In fact, AIG shares will boom from less than one dollar a share to over $8 a share in a short matter of weeks after they unveil the fact that they are back in the black.
So, how do I know this? I happen to have a very close friend who works at a high level position at AIG. This is more than just gossip. Right now, any of the major banks-but especially AIG-would be an excellent investment.
“In fact, many banks are artificially reporting losses in the hopes that it will generate media attention for them that will later pay off.”
Yeah, “fact”. What a loony claim.
BTW, mark to market does not cause destruction of asset values — it only reveals it. Any change/lifting of mark to market requirements would be just a sign that the same corruption and looting mentality that caused this mess in the first place is still in control. Meaningful reform and a genuine recovery will only be delayed.
Go ahead and try to sell your house by assigning some phony non-market value to it. Good luck with that.
The same way M2M accounting results in deepening losses each quarter, it also heavily bloats their bottom lines when markets for their “assets” are overly generous. The market doesn’t need that sort of volatility. Bottom line…Mark to market needs to go. IMO