Making the Market to Mark to.

Robert Waldmann

“the Financial Accounting Standards Board, which sets U.S. accounting rules, proposed to give more leeway on mark-to-market accounting rules. “

In my (ignorant) view, this is an act of desperation allowing banks to make up asset values, because given current market prices they would be insolvent.

The argument is that current prices are below fundamental value because of a panic, or forced deleveraging (due to mark to market rules) or adverse selection.

I don’t believe any of this. However, I note that, if this is the problem, there is a less extreme solution.

Bank A can buy 10% of Bank B’s holdings of toxic sludge for X% of face value which equals Y dollars and, in exchange, bank B buys Z % of Bank A’s holdings for W% of face value which equals Y dollars.

I’m sure each bank will claim (and think) the other is getter a better deal (the average banker is sure he is above average). However, if market prices are grossly under fundamental value *and* marking to market is forcing banks to unwind anyway, then both will benefit.

Now I ignorantly guess (and certainly hope) that existing mark to market rules require arms length transactions. Still if we need to bend the rules I would bend them this way — allowing specific non arms length transactions.

If banks were allowed to do this, but would refuse to do this and insist on marking to model, it means there is no half way objective rough estimate of hold to maturity value and the marking to model is fraud.

update: After a long struggle with my sense of propriety (I won my sense of propriety lost) I note that my original running title was

“The Ball Kickers Approach To Balance Sheets”

Surprisingly, there is not a punctuation error in that phrase, Kickers is a plural and not a possessive. The ball kickers are soccer players. The traditional means by which insolvent Italian Soccer teams cook their books is to each buy the contract of a player from the other team — and grossly overpay. The gross overpayment counts as a capital gain to each. Each purchased contract is marked to the pseudo-market they just made.

You know living in Italy (and occasionally reading the sports pages) I think I’ve picked up some business skills that are in very high demand these days back in the USA. Italian cooking is an art, including book cooking.