Poof! Instant profits.

There has been a lot of talk about the accounting concept of "mark-to-market" during this economic crisis. Some financial conglomerate defenders in the media have argued that "market-to-market" caused this crisis. Obviously, this far from the truth but financial conglomerates need to scapegoat something to cover for their complete incompetence. Financial Accounting Standards Board (FASB), the accounting board responsible for establishing financial accounting standards, was intensely lobbied by the banking industry to change the "market-to-market" rule. On March 16, FASB issued a change to "mark-to-market" rule that may improve financial conglomerates' profits instantly.

The change to the "mark-to-market" rule would allow companies to use "significant judgment" in valuing assets and reduce the amount of write downs they must take on "toxic assets" such as mortgage-backed securities. FASB is expected to vote on this change on April 2. But if passed, this slight language change may improve Citigroup's profits by 20% or more. Are these profits real?

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s change could boost bank industry earnings by 20 percent, Willens said. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.

Financial conglomerates are crying because "mark-to-market" is forcing them to deal with reality. They argue that their "toxic assets" are worth something at least the price they paid for them. But they are wrong. We wouldn't be in this crisis if that was true. Investors and the market for the mortgage-backed securities believe that the price for these toxic assets are worth a lot less than what financial conglomerates think their "toxic assets" are worth.

Financial conglomerates are fighting for their survival. This change to "mark-to-market" may encourage financial conglomerates to hold on to these "toxic assets" instead of selling them or even worse they will want an unsubstantiated higher price for the toxic assets. Their lobbyists may have succeed in getting the change they wanted to "mark-to-market". But it will do nothing to improve the lack of confidence and trust that so prevalent in our financial markets. This may only serve to prolong this crisis and require even more taxpayer money later.

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I wrote a piece on mark-to-market previously

What is Mark-to-Market and why should you care about the ability to keep toxic assets on the books, overinflating their value.

But note Bill Isaac's argument in favor of modifying mark-to-market. It's to keep the U.S. taxpayer's money in their pockets. Since Isaac's has also heavily recommended RTC from the S&L crisis in the 1980's and had a host of recommendations in order to take over these insolvent banks that didn't cost but around $200 or $300 billion, I think his views should be checked out. He also has "been there, done that" in that he managed the S&L crisis in the 1980's and any idea that beats dumping $1 trillion of U.S. taxpayer money down the throats of Zombie banks is worth investigating.

Of course he and many of the other experts testifying before the first TARP was passed were completely ignored (except to testify) by Congressional leadership.

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This current modification only inflates profits

and artificially inflates values of toxic assets. There are two potential problems and neither is any good:

1) Toxic asset prices are inflated to point that financial conglomerates keep them on their books - ala Japan; or

2) Toxic assets are priced too high for private investors and the Private Public Investment Fund which may make the bailout more costly.

Here is the thing: financial conglomerates can dress up these pigs all they want but it won't change the fundamentals any or even restore confidence and trust.

Cashflow is king and if these toxic assets are not producing cashflow because of loan defaults these securities are worthless.

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yes, this is all true

but missing Isaac's point & reasons. The real goal is to get these institutions to take the bath on these worthless assets and that was not missing from Isaac's recommendations, he is simply recommending mark-to-market as a "wind down" method in order to not allow the banks to suck all the U.S. taxpayer money dry.

Not quite the same as what the corporations who are lobbying for this are up to.

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