Behind the Mark-to-Market Flap

by Alex Stenback on April 2, 2009

A very excellent, illuminating, mercifully concise, and assumption challenging read on the Mark-to-Market Debate from Housing wire.  I excerpt, but read it all:

I didn’t come here to praise FASB, however, but to bury the notion that the devalued and disgraced RMBS securities on banks balance sheets are illiquid. Nor should the observable market prices be described as “fire sale” or “distressed sales.”
First, there is plenty of pricing information on triple-A private RMBS and CMBS. They may not trade where banks holding lots of this paper at a loss wish they traded, but they do trade.

It occurs to me that the casual reader may not pick up one why they should care about this.  Here’s the deal (on the fly so may need to revise a little later):

Conventional wisdom (mythology, really) has been that among the biggest problems for the banks was that they are holding a bunch of loans (or pools of loans, or mortgage backed securities, or what have you) on their books that are being undervalued because there were no sales taking place except for fire/distressed sales at very low prices. 

These fire sales were then forcing the banks to “mark” what they held “to market” at these lower prices, which in turn meant banks had to set aside more capital for losses, which resulted in further fire sales, and a vicious cycle ensued that was killing the banks.

As a result, there have been a number of high profile efforts to amend, change, or otherwise alter the standards put forth by the FASB (Financial Accounting Standards Board), an independent body and standard setter for financial accounting.

Anyway, today, the FASB announced some changes or clarifications to mark-to-market accounting standards, and the  piecewe linked above gets behind the headlines, some of the conventional wisdom, and does some interesting myth busting, which is why we hoisted it here.

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