Credit Crisis Solution

The FASB is easing the rules on Mark to Market accounting. As the rules are now, assets are currently valued at their market price, demand of “toxic” mortgage assets were down which lead to a decrease in value. Many of these assets are still generating cash flows and banks often use internal valuation to place “more realistic” value on the assets internally. Under the proposed changes, the valuation would be done based on internal company models vs. the market price.

Proponents believe that the easing in the rules will allow banks to true up the balance sheets allowing them to lend more based because of better ratio’s. Which has a good amount of validity because a lot of these held to maturity assets suffered other than temporary impairment (OTI), which cannot be trued up if market conditions change. Additionally, their liquidity and debt ratios will become more favorable allowing more lending.

Conversely, many of the large banks have been covertly buying up these assets on the inactive markets under the expectation of these changes. This completely undermines the efforts of the government to rid the banks of the “toxic assets”. The point of market to market accounting is transparency and for the banks to do this will potentially lead to inflated balance sheets, part of the original problem.

Note: Keep in mind that the Fed put out a plan to rid the bank of the assets discussed. This will potentially have a significant impact on the value of those assets, benefiting the banks beyond their share price.

This entry was posted on Thursday, April 2nd, 2009 at 9:50 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.