Ed Note:Ã‚Â See comments below to follow this notion through time.Ã‚Â As President Obama takes office the stock markets are again in free fall — and again everybody’s talking about “suspending mark to market” to stop the writedown madness. Ã‚Â
“Suspending” alone is not the answer, and alone would lead to a new and even more anarchic chaos. Ã‚Â Price controls are the other side of the coin.
I.e., yes, we should replace Federal Accounting Statement 157 — the 2007 regulation issued by the Federal Accounting Standards Board requiring assets that never supported secondary market trading to be marked on bank books at (non existent) market prices.Ã‚Â
But instead of allowing individual banks to go back to their own pricing models — as the FASB kinda did on the sly with the issuance of Staff Position 157-3 not long after the bankruptcy of Lehman froze the world — the feds should themselves do the modeling/forecasting.
That is, instead of spending hundreds of billions on Band-Aid bank bailouts, hire several rooms of earnest spreadsheeters and have these folks prescribe the “marks” for wounded segments of the structured finance universe, quarter by quarter, based on actual performance and best guesses about the near term future of the relevant industry (eg US housing, for mortgage bonds). Ã‚Â
All as eblaborated at some length here since August 2007, when it was already clear that otherwise the sudden crisis of confidence in the bankers/rating agency models would burn down Wall Street and the City of London. And Frankfurt. And Singapore, Hong Hong, Shanghai and Tokyo.Ã‚Â And San Franciso. Houston.Ã‚Â Charlotte …
Background: The Dow 30 rallied 485 today (ho hum) chiefly on rumors the SEC will repeal “mark to market” accounting rules, which would allow institutions to “mark” on their balance sheets their wounded mortgage bonds and similar at prices well above current (non existent) market values — thus, writing UP some of the horrendous writedowns of the past year, juicing the bank balance sheets at a stroke of a pen.
The rumor sparked many alarmed and/or sarcastic reactions from the pundits, money managers and traders I follow.
I responded to one such at Mville. Colloquoy ensued.