Thursday, April 2, 2009

Oracle On The Hudson

Today FASB has announced changes to the mark to market rules. Rough Fractals has long predicted and advocated for this change - see for example the post below dated February 24. Thank you.

Among many of its shortcomings, including what people have been calling the "proclivity" of the mark to market rules (meaning they exaggerate cyclical ups and downs), one of the odd things that mark to market did was ensure that balance sheets would be wrong by requiring balance sheets to mark to an illiquid market, ignore marks to value, and use an averaging methodology for many debt instruments that either pay $0 or $100 - thus $50 is necessarily incorrect (though it is the average outcome - a useless and misleading calculation). Critics suggest that value benchmarks used in the past were fiction (this was called mark to make believe). That may be true and is a valid concern but that is what audits are supposed to verify.

In Rough Fractals' view changing mark to market is the right thing to do and combined with increased accounting vigilance - balance sheets will be more, not less, accurate. (there are some other benefits as well which have to do with how bank capital is measured etc but those (while important) are beyond our expertise. Rough Fractals would be bullshitting if we claimed to understand how the bank capital rules really work (as are most people who speak about them).

Finally just a mention that the mark to market changes have an interesting correlation with and impact on the Geithner toxic asset purchase plan in terms of the pricing of those assets. However Rough Fractals is not going to say more about that now because its not all that interesting.


Economic Prediction

I have made this prediction before and have seen nothing at all to make me believe that I am correct. Nonetheless I continue to believe that it will happen (and will be a good thing in a very perverse way). We will suspend the mark to market rules (FASB 157 and FASB 105). I am not going to reiterate here why I think this will be done or why I think it should be - just want to reiterate the prediction.

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