Pragmatism will trump Principles in MTM war
I wish Ross were around. Today’s rally is far more exciting than the Pandit Rally (see prior post “Has Citibank turned the corner?” March 11-09). I could call him now to see what to make of it all, and Ross would have some great line, like “The Casino is Open”.
I caught the CNBC interview this am with a ranking Democratic U.S. Congressman; a member of the “Capital Markets” subcommittee. He was talking about giving the Accounting Standards Board and the SEC less than “15 weeks” to come up with a new solution to the scourge of mark-to-market accounting. “If your neighbour is in financial trouble and has to sell their house for a low price, you shouldn’t have to also mark down your own home if you have no plans to move,” offered the Congressman. “I want them to be able to use their good judgment about what these things are worth,” not fire sale prices that reflect an illiquid market. And so forth.
Sure enough, the Dow Futures ticked up during the 8am interview. And carried on through the balance of the day.
If the U.S. Congress is going to “jawbone” major changes to how assets are valued, one would expect there to be minor, if any, asset writedowns on the horizon. Particularly if the underlying securities are still paying interest and a DCF supports the current value. What a bonanza this would be for the banks, GE Capital, and (potentially) the insurance companies. (Making many of my recent blogs as relevant as a 14 day old bagel.)
Sure, we’d be suspending reality for some asset values. And that can’t serve American taxpayers well if the U.S. Government then begins to buy those very same, now inflated, “toxic” assets from the banks. But since the U.S. Taxpayer seems to be paying either way, saving shareholders may well be a sure vote-getter.
The recession is still all around us, new layoffs happen every day, and 2009 earnings forecasts are still over-inflated, but this MTM-suspension move will have the capacity to power the stock market higher.
And if that makes everyone feel better, which sends the consumer back to the car lots and malls, which saves the economy from going into a Depression, whose to complain?
The accounting Lords are about to discover something politicians have long known: principles are fine, until such time as pragmatism is required.
MRM
If the rules of the game (MTM principals) are reversed in middle of the game, to suit the same crooks who enjoyed big bonuses when the ‘asset value’ was going up, then why should Jon Doe be asked to abide by the rules?
If banks/Insurance companies get this ‘another’ bailout due to suspension or outright removal of MTM, shouldn’t these banks/brokerages also suspend the margin calls on MTM losses for Jon Doe? Who is to say that Jon Doe’s investments are not ‘long-term’?
Everything about these bailouts is really sickening! Lets throw out all the books on the efficiency of capital market, we all have studied.
Thank god, I am in cash/bonds for the last 19 months.