Fed chairman Ben Bernanke alluded to the possibility in his Tuesday speech. Now this story has crossed our radar:
WASHINGTON (MarketWatch) — The Republican Study Committee, a group of conservative GOP lawmakers, believe that instead of pumping billions to bail out banks, lawmakers could save the economy by simply eliminating controversial mark-to-market accounting rules, which require daily revaluing of assets.
The panel’s effort failed last year as Congress approved $700 billion for banks in October. However, seven months later, their efforts seem to be advancing on Capitol Hill.
Indeed, even fierce opponents to changing the methodology are now beginning to think about some mark-to-market alternatives. As the markets continue to slide, pressure is building in Washington to find a bipartisan consensus on the issue.
The first step is a hearing Thursday, hosted by House Securities Subcommittee Chairman Paul Kanjorski, D-Penn. …
As the article notes however, there’s unlikely to be a total suspension of the mark-to-market rules. Instead it seems we are more likely to get some sort of compromise. For instance, asking a bank to model what they believe their assets are worth now and what the securities will be worth the following quarter.
MarketWatch has a hypothetical sketch of such a scenario:
… A bank produces analysis and documentation that its asset is worth $80, its value will be $90 next quarter and it can get $50 in the market today. Analysts and investors would become more or less confident in a bank’s asset valuations, as it becomes clear whether or not they meet these estimates. …
But a key question is whether a suspension, or some sort of alteration, of the mark-to-market rules would really do anything for financials.
Bloomberg’s David Reilly has a key stat on the issue:
… Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29 percent is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2 percent of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.
What are all those other assets that aren’t marked to market prices? Mostly loans — to homeowners, businesses and consumers.
Loans are held at their original cost, minus a reserve that banks create for potential future losses. Their value doesn’t fall in lockstep with drops in market prices.
Yet these loans still produce losses, thanks to the housing meltdown and recession. In fact, bank losses on unmarked loans are typically bigger than mark-to-market losses on securities like bonds backed by mortgages. …
Related links:
Mark-to-market rule compromise is on the way – MarketWatch
Elvis Lives, and mark-to-market rules fuel crisis – Bloomberg