Thoughts & Comments
Mark-to-Market Insanity
The logical conclusion to the speculator mentality

Vernon Hill  ( about me )
Posted 10/15/2008
bankstocks.com
vhill@bankstocks.com

I recently had the pleasure of doing a joint interview with Jack Bogle, the legendary founder of Vanguard Funds. Jack reminded me of his belief that the U.S. has become a country of speculators rather than investors, and that this change was one of the causes of the current malaise.

I agree with Jack. In the financial markets, the traditional investment mentality has been replaced by a speculative one. While investors’ goal is to realize the value of their holdings over the long term, speculators believe everything can be instantly priced. Nothing has intrinsic value, and the object is the transaction itself. 

Nothing reflects this speculative mindset more clearly than rulemakers’ insane obsession with market-to-market accounting, embodied by the FASB’s insistence that companies use market prices to value their financial assets, regardless of the asset’s type, maturity—and whether or not it even trades in a market active enough to even generate a meaningful price in the first place. The rationale behind the rule is that every loan and asset has an instant value, and that banks should run their businesses to maximize those instant values rather than build value for customers and shareholders over the long term.

This view is reinforced by Wall Street firms’ habit of funding themselves with 24-hour paper rather than the more stable deposits of real banks. 

How many banks would have survived the 1990's credit crisis if they’d have been forced to mark every loan to market? We now know that the OCC’s own, early attempt at market-pricing assets, in the form of" performing non-performing” loans, severely aggravated the problem.

Regulators’ mark-to-market hysteria is just another instance of how the psychology of Wall Street’s "shadow banking system" has seeped beyond Wall Street, and has begun to destroy the country’s core banking system. 

Yes, assets and liabilities that have readily obtainable market prices should be reflected on companies’ balance sheets at those prices. But the vast majority of a commercial bank’s assets--loans to individuals and business—can’t and shouldn’t be subject to the instant pricing whims of a speculative market.

If you commercial bankers agree with me, as you often tell me you do, get on the phone with your lawmakers and exercise your political muscle. You may never get another chance.

What do you think? Let me know!


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Thud_McGuffin Posted On 10/15/2008 7:30:39 PM

"But the vast majority of a commercial bank’s assets--loans to individuals and business—can’t and shouldn’t be subject to the instant pricing whims of a speculative market." Surely most aren't marked? Isn't it only securitised stuff held as trading securites or available for sale? On balance sheet, traditional loans are still cost less provision for loan losses?

itserich Posted On 10/15/2008 9:52:05 PM

My understanding is financial companies are trading at below book value is because people do not believe assets are worth their current marks. It is confusing what is expected to be achieved by raising the marks. This paragraph is particularly confusing: "Yes, assets and liabilities that have readily obtainable market prices should be reflected on companies’ balance sheets at those prices. But the vast majority of a commercial bank’s assets--loans to individuals and business—can’t and shouldn’t be subject to the instant pricing whims of a speculative market." Why not just have companies mark everything at inflated values?

rondinelli Posted On 10/16/2008 2:40:16 AM

i agree 100%. there are many causes of our current problems, but there cannot be any question that mark to market accounting and the ratings agencies are exacerbating the problem. i heard someone on cnbc say that no one complained when mark to market overinflated the prices ... but they should have !! thats part of the problem. by overinflating prices, it makes these companies appear that they have more capital than they should and vice versa. whether it be book value or hold to maturity value ... anything that is more stable and consistent in good times and bad would be better.

sparks13 Posted On 11/13/2011 11:00:05 AM

When real estate is pledged as collateral it is valued according to an appraisal of it's current market value. That's marked-to-market. It doesn't vary day-to-day but maybe week-to-week. And easy access to mortgage money is (actively promoted by bankers prior to 2007) was a major reason for the real estate bubble. Do you suggest that banks no longer be permitted to use appraised value of their real estate holdings to compute their assets?
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