DISQUS

tomob · 1 year ago

How about the same thing for the beggar banks?

dfriedman · 1 year ago

I don't follow the logic of your mark-to-market accounting argument. We have illiquid, opaque assets for which there is no readily available market to which their value can be marked...yet we should mark the value of these assets to market.

I acknowledge that a lack of mark-to-market regulations would essentially mean that opaque, illiquid assets can be given any value. It would seem, then, that their opacity and not their accounting or illiquidity is the issue: if the structure of an asset is transparent it can be valued more readily, whether there is a market or not.

The market for real estate in Manhattan is not liquid and the value of real estate is not marked to market, yet its valuation is rather straightforward: ask a broker well-versed in the nuances of the neighborhood and the building and you have your (approximate) answer.

infoarbitrage · 1 year ago

The argument is as follows. Yes, the assets are illiquid and opaque, but like your New York real estate example, there is an ascertainable value that constitutes "market." This must be used to give the consumer of financial statements accurate insights into where the book would currently trade. I was merely responding to Paulson's "pro cyclical" argument, that I personally believe is specious. Mark-to-market isn't pro-cyclical, it's the nature of today's instruments that are pro-cyclical. As you know from reading this blog, Dave, I am a huge believer in simplifying financial instruments in the first instance, and moving them onto exchanges in the second. This eliminates any of the current bitching and bellyaching among bank managements and their lobbyists and pals in Congress.

Tanmay · 1 year ago

Does giving 15 bn to the automakers make any sense? They asked for 25 at the start and 34 later (which means that they obviously need more). Why is Obama trying to fool people by giving a 15bn package when surely more would be needed? and once you give 15, you will have no choice but to give more.

michael_webster · 1 year ago

Didn't Enron abuse the mark-to-market - stealing from the future to pad today's accounting profits? You need to have a more nuanced view about when mm is good, and when it can be abused as fraud, in my opinion.

infoarbitrage · 1 year ago

I'd say Enron's principal abuse was of the securitization/true sale rules. They shifted off-balance sheet exposures for which they retained ultimate responsibility, yet accounting didn't make them reflect them as such. If mark-to-market is applied in a consistent manner without attempts to game the system (e.g., going to a friendly dealer to get a "market" quote), then I believe it is clearly the best approach for consumers of financial statements. I can get my mind around non-mark-to-market treatment is a position can specifically be financed for long periods of time, but this clearly was not the case with the financial sector. So, to be clear, my main issue with mark-to-market is that is should - it has to - be applied in situations where assets are not financed on a term basis. Any other accounting methodology would distort the liquidity risk embedded in the balance sheet.

michael_webster · 1 year ago

The 3% rule was clearly abused, but many of the energy projects Enron valued using mark to market were long term, uncertain at best, and capital intensive.

Even without abusing the 3% loophole, Enron would have been forced to come with grander and grander projects each year to maintaining earnings, under mark to market.

That is why I think that for Enron the principle driver for accounting fraud was the use of mm, which conveniently paid out huge stock options to their board of directors.

Peter · 1 year ago

I agree about cyclicality. It was the opacity of the instruments, not the required clarity of m2m that caused the problem. It's like blaming the mechanic who just told you the used car you bought is really a piece of junk. And as Buffett says, why can't managers just footnote that they believe the assets have more long-term value once things change? Isn't that the nature of investing?

I also agree with most of your comments about the newspaper industry. But aren't we losing something valuable if we don't have trained professionals paid to learn about subjects and develop contacts and sources of information? I don't believe the Fourth Estate has done a good job overall or can survive in current form, but we need some sustainable form of professional journalism.

teamlram · 1 year ago

Do you think mark-to-market accounting rules at times make the markets inefficient?

Recently I learned about negative basis trades. A trader was showing me CDS' on a Bloomberg terminal and I asked about the arbitrage opportunity between the mismatching yields between a bond and its respective CDS (the bond had 3-years left to maturity). The trader told me because we live in a mark-to-market accounting world, the clear arbitrage opportunity is not a no-brainer trade. Technicals could take hold of prices and cause the spread to widen. Investors sickened by the paper loss might pull out money, forcing the trader to sell out of a trade fundamentally sound.

It seems to me there's a disconnect between time frames for investors and investments. Investors want to see results every quarter, every year. Investments however, might take years (3 years in that case). In this regards, I believe mark-to-market accounting promotes short-sightedness which besides barring some arbitrage plays, also fosters a dangerous "I'll be gone - you'll be gone" mantra.

infoarbitrage · 1 year ago

You are only looking at one side of the equation. There is investor time horizon, and then there is liquidity. Traders wouldn't have any problem with mark-to-market if they had a potential holding period and/or stable financing that matched the duration of the instrument. If traders have a short-term investment horizon and short-term financing, then anything other than mark-to-market treatment makes no sense. This is why I've repeatedly argued for a central clearinghouse for handling CDS collateral, in order to take the liquidity concern off the table. If you can't post if a position moves against you then you are out of business. I would argue that the lack of arbitrage opportunity is due to a disparity in liquidity, not due to mark-to-market accounting treatment.