Markets like new rules on asset prices

Traders work on the floor of the New York Stock Exchange during afternoon trading on April 2, 2009.


Kai Ryssdal: I'm going to have to do something here that we try really hard to avoid: Hit you with one of those phrases that Wall Street insiders like to throw around as if it's the key to all knowledge -- which, in this case, it might actually be. Mark-to-market accounting. It's a lot more simple than it sounds, as Amy Scott's going to tell us in a minute. But it's also pretty high on the list of things some people think are responsible for the financial part of this economic crisis. Today the folks who get to make up the rules on how companies keep their books eased back on marking to market. Here's Amy.

AMY SCOTT: Let's say you own a house. If you want to know how much it's worth, you see what people are paying for similar houses down the block. That's mark-to-market accounting. Putting a value on something based on what the market will pay.

Of course, you might think your house is worth a lot more than the market does right now. Banks feel the same way about some of their mortgage-backed securities. Today the Financial Accounting Standards Board voted to give banks more leeway in saying what some of those securities are worth.

John Gavin runs Disclosure Insight, a research service for investors. He calls the decision a disappointment.

JOHN GAVIN: If a company can essentially make up whatever numbers they want, that really compromises the integrity of those disclosures.

So why have bank stocks been going up since the accounting board first announced its proposal a few weeks ago? Analyst Stuart Plesser follows the industry for Standard & Poor's. He says investors seem to think bank earnings will look a lot stronger now. But he says those banks may be more inclined to report losses if they're not as bad.

STUART PLESSER: Ironically, this might even result in more impairment charges coming out.

The ruling today could also hurt the Treasury Department's efforts to get banks to unload their troubled assets to investors.

DAN RIPP: It kind of neuters Secretary Geithner's plan.

That's Dan Ripp. He's president of research firm Bradley Woods and Company. Ripp says if banks don't have to take heavy losses on their mortgage bonds, they may just hold onto them.

RIPP: There's a disincentive for banks to sell those securities at depressed prices when they can keep them on their balance sheets at higher prices by virtue of the new ruling.

Ripp agrees the accounting rules need to be fixed to more accurately portray what banks have on their books. But he says the timing of the new rule may prolong the pain.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.
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Years ago, my wife inherited some money. We took it to Merril Lynch and we were talked into investing the money in a product the broker pitched at us, who were very ignorant of investing. Every month we received a statement from Merril Lynch, which showed that our investment never gained in value nor did it lose. We decided to close our account and, when we had to sell, we found the broker's product had declined by 25%. The investment was in real estate and should not have been pushed to us. Years later, the Wall Street Journal printed an expose of this investment. All I recall from the article was that the brokers were richly rewarded for selling the product.
I can see a resurgence of similar products if real estate is not currently priced.

Amy, I am a dedicated listener to Marketplace. In general I am impressed, but today I was disappointed. You are under the impression that mark to market accounting means that you value your house at appraised value, which is incorrect. Market to market accounting values the house at liquidatuin value not appraised value. The change in the rules a few years ago are one of the underlying causes of the present problems. Today, paper is not valued at the present value based on a expected future discounted cashflow. If everybody had to value their house on liquidation value, not many homes would be worth the investment, and certainly not what a willing buyer over time is prepared to pay for it. If we do not reverse those rules, we will not get out of the extreme swings we have seen in the past few years ( it works to the down side as well to the upside )
I know it is a complicated issue, and therefor your reporting has a large impact.
Hans Kempers

I see a myriad of troubles with the ruling, especially as they is no reason why it should no be applicable beyond it original purpose.
If the property has deteriorated can it still be evaluated on the mew rule?
If I have a home equity loan with a bank, can I use their evaluation to increase the amount I can borrow?
A rogue bank could snap up billions of these toxic assets and use the new rule to elevate their worth?
Why couldn't the same ruling be used in Mutual Funds and Hedge Funds to stabilize their worth?
Basically, the banks as saying, "Trust me." They really should be saying, "Trust me?"

I'm obviously a layman; but, I don't really understand the "mark to market" way of figuring a bank's assets.

Say I take out a loan with the bank for a house that costs $400,000. After 30 years, the bank collects $500,000; the cost of the original loan plus $100,000 interest as profit. It seems to me that the value of the asset to the bank is the amount remaining due on the loan at any particular point in time, not the value of the house at any point in time. The bank never gets control of the house unless it forecloses on the house, so whatever the house is worth on the open market is meaningless unless the bank forecloses.

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