Mark-to-Market on block?
Ed Note: Been whining and yammering here about mark-to-market accounting since August 2007. Â
For the best succinct discussion on the topic in these here parts see this section and that section in a profile of Bill Seidman the Zombie Slayer.
The current below was first posted Feb 9, 2009, day before Young Tim Geithner gathered his loins like a wrestler and went before cameras to pee his pants. See comments below to follow thru time since — in purticlar takin’ notice of Ben Bernanke’s signal-laden comments of March 10.
1. Vince Farrel, something of a grizzled eminence on Wall Street, suggests today that part of Geithner’s plan (the announcement of which has been delayed til tomorrow) will be to repeal the Financial Accounting Standards Board regulation (passed in late 2007 if memory serves) that requires institutions to “mark” their wounded structured-finance bonds on their books at (non existent) market values.
Institutions would then mark the assets in accord with “models” (spreasheet predictors) based on actual performance and guesstimates of the future — the old fashioned way.
2. This would be HALF of what I’ve been whining/screaming for since August 2007.
The other half would be to have the feds — not each individual institution — do the modelling and setting the marks for the distressed segments of the s-f universe.
This “price control” regime would bring transparency and level-playing field fairness to the world. Doubts about what banks hold would vanish. Most banks would enjoy write-ups (reversing some of the gargantuan paper losses taken in the past 20 months).  Banks would retain the essential risk of the asset, but would no longer be punished for the absence of a market.
Market Fundamentalists would cry havoc. But they were raised on Age of Reagan television, and it’s time to tell them to shut up. Markets break. Markets are often irrational and fail to work properly. The market is not a fundamental cultural value.
Vinnie’s lips to Geithner’s ears.
ed says:
This Times story, well briefed on the Geithner plan the evening before its unveiling, confirms rumors from last week that Team Obama has rolled over here, conceding point and principle to Geithner, who clearly is Paulson II (or perhaps was in good part Paulson I).
A hodge podge of old ideas. Including the MLEC idea that Paulson tried in late 2007 re the SIV problem (failed).
Nothing like Change. We might as well have elected McCain.
Obama’s emptiness is shocking. Geithner, Gates, Mullen: Treasury and the Pentagon: NO CHANGEÂ from Bush-Cheney.
February 10th, 2009 at 1:04 am
ed says:
Geithner’s speech begins in fifteen minutes.
One thing is certain. The stock markets are so pent up, since the week before Christmas, that they are going to blow on this news — a sustained move, across weeks at least, up or down.  Sampling opinion among traders and pundits … Nobody knows which way.
“Selling the news” is conventional, but many reply we are living in unusual times.
David Brooks at the Times is happy with the well-leaked outlines of the plan.
February 10th, 2009 at 10:44 am
ed says:
Geithner’s speech.
He read from the teleprompter robotically in clipped, chipper tones, sounding like the evil robot of The Matrix films.
One pundit sighed: “This isn’t a plan. It’s a plan to make a plan.”
Dow is down 300. Not looking panicked however.
The main idea for dealing with the wounded assets — encouraging the private sector to buy them, rather than Uncle Sam — is basically Paulson’s MLEC idea, which they tried in late 2007 with the SIV problem.
It failed simply because the “private sector” — which then was in much better shape — said thanks but no thanks. How does Geithner intend to change their mind now, when all the major banking instituitons are much, much weaker?
The sense is that this collection of ideas intending to become a plan and then policy was gathered because (as the Times story reports) the political heart of the Obama administration was unwilling to override the steady protests of the banks, for which Geithner (as before) served as agent. As the Times reports, Geithner won each round.
My guess is that the markets will sell off and across the coming weeks retest the November lows. I hope I’m wrong.
February 10th, 2009 at 11:42 am
ed says:
Here is a trader/pundit, Jason Schwartz, at RealMoney.com:
QUOTE
Geithner’s plan wreaks of quasi gov’t/hedge fund abuse. Wasn’t that the big problem with Fannie and Freddie?
He has now created the Superfund/Specialist Fund that Hank Paulson always wanted.
There are two fundamental ways to fix our banking problems, the first is to artificially create a market for fur coats in August which is what Geithner just did, this solution is incredibly complex and costs a lot of money.
The second is to replace the mark to market pricing mechanism with a cash flow pricing mechanism. This solution is very simple and costs no money.
Geithner missed the message that the market sent him last week when rumors hit that he was considering repealing mark to market. Too bad.
Who would ever invest in a financial before a stress test? Geithner just created more questions than answers. Uncertainty abounds. We are flooded with uncertainty. Time to short banks. Is Geithner out of his mind?
END QUOTE
February 10th, 2009 at 12:08 pm
ed says:
Geithner has gone immediately to NBC, to talk to Brian Williams (the nightly news anchor).
Geithner’s first comment, when asked why the stock markets tanked on the speech: It is a massive undertaking and will take time to enact.
Take Time?! You are out of time. You have been there since before the beginning. You have been the number two man at the Fed since before the beginning. You have been working on this since the beginning.
Geithner did not announce a single active policy or program today. He announced a collection of old ideas intended to become policy. SOmeday soon, no doubt — at least some of them.
What the fuck ever happened to the Fierce Urgency of Now?
February 10th, 2009 at 12:18 pm
ed says:
Tony Crecenzi, a bond trader and one of the best commentators on those markets:
QUOTE
The bailout speech pointed out a final destination without offering a map. …
Geithner needed to speak to Wall Street, where the problems lie, rather than stay at a distance. He left Wall Street with too few details and no roadmap …
This is not to say that the framework isn’t good — it is, largely because it relies upon the Federal Reserve’s balance sheet and will eventually help to corral bad assets.
But there is a major difference between providing a framework and final destination and the details that are needed to reach that final destination.
What is missing?
Let’s start with the TALF, or should we say the elusive TALF. The Fed announced the program in November and it remains at the launch pad awaiting takeoff. The Fed today said that it would announce the date when the TALF would commence.
In other words, whereas expectations previously were that the TALF would be implemented in February, the Fed said today it would only announce the date it would commence.
Missing also from the TALF announcement is the details of it, with market participants still unsure of how it will work.
What else is missing?
How about the oldest question of all: How will the Treasury and the financial markets price bad assets? It remains extremely uncertain, along with how the Treasury will entice investors to do something they have been avoiding since the start of the crisis.
END QUOTE
Tony’s last paragraph speaks to my main whine — the need to revoke MTM and have the feds provide the Mark models — as opposed to Geithner’s prime tool, his re-tooling of the Paulson MLEC which relies on the banks themselves to buy up the assets (in a sense from each other?!?) with “encouragement” from the feds.
The heart of the matter: A shocking lack of political will by the new administration. The banks won this battle. Geithner is their man. Nothing is going to Change anytime soon. Banks are going to continue to fail, jobs get lost and housing to flounder.
February 10th, 2009 at 12:35 pm
ed says:
Aha. Here’s Joltin’ Jumpin’ Jim Cramer:
QUOTE
It’s an UltraShort Financials ProShares bonanza! And why not?
Over and over again I have tried to tell people that what happened with the banks in the last year was all Tim Geithner. He has managed to buffalo everyone into thinking that he is a genius and a loved figure, He has let it be known that when things went wrong, it was Hank Paulson’s fault. He has made it clear that the reason we aren’t out of this morass is because he hasn’t had his time.
Now, of course, everyone is discovering that it was Geithner all along. Public/private. Are you kidding me? Do you think there is enough money, even with financing, to make a dent on Citigroup’s (C – commentary – Cramer’s Take) structured investment vehicles, let alone the banking system? Does it matter that he will make “a trillion” dollars available?
Now, what the market wanted to see was, “We will give the banks the capital that they need to make it through this, we will certify that they have the capital, and they will give us a note back, saying they will pay us back.” True equity capital. If you have to come back more than once, we will break you up and sell you.
Nah. More facilities. More trusts. More piecemeal. More, well, Geithner, complete with the daily leaks right up into this and the heavy press-courting that has been his style from day one.
I am embarrassed by the “press” that made us believe in this Geithner. I am sure they will still defend him. Because he knows how to get the defense.
We are all about muddling through and “We will be tough on exec pay” and “Here’s a brand-new term auction rate private guarantee term program” that is the same as we had before, but we added a couple of zeros.
I know the apologists will say, “New! Different!”
Yeah, like New Tide.
END QUOTE
February 10th, 2009 at 12:39 pm
ed says:
And here is James “Rev Shark” Le Porre, a trader/pundit:
QUOTE
Last Friday, I jokingly made the comment that perhaps the best thing for the market would be if we delayed the actual bank bailout details so we could continue to rally on hope for a magical solution.
Unfortunately, even though we still haven’t received any details, the market is no longer nearly as optimistic.
It now looks like we are doomed to months of rumors about what the “real” bailout plan will be. That may be good for some spikes of hope like we saw last week on talk of ending mark-to-market, but it’s going to keep an undercurrent of uncertainty in place and make it much tougher for the market to put together a good bear market rally.
With the news of both the stimulus bill and bank bailout now behind us, the big problem is that we still have so little clarity. The market always hates uncertainty and, despite all these monumental governmental plans, we have even more.
The market is very confused here and we are stuck back in the middle of the recent trading range.
The good news is that we are still holding above the January lows. The bad news is that we are moving closer to testing them and the chances of holding are declining.
END QUOTE
IMHO it seems we will now have to wait months, perhaps a year, for Geithner’s regurgitation of the MLEC to flounder and fail, before the notion of relieving the banks by suspending mark-to-market again gets a serious airing.
February 10th, 2009 at 2:05 pm
ed says:
A good overview of the reaction to Geithner at Naked Capitalism
February 11th, 2009 at 8:30 pm
ed says:
THE DAY AFTER
Geithner on the Hill, trying to placate the Congressmen. But supplying nothing more in the way or numbers or detail.
The Dow was up 50 points on low volume, after down almost 400 yesterday. My best guess is still that stocks are going down for a while. But …
February 11th, 2009 at 8:31 pm
ed says:
Here’s somebody at Marketwatch.com who expresses very much my own view.
Let Them Eat Fudge
February 12th, 2009 at 10:56 am
ed says:
Nationalize the big banks?
Here is a good overview of the argument for nationalizing the big wounded banks before they become Zombies (technical term now in common usage) like the Japanese banks of the 90s.
And .
February 13th, 2009 at 2:30 pm
ed says:
Ben Bernanke today suggested adjusting the accounting rules in some way. From Marketwatch.com:
QUOTE
Federal Reserve Chairman Ben Bernanke on Tuesday argued that regulators should make some improvements to controversial mark-to-market accounting rules at the same time as lawmakers create a systemic risk regulator that will fill in ‘shocking gaps’ in regulatory oversight.
“We all acknowledge that in periods like this when some markets don’t exist or are highly illiquid that the numbers that come out can be misleading or not informative,” Bernanke said at a Council on Foreign Relations event in Washington. “We need to provide more guidance to financial institutions about what are reasonable ways to address the valuation of assets that are traded at all in highly problematic markets.”
END QUOTE And from the Times:QUOTE
“Further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro-cyclical effects without compromising the goals of disclosure and transparency,†he said.
In a question-and-answer session after the speech, Mr. Bernanke said he did not favor a suspension of the mark-to-market accounting standards, but said that the weakness in current rules should be identified and corrected.
END QUOTE
Dow 30 were up nearly 400 points — despite WSJ story reporting that Citi and the Gov are talking again about support and suggesting to me that Citi may be under water by the Ides of March. Or St Paddy’s Day.
March 10th, 2009 at 7:12 pm