More Critics of Mark to Market

On January 22, 2009 I posted a letter from Alan Greenspan on the inappropriateness of mark to market accounting for the commercial bank business model [click here]. I also quoted from a recent report issued by Paul Volcker on the same subject.

For your convenience I'm posting two other pertinent letters on the subject: One by Treasury Secretary Brady, dated March 24, 1992 [here]; and one by William Taylor, head of the Federal Deposit Insurance Corporation, dated March 2, 1992 [here].

Comments (3)

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  1. SN Thomas says:

    Bob,

    If we are so worried about these mortgages and impact on regulatory capital going forward….Why don’t banks spin out their existing distressed mortgages (and potentially other mortgage assets) to existing shareholders……The banks can create a Newco that will hold these assets and the bank can transfer a portion of its long-term debt into Newco….Existing bank shareholders will get stock in Newco and the Banks will be done with the existing mortgages on their books….If capital is needed to support these assets in Newco from a cash flow perspective, the government could invest directly into those entities.

    What do you think?

  2. hoho says:

    excuse me. english is a foreign language to me, but i believe what Big Paul and Uncle Alan said is something way beyond the fair value accounting.

    first, securitization.
    when illiquid assets are securitized, financial institutions must roll over the finance process by short-term liability again and again so as to finance the long-term investment. this is a trap. in this case, mark-to-market is similar to a simple request of an honest answer to a question such as “Have you trapped youself again, sweetheart?”

    second, commercial or investing.
    when the off-the-balance-sheet tricks are not enough to feed the appetite, people turn to the trading book. nevertheless, you have a footprint on the income account anyway.
    admittedly true, commercial banking is different from investment banking, but anyhow, who can tell the difference nowadays?
    commercials don’t need to do due diligence and the lending accordingly, and Jamie watches Becky, remember?

    i just can’t believe Jamie said that in front of Erin. Hmm…