Lawrence Summers
FT Nov 25 2007





Mark-to-market accounting

Crisis News

Rolf Englund IntCom internetional

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The entire world went into debt for the equivalent of tropical vacations and, having now enjoyed them, realizes it must pay the bill. The resources to do so do not yet exist.
So, in the time-honored tradition of lenders everywhere, we extend and pretend.
But with our ability to pretend almost gone, we’re heading to the Great Reset.
John Mauldin 8 June 2018

"extend and pretend."
Some banks have a special technique for dealing with business borrowers who can't repay loans coming due:
Give them more time, hoping things improve and they can repay later.
Banks call it a wise strategy. Skeptics call it "extend and pretend."
Wall Street Journal, 7 July 2010

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“pretend and extend”
You extend the maturity of the loans, reduce the interest rates and pretend your credit is still whole.
It lacks transparency and it is undemocratic.
Wolfgang Münchau, Financial Times, September 24, 2013

Extend and Pretend is Wall Street's Friend
Financial Sense 31 March 2011

IFRS imposed a strict “incurred-loss” method, in which debt was valued at par until a borrower actually stopped paying.
One of the biggest changes between the new rules and many of the national guidelines that preceded them was
a ban on banks writing down the value of their loans in anticipation of future losses, a practice some had abused to disguise volatility in their earnings.
The Economist print 26 July 2014

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JPMorgan said the mark-to-market losses came in the bank’s chief investment office, a unit set up to invest excess deposits,
which has drawn controversy after hedge funds alleged it was taking big proprietary bets.
Proprietary trading is set to be banned in the US by the forthcoming “Volcker rule”
Financial Times, 11 May 2012

"it is an open secret that numerous European banks" would run into trouble
were they forced to write down their sovereign bond holdings to reflect current market value.
Deutsche Bank CEO Josef Ackermann, Der Spiegel 5 September 2011

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Two /IMF/ officials said one estimate showed that marking sovereign bonds to market
would reduce European banks’ tangible common equity – the core measure of their capital base – by about €200bn ($287bn), a drop of 10-12 per cent.
The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks.
FT, 31 August 2011

IMF’s work, contained in a draft version of its regular Global Financial Stability Report (GFSR), uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bail-outs – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium.

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En bank får låna ut 10–20 gånger sitt egna kapital.
Förlorar banken en miljard måste den alltså kräva låntagarna på 10–20 miljarder.
Det får konsekvenser i den reala ekonomin.

Tomas Fischer, Fokus 19/12 2008

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IMF och EU oense om värderingsprinciper. Är det viktigt? Ja!
Experterna på IMF har räknat ut att bankerna i Europa skulle se sitt egenkapital minskat med typ 200 miljarder euro,
runt 1 800 miljarder i svenska kronor, om de bokförde sina innehav av diverse skuldländers statspapper till marknadsvärde.
Rolf Englund blog 1 september 2011

Cconcern at the approach taken by BNP Paribas and CNP Assurances
In a private letter sent to the European Securities and Markets Authority, the European Union’s market regulator,
the International Accounting Standards Board, the body that sets their accounting rules,
criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt.
Financial Times, 29 August 2011

US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators.
They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place,
which on average takes about 16 months.
Forbesblog 12/1 2011

Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

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Mark-to-Make-Believe Perfumes Rotten Loans
Jonathan Weil Bloomberg Opinion Nov 18, 2010

Ever since new rules took effect last year, lenders have been required to disclose the “fair value” of their loans each quarter. The results have been something of a mystery, though. Some banks show large disparities between these numbers and the loan values on their balance sheets. Others don’t.

One big reason: Thanks to the loophole, they don’t all have to follow the same definition of fair value. My guess is most investors don’t know this. Often lenders’ disclosures don’t clearly explain which approach they’re using, or that companies have a choice. Unsuspecting readers of their financial statements easily could be misled.

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By the way, what ever happened to all those Toxic Assets that were on the banks' books?
Oh, they no longer count since they do not have to mark to market anymore
Aubie Baltin, June 2010

I never imagined that mark-to-market accounting would be the theme of a sell-out musical comedy.
But if you beg, borrow or steal a ticket for Enron at the Noël Coward theatre in London’s West End, you will discover that the financial crisis has made a topic that was once a guaranteed conversation-stopper the talk of the town.
John Kay FT February 16 2010

Any alternative to universal mark-to-marketing accounting gives carte blanche to creative finance directors.

And yet I realised that I did not apply mark-to-market principles in my own life. Like most homeowners, I would pass the windows of the local estate agents and take a surreptitious look at the prices of houses that resembled my own.

At other times, market values are flattering. Enron, the musical, begins with the US energy trader’s (now jailed) president Jeff Skilling holding a champagne party with his colleagues. Not to celebrate a deal, or a promotion, or to toast Enron’s ever rising share price: but to recognise the arrival of a letter from the Securities and Exchange Commission approving the wider use of mark-to-market accounting in Enron’s business.

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Five golden rules for regulating the banks
Mark-to-market - If there is a contest between shareholder transparency and financial stability, stability must win
Anatole Kaletsky, The Times July 9, 2009

Financial markets are imperfect and often make catastrophic mistakes. Financial institutions are driven by herd instincts. Waves of euphoria and despondency among bankers invariably aggravate economic cycles and sometimes mis-allocate capital on a monumental scale.

The implication is that bank rules must change with the economic environment — tightened when the economy is booming and loosened in slumps. Banks must be forced to save their boom-time profits, rather than pay them out to shareholders and employees, so as to offset inevitable losses when the economy slows.

Banks are not just ordinary businesses and cannot operate by the same rules. Much of the damage in the financial crisis was caused by forcing banks to use mark to market accounting rules, which deluded them into paying out illusory paper profits in the boom and then vastly exaggerated their potential losses in the slump, causing panic among their depositors.

Mervyn King and Vince Cable have claimed that a bank that is too big to fail is simply too big. But this is plain wrong. As the Treasury White Paper points out, even quite small bank failures will have catastrophic results in a modern globalised economy, as the world learnt from the Lehman Brothers disaster and Mr King himself should have learnt from the messy effort to rescue Northern Rock.

Once it is accepted that all banks at all times require an ultimate back-stop of government guarantees, this leads to several conclusions.

All banks must be regulated and operate with more capital to cover potential losses. But they must also be forced to keep a large portion of their money invested in cash and government bonds, which they can liquidate immediately. This liquidity regulation is even more important than capital regulation and has been neglected in the British debate.

In future, governments will have to acknowledge that all bank deposits and secured loans are guaranteed without limit, but that all other money invested in the banks could be subject to 100 per cent loss.

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Robert Reich, October 21, 2008
If They're Too Big To Fail, They're Too Big Period

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Last Wednesday, the European Central Bank injected €442 billion (£377 billion) of new cash into the euro money markets. This was the biggest long-term lending operation in the history of central banking and was equivalent to half the Fed’s entire monetary expansion in the past 18 months. Yet most people still believe that the Fed (along with the Bank of England) is engaged in a “reckless” experiment with inflationary quantitative easing (QE), while the ECB is steadfastly honouring the deflationist traditions of the Bundesbank’s “steady hand”.
Anatole Kaletsky, The Times June 29, 2009

The move is part of a worrying pattern of hasty changes in valuation rules that leave companies freer to use their own numbers rather than market prices.
In October, for instance, the International Accounting Standards Board was forced by Brussels into a swift relaxation of its own standards,
which were then applied immediately to third-quarter results.

Marking-to-market has some clear strengths.
Where there is a market to price to, then mark-to-market accounting is more useful to investors than a rule that tells them what a bank’s assets were worth some years ago or in normal economic conditions.
It forces banks to confront problems rather than deny them.

But no one set of rules is perfect: if the market does not function then marking-to-market cannot work either. Even so, any move towards marking to model must come with robust plans for a thorough audit of the assumptions that underpin such valuations.

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In depth: Accounting standards

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The Financial Accounting Standards Board voted to adopt new guidelines under the so-called mark-to-market accounting rules,
which require companies to value assets at prices reflecting current market conditions.
The changes will allow the assets to be valued at what they would go for in an "orderly" sale,
as opposed to a forced or distressed sale.

CNBC 2/4 2009

The new guidelines will apply to the second quarter that began this month.

The mark-to-market rules have forced banks to take steep write-downs on some assets, especially securities tied to high-risk subprime mortgages,
as the industry has reeled from the housing market slump and banks have foundered and failed.

The banking industry and lawmakers of both parties have been pushing for the rules to be relaxed.
An estimated $2 trillion in soured assets is gumming up banks' books.

In an ironic twist, the new leeway for banks could undercut the government's new financial rescue program
in which it is joining with private investors to buy up about $500 billion in toxic assets from banks, some experts say.

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Financials build steam on mark-to-market accounting
High-profile bank stocks make sizable gains
MarketWatch April 2, 2009

U.S. financial stocks rose Thursday, drawing strength from a decision made by the nation's accounting arbiter to ease guidelines that would have the effect of helping bolster the bottom line at troubled banks.

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However, just as an exercise, imagine what it would be like if all homeowners were forced to mark to market the value of their homes,
and post cash collateral in cases of negative equity.
John Gapper's blog March 17 2009

In a sense, some owners marked to market in the US by using home equity loans to withdraw cash when values were at their peak in 2005 and 2006. And everyone behaved somewhat as if they were rich because the market value of their homes had risen.

Nonetheless, the freedom of homeowners with long-term mortgages to sit tight when the value of their homes falls, rather than realising losses, does help to cushion the blow of a swoon in asset prices.

Of course, households are not banks and do not have shareholders and bondholders, so there is probably no good reason for them to mark to market their assets.
Still, it makes you think.

Congress will force regulators to relax the much-criticised mark-to-market accounting rule

if they fail to take action themselves, Barney Frank, the chairman of the House financial services committee warned.
Financial Times March 12 2009

Mr Frank told representatives of the Financial Accounting Standards Board and the Securities and Exchange Commission that they had to act quickly to revise the rule.
“We do have to have you move now,” said Mr Frank. “You are the FASB. In this one you can’t be the slow-B.”

Fair Value vs. 'Alice in Wonderland' Accounting: SEC Eases Rules
SEC agreed to back an effort by banks that may delay writedowns on perpetual preferred securities-->
Banks in certain cases may account for perpetual preferred securities as debt, allowing them to postpone writing down their value
Proponents of fair value, including FASB, say fair-value adds to transparency and gives investors more information about publicly traded companies.
FASB agreed Oct. 10 to offer companies guidance on valuing assets in inactive markets, without changing the current rule
RGE Monitor

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Reverse Leverage of Mark-to-Market Wrecks Banks
John M. Berry Oct. 13 2008(Bloomberg

The world's banking system is caught in a vicious trap, with a forced sale of assets at one institution wiping out capital at others holding similar assets. Think of it as extraordinarily high reverse leverage.

You can blame mark-to-market accounting, the advent of new indexes that supposedly track values of a wide range of assets, or a market mind-set that assumes every asset is part of a bank's trading book.

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Suspend Mark-To-Market Now!
Newt Gingrich 29/9 2008