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Posts Tagged ‘toxic crap’

The return of Mark to Myth

Tuesday, September 30th, 2008

Want to know the real reason financial stocks rose so much today? The SEC loosened the accounting rule called “Mark to Market” today. This accounting rule is blamed for the financial problems of banks and other financial institutions, because it requires companies to value assets on their books at the price they could actually bring if they were sold.

This is what has caused the massive writedowns you’ve seen banks taking over the past year - and it’s a good thing!

In essense, it requires companies to realistically value the real estate assets they show as assets, and to realistically value those assets when using them for collateral on loans. What’s wrong with that?

Nothing - but the banks are vehemently opposed to the rule, and they want the old way of valuing these assets restored. The old way was called “Mark to Model” or as I like to call it, Mark to Myth. I call it that because it allowed companies to claim almost any value for their assets - even if no one would touch them with a 10 foot pole.

The mark to model requirement was part of Sarbannes Oxley which was passed after all the accounting problems uncovered in the wake of the Enron and Worldcom fiasco’s in 2000 and 2001. The old way (mark to model) meant you couldn’t tell what a company was worth, because their assets were really just made up numbers.

Anyway, Marketwatch said:

“The SEC staff and the FASB staff will continue to consult with capital market participants on issues encountered in the application of fair value measurements,” the SEC said in a statement. FASB said it will issue additional “interpretative guidance” later this week.

Statement 157 went into effect for financial institutions starting in November 2007. The accounting treatment is applied to certain assets, such as mortgage-backed securities. Using the method, asset values are determined by what sales-price those assets would fetch in the current marketplace from a buyer, not necessarily the price a seller would hope to get.

In other words, get ready for some huge “write-ups” as companies get to claim whatever the hell they want for a value of their toxic assets. That’s not good, because investors have no way of knowing what a company is actually worth.

And guess who supports this change? Here’s what McCain said about it:

“John McCain is pleased to see that the SEC has finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists. There is serious concern that these accounting rules are worsening the credit crunch, making it difficult for small businesses to stay afloat and squeezing family budgets. In March, John McCain called for a meeting of accounting professionals to discuss whether mark-to-market accounting was magnifying problems in the financial markets.”

This settles it - McCain is an idiot. “Alternative accounting methods”? Here’s an idea - tell the truth and value your assets at what they’re actually worth!