Post #306,595
4/2/09 10:21:37 AM
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Companies get more leway in Mark to Market rules
http://www.bloomberg...&sid=agfrKseJ94jc
The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say donÂt work when markets are inactive.
The changes to so-called mark-to-market accounting allow companies to use Âsignificant judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks writedowns and boost their first-quarter net income by 20 percent or more. FASB voted on the rules at a meeting today in Norwalk, Connecticut.
Depending on what they mean by judgment, this could be a good thing or a bad thing. Either way, it will make the banks numbers look better.
It really depends on just how much judgment the banks have. If there is some sensible way of determining the long term return from a security if you hold it to maturity, you should be able to use that return instead of the current market value. If the banks are inventing models to predict the long term return, and then punching in estimated numbers they provide into the model they built, the result is sure to look good for the bank but doesn't mean much in reality.
Jay
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Post #306,596
4/2/09 10:31:55 AM
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Re: Companies get more leway in Mark to Market rules
Analysts say the measure may reduce banks writedowns and boost their first-quarter net income by 20 percent or more.
That's the kind of thing that gives me the heebie-jeebies. I use the layman's definition of income. It's a measurement -- not a calculation -- of how much money, you know, came in. Sorry to get all "word origins" about it, but there it is.
You can talk about the future value of investments, fine. I know that takes some analysis and prediction. But that's a different column on the financial statement. Or should be.
Income is money that came in. In most businesses, that's kind of an important number. --
Drew
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Post #306,597
4/2/09 11:02:47 AM
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that part doesnt change
income is still measured against money coming in the door, it has to balance against liabilities.
A liability is the value of asset, if the underlying asset decreases against the value assumed when purchased the liability column increases, that reduces the income side of the sheet. The asset is still there but they cant define a value on something they cant sell, although the note itself may well be whole when coming to term.
thanx,
bill
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Post #306,598
4/2/09 11:11:30 AM
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Net vs Gross
This is net income, that is income - expenses, the money that the average person would call the profit. What you are thinking of is gross income, which is more commonly called revenue.
Jay
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Post #306,608
4/2/09 3:11:47 PM
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Yup, missed the word "net" in there
Actually I think that's a dangerous way of thinking. Yes, it's perfect MBA-speak. But normal humans think in terms of income, expenses and assets as different things. Changing the book value of your assets really doesn't change your income. When you combine the two and talk about "net income" you make it look like your had a better month, when your didn't really have any more money coming in the door.
--
Drew
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Post #306,619
4/2/09 4:27:12 PM
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That happens in any technical field
Actually I think that's a dangerous way of thinking. Yes, it's perfect MBA-speak. But normal humans think in terms of income, expenses and assets as different things.
That happens in any technical field. Theory, temperature, and OS all have somewhat different meanings to people inside that field that is at odds with the common meaning.
When you combine the two and talk about "net income" you make it look like your had a better month, when your didn't really have any more money coming in the door.
Your right, but I think it's a far more fundamental point then that. Half of what modern companies do is manipulating the accounting. The modern corporation and it's dependence on finance means that actual cash flow is almost incidental. Your borrowing money based on potential future cash flow to pay for operating and expanding the business right now. When it comes time to pay the loan, you take out another bigger loan. The goal is to expand fast enough that you can always justify a bigger loan.
A significant part of our current crisis is that cycle reaching it's limit. The businesses went to the banks, who said "We would like to but there is no more money. We can't loan anybody anything until somebody pays us back." And the businesses are looking at the banks going "We would like to but there is no cash, we can't pay anybody until we get some loans." Literally, part of what the government is doing is giving the banks enough money so they can start making loans again.
Jay
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Post #306,622
4/2/09 5:02:42 PM
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Exactly the point I was trying to make
"The modern corporation and it's dependence on finance means that actual cash flow is almost incidental."
I read a lot of small business blogs. Any one of them will tell you cash flow is king. Every time a politician talks about small business being the backbone of our economy, they turns around and points to the DOW as a barometer for the economy, I wonder if they even know how full of shit they are.
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Drew
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Post #306,630
4/2/09 6:38:34 PM
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Except for the fact that its pretty much dead wrong
cash flow is not incidental. It is a principle driver, even at big corporations.
Jay's analysis of what happened is also wrong...the banks and investment houses ran out of leverage because they were using it, not corporations...then when they dried up the supply, companies who used receivables financing to fund payroll during an off month..or to stock inventory or whatever...couldn't. The companies weren't being irresponsible. They were forced to pay for the irresponsibility of others.
I will choose a path that's clear. I will choose freewill.
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Post #306,652
4/2/09 10:42:22 PM
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Comedic exaggeration
What I said above was a comedic exaggeration, though it has a bit of truth. Even start up companies that are literally trying to loan their way into large expansion watch their cash flow closely.
I'm also aware of how many companies play games to make cash flow and/or their books look better. From cutting deals they know will fail so they can book the income now, to delaying payments so they have more cash on hand this quarter even if it provokes penalties the next. Companies wouldn't play those games if cash wasn't important.
The same thing goes for my comment about loans. Only a small portion of corporate loans are really bad. Most are perfectly sensible short loans to cover payroll until the cash comes in or to finance real expansion. And there is another substantial chunk that are stuff that a company could do without loans but if the loan is cheap enough, why not do it now rather then wait to save up the money? Accounting departments are perfectly capable of judging that the $10,000 cost of the loan will be more then offset by the extra $15,000 in revenue.
The problem is that the bad loans and the insurance on those bad loans may be a small percent of the market in terms of number of loans. But in terms of cash value, they are significant, possibly even a majority.
Jay
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Post #306,613
4/2/09 3:47:14 PM
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This was absolutely necessary
as I talked about in several other posts. The market value of alot of these securities is nowhere near reflective of their actual par value..simply because noone wants to buy them. They will mature at a value, in some cases, of double to triple current market price.
I will choose a path that's clear. I will choose freewill.
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Post #306,656
4/3/09 8:05:13 AM
4/3/09 8:05:41 AM
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Kwak's take at BaselineScenario [tyop]
http://baselinescena...k-to-market-myth/
Today the Financial Accounting Standards Board voted - by one vote - to relax accounting standards for certain types of securities, giving banks greater discretion in determining what price to carry them at on their balance sheets. The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets.
This makes no sense, for three reasons.
1. Investors and regulators are not idiots. They know what the accounting rules are. If banks claim they were forced to mark their assets down to Âfire-sale prices, investors can look at the facts themselves and apply any upward corrections they want. Now that banks will be able to mark their assets up to prices based solely on their own models, investors will the downward corrections they want. ItÂs a little like what happened when companies were forced to account for stock option compensation as expenses; nothing happened to stock prices, because anyone who wanted to could already read the footnotes and do the calculations himself.
[...]
2. Between the two options, this is the unsafe choice. Accounting in general is supposed to embody a principle of conservatism. Given plausible optimistic and pessimistic rules, you are supposed to choose the pessimistic one.
[...]
3. Mark-to-market is a red herring to begin with. Accounting rules are much more complex than Âall assets must be marked to market and Âall assets can be marked to model. There are different types of assets (Level 1, 2, and 3); different types of impairments to asset values (temporary and other-than-temporary); different accounting impacts (some writedowns on the balance sheet affect income statement profitability, some donÂt); and, most importantly, different ways of holding assets. How a bank accounts for an asset depends in part on whether it says that asset is held for trading purposes, is available for sale, or will be held to maturity. Wharton has a high-level discussion of some of these issues, but if you really want to understand them you should read Sections 1.B-D of the SECÂs study of mark-to-market accounting, which I helpfully summarized for you in an earlier post.
The SECÂs conclusions were, in short:
* Most bank assets are not marked to market to begin with, and half of the ones that are marked to market are the type that donÂt affect the income statement.
* Marking assets to market had only a very small impact on bank capital through September 2008.
* The bank failures of 2008, including Washington Mutual, were not caused by marking assets to market (increasing loan loss provisions were a bigger culprit). In each case, stock prices started falling before the banks took writedowns, implying that investors already knew something was fishy before the accountants did anything.
[...]
I suspect he's closer to being right than the bankers and congressmen who were pushing this change.
Cheers,
Scott.
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Post #306,660
4/3/09 9:11:00 AM
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What he's not considering
is the "run on the bank" herd mentality...
Simple question..without googling...how much money did BOA lose last year?
Save you the time...they didn't lose anything. They earned $4 Billion dollars net profit. Sure it was down from 14B...but hey, who's counting.
As it stands, BOA looks to be profitable again starting q1.
What the mark to market problem created was a crisis of confidence, fueled by a whole raft of people that were in full out panic mode.
This is what a run on a bank is...rumor starts about something...(true or not) and people start pulling real assets from the bank, more hear this, more come...it becomes a self fulfilling prophecy.
I will choose a path that's clear. I will choose freewill.
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Post #306,662
4/3/09 9:52:09 AM
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I can play too: How much money did GM lose the last n yrs?
Accounting rules for multinationals are a big hairy mess. They can play with the numbers, even without the M2M changes.
GM had to write off $xxB due to changes in accounting rules. I guess if they didn't have to do that, they'd still be profitable, huh.
BOA is a dead man walking, while Citi is a corpse.
I'm no expert on this stuff, but a quick glance at http://www.federalre...eases/h8/Current/ gives an indication that something is terribly wrong with the existing accounting:
Feb 2008 US Commercial Banks (Seasonally Adjusted):
Total Assets: $11,050.3 B
Total Liabilities: $9,859.5 B
Net: $1,190.8 B
Feb 2009 US Commercial Banks (Seasonally Adjusted):
Total Assets: $12,051.1 B
Total Liabilities: $10,831.1 B
Net: $1,219.9 B
I don't know how the TARP funds figure into this, but these numbers are clearly not a true reflection of the state of the US commercial banks.
We'll see if BOA announces a profit, and whether the market believes them, soon enough.
As for a run on the bank, sure that can happen and it can happen quickly. With the Fed guaranteeing everything, that's not very likely though. And presumably once the Stress Test results are announced, there will be a methodology in place to restructure the corpses.
Cheers,
Scott.
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Post #306,665
4/3/09 10:09:15 AM
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How do you know this?
Because the press is TELLING you that the banks are failing.
What the banks are asking for is the ability to apply a bit more logic to the valuation of their assets than the blind panic of the market..which you seem to be participating in.
One of the principle necessities of the banking system (not just ours) is confidence. Its how the money multiplier works. Banks take everyone's assets, have a certain retention limit, and loan out the rest. So, if 10 people run on the bank...they are only holding enough hard asset to pay one of them back. That does NOT mean the system is broken. That means the system is working as intended.
What the mass writedown of assets did was create a liquidity crisis. Because they had less assets, they had no money to loan. Not loaning money created, in some cases, an inability for existing loans to be be paid. TARP funds are, IIUnderstandC being used to bolster assets in order to create that liquidity. Allowing assets to be valued in a more logical fashion than a panicked market will also help create more liquidity.
I will choose a path that's clear. I will choose freewill.
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Post #306,671
4/3/09 10:17:07 AM
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There have been real losses, not just paper losses.
I don't have time to dig up links, but when houses that sold for $2M 2 years ago are now priced at $1M or less (cf. Jim the Realtor), then real losses have occurred. It's not just a M2M problem - those houses aren't ever going to be worth $2M again.
Paper built on the assumption that that home is always going to increase in value suffered a real loss. Banks have a lot of crap like that on their books, and changes in M2M isn't suddenly going to make it valuable.
We'll see how solid the major US banks are when the Stress Test results are made available....
Cheers,
Scott.
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Post #306,681
4/3/09 10:36:55 AM
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Those home value losses don't belong to the banks.
they belong to the people.
the valuation of the investments was given aaa status based on the thought that home values always go up. The assets themselves are based upon the loans made to PEOPLE to buy those homes.
And yes, some of those houses will be worth 2M again. Some won't. The only impact that has on the paper in question is how it impacts the default rate.
And how much of that paper is actually left in banks hands.
I will choose a path that's clear. I will choose freewill.
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Post #306,687
4/3/09 10:45:13 AM
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No, no and no
You've already argued that corporations can't pay taxes, because corporations are really the people who are shareholders. So you don't get to argue about what belongs to the banks. The banks are people, remember?
Second, a loan is how a bank invests its money. When I invest in a company and they lose money instead of making it, that loss belongs to me. So if a home that is collateral on a mortgage (investment) loses value, that investment has lost value. That belongs to the bank. "But the mortgage holder owes the bank that money!" So? A balance sheet should reflect what investments are actually worth, not what you think they're suppose to be worth.
Finally, "the only impact that has on the paper in question" is how much it will eventually return. You do realize that's the outcome of the default rate, don't you?
--
Drew
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Post #306,691
4/3/09 10:53:00 AM
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In a fashion, one of your nos is correct
the banks are a portion of people. Home value (equity) is NOT part of the banking equation...its part of a persons net wealth. Not all of which goes to banks.
If I loan money against a collateral item, my return is NOT the collateral. Its the payments on the loan. I only lose based on the value of the collateral if the payer defaults. So the valuation should NOT be the valuation of the home...its the value of the future payments.
The RISK assigned to that investment is the default rate and that is where the valuation of the cbos is a problem. Because it is discounting these values far above even the most pessimistic default rates.
I will choose a path that's clear. I will choose freewill.
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Post #306,745
4/3/09 11:25:11 PM
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Bloomberg: GS says FASB won't help bank stocks.
http://www.bloomberg...WVSFa8&refer=home
April 3 (Bloomberg) -- The relaxation of fair-value accounting rules wonÂt prevent bank shares from falling because growth in bad loans is accelerating, according to Goldman Sachs Group Inc.
ÂOur core view is that banks will not bottom until underperforming asset growth decelerates, Richard Ramsden, a New York-based analyst at Goldman Sachs, wrote in a report today. ÂLoans are going bad faster than banks earn money.Â
[...]
U.S. regulators may force Bank of America, Citigroup and at least a dozen of the nationÂs biggest financial institutions to write down as much as $1 trillion in loans, twice what theyÂve already recorded, based on Federal Deposit Insurance Corp. auction data compiled by Bloomberg.
[...]
(Emphasis added.)
Cheers,
Scott.
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