Wednesday, September 24, 2008

Bernanke: Put Mark to Market on Hold

Reflecting the views of Wall Street firms and their lobbyists, the Wall Street Journal has written at length about suspending mark to market rules as part of the resolution of the current financial crisis. Bloomberg has remained silent until this morning when they published a commentary by John M. Berry.
His points on the mark-to-market issue:

  • As Bernanke has stated that the government's proposed buyout should be based on ``hold-to-maturity price'' for mortgage-related assets, institutions would receive double the proceeds if held-to-maturity prices were the basis for buyouts of their CDO positions, providing them with a substantial infusion of capital.
  • The government can hold the assets for an extended period, so such pricing might be justified.
  • Buyouts should be based only on hard-headed, realistic estimates of the probabilities of default of the underlying mortgages.
  • American International Group Inc., was carrying long-term mortgage-backed assets at almost 70 percent of their par value on the basis of hold-to-maturity, while Lehman Brothers Holdings Inc. held them at less than 40 percent of par on a mark- to-market basis.
  • Hold-to- maturity pricing has been seen as nothing more than an accounting gimmick used to avoid telling the truth.
  • Bernanke has been critical of mark-to-market accounting regarding long-term assets and bank loans, as well he should be. Such rules didn't cause the current crisis. On the other hand, when the mortgage-backed asset market ceased to function, it was absurd to insist on its use, and it certainly has made matters much worse than they had to be.

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