Comments on: Volcker and Greenspan: Mark to Market

By: Paulson on Mark to Market Accounting | Economic Policy | Bob McTeer | NCPA

Tue, 02 Feb 2010 16:46:37 +0000

[...] I’ve written about before, Alan Greenspan argued passionately about the inadvisability of applying mark to market to commercial banks whose [...]

By: Remarks made in Hong Kong on U.S. Financial Crisis | Economic Policy | Bob McTeer | NCPA

Tue, 24 Mar 2009 16:02:53 +0000

[...] the SEC was contemplating bringing it back in the early 1990s, the head of the Federal Reserve (Alan Greenspan), the head of the FDIC (William Taylor), and the Secretary of the Treasury (Nicholas Brady) all [...]

By: Bob McTeer’s Blog » Blog Archive » More Critics of Mark to Market

Wed, 11 Mar 2009 15:18:58 +0000

[...] 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 [...]

By: KC Kid

KC Kid — Mon, 16 Feb 2009 18:36:21 +0000

Sometimes an analogy helps.——————– If you were to “Mark to Market-ize” (M2M-ize) the cruise control on your car you would need to reverse the action it now takes when your car slows down or speeds up. ——– As the car slows down instead of pushing the accelerator pedal down to speed the car back up, as a normal cruise control would do, the M2M-ized version would instead let up on the pedal. ——— Thus the car would slow down even more causing the M2M-ized cruise control to lift the pedal up even more. ——— This cycle would be repeated until the engine eventually was at idle and the car stopped moving or was moving at minimum speed (assuming a flat road). Of course the reverse is also true. ——— So when this type of seeming logical yet improper feedback is introduced into the banking system it tends to help produce (destabilizing) boom and bust cycles. Of course if you are an active trader that’s great but if you are a retired long-term investor it’s pretty scary. ——— If M2M is to be kept, which I’m not in favor of, we need to find some way to help stabilize the system. ——- That’s why the counterintuitive recommendation from some of inverting the capital raise requirements makes sense from a dynamic system analyst’s perspective. —— Right now anything that causes capital raise requirements, which M2M does in a down economy, will tend to cause banks to let up on the lending pedal. —— That in turn reduces the velocity of money and economic activity (MV=PQ) thereby causing more defaults driving the market marks down even further. And, the cycle repeats itself until the economy comes to a standstill or is finally reversed with gigantic sums of new money. This process is particularly troubling because the banking system is naturally leveraged which amplifies the effect.

By: JKH

JKH — Mon, 09 Feb 2009 12:41:08 +0000

The problem with MTM accounting is that most people view it as a necessary condition for transparency (in the usual financial sense of that word).

It isn’t. It is sufficient, but not necessary.

The necessary condition for transparency is MTM disclosure.

The necessary and sufficient condition for transparency is MTM disclosure without MTM accounting.

Disclosure is different than accounting. Accounting affects capital. Disclosure doesn’t necessarily affect capital. Disclosure without MTM allows the matching of time horizons between the life of assets and their effect on capital. And it allows shareholders to make an independent judgement on the effect of MTM disclosure on the market value of equity. In this sense, MTM accounting forces a double-up valuation of MTM in both the book value and market value of equity. This redundancy is absolutely dysfunctional.

As to exactly what the best complementary accounting to MTM disclosure might be, I don’t know precisely.

But the more critical point is to understand at the outset that MTM accounting is not necessary for transparency, and that it is accordingly suboptimal for accounting and capital measurement.

I think this logical imbroglio may be why there is such a division of opinion between two groups of thinking on the issue, both of which include intelligent and experienced people.

By: JustOne

JustOne — Tue, 27 Jan 2009 17:13:27 +0000

I wonder where the “religious-fundamentalist” adherence to mark-to-market “faith” is based. Are markets “god given” an inalienable right to price all things?

The world is full of examples of market variability and mispricing of assets. For example, there are whole schools of technical analysis focused on taking advantage of market errors in pricing of assets and risks.

PBS has a huge hit show that continuously exposes market errors when a toy or picture or other item is bought for a few dollars at an estate sale but in the “right” auction would be worth 10s of thousands of dollars (in the opinion of the expert appraisers).

Why does the FASB put so much faith in markets? Markets are manipulated, markets are often closed, markets are subject to group psychology and dynamics, markets are anything but a consistent measure of value. They are constantly “correcting” their errors. If markets are the PRIMARY source of truth in our banks’ asset values, no wonder they are having trouble maintaining liquidity and reserve ratios.

In the words of a famous reporter … “Give me a break.”

By: Alan H

Alan H — Sun, 25 Jan 2009 21:23:30 +0000

Thanks for the great commentary on this subject, Mr. McTeer. With Volcker on board, I have some hope now that a realistic change can be implemented.

By: cc

cc — Thu, 22 Jan 2009 16:58:36 +0000

time for you, greenspan, and every other MtM opponent to form a private equity firm and buy up stakes in US banks.

policy prescriptions are one thing, putting $ where your mouth is another.

if you passionately believe this issue is hampering the underlying value of these firms, and these loans in and of themselves, you should seriously consider raising a vulture fund or throwing in with someone like Hilltop (gerald ford).