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[Mark To Market] To Buy A Fat Pig

Dan Gross over at Newsweek/Slate makes a great case for the argument that the bailout is a lot like a hedge fund [1].

It’s massively leveraged, It’s buying distressed assets, It’s taking equity stakes.

Mother Goose [2] probably had no idea that she was to be in the conversation of hedge funds, equity investors investment banks and commercial banks.

To market, to market, to buy a fat pig,
Home again, home again, dancing a jig;…

Ok, ok so I tweaked the wording a bit, but the whining associated with the mark to market pricing concept of mortgage backed securities comes to mind. Apparently now accountants are to blame [3]for the credit crunch because of Statement No. 157: Fair Value Measurements [4].

Mark to market [5] explained: In accounting, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments.

Much like market value estimates of properties derived from a typical residential mortgage appraisal, the state of the market at the present time frames the value of the asset. But what if there is no value because there is no market? We had this situation come up in Manhattan just after 9/11 because there were no sales. How do you estimate market value if there is no activity? I have long held that there is no market at that moment in time [6] and therefore a value estimate is moot.

One of the biggest issues and the driver for the bailout is to be able to move the toxic mortgage junk off the balance sheets of lenders so they will not have the same capitalization requirements, which will free up capital to re-enter the markets to provide more mortgage money to homeowners.

Well the US Senate tried again and succeeded [7] in passing the bailout wednesday, which was described as having more “lard” added to it (ahem… pork). Say what you want about Senator Dodd and his poor judgement in accepting favorable mortgage rates from Countrywide, he sounded pretty sharp even with the obligatory political posturing in this interview with IMUS [8] just before first bailout bill vote.

And nearly every politician is fired up about mark to market in Washington and reversing the 50 year trend toward fair value accounting [9].

the big complaint at the moment is that markets for some mortgage-related securities have so totally broken down that marking them to market dramatically understates their value and makes banks’ finances look much shakier than they really are.

In Justin Fox’s Curious Capitalist blog over at Time he concludes in his Suspending mark-to-market is for zombies [9].

investors and regulators and reporters and corporate executives need to learn not to take any financial reporting numbers, whether marked-to-market or not, at face value. The health of a bank or any corporation can never be adequately measured by a single bottom-line number. Understanding the assumptions and uncertainties inherent in accounting numbers is crucial to understanding how to use them.

Think of it as a balance sheet with lipstick.