Mark to Market
Apr 6, 2009
Posted by Jody Eisenman | Filed under Uncategorized
In a controversial move to save the banks, the Financial Accounting and Standards Board (FASB) voted last week to ease some of the restrictions on mark to market accounting. According to general accepted accounting principles, assets that are held on a company’s books must be valued at their current value. So, if a company owns a portfolio of stocks and bonds, the balance sheet must reflect the current (depressed) price. Sounds simple enough. The problem comes when you are trying to value an asset that barely trades, since some of the exotic CDOs that banks hold in their portfolio. What FASB has previously demanded is that they value this on their books at last sale price (which is bound to be very low, as the only sales are being done at fire sale prices). Thanks to political pressure, FASB has now decided that banks can value some of these assets based on cash flow estimates, which immediately increases their value, and this reduces the amount the banks must maintain as their net capital. This makes the banks’ books look better, and thus less reliant on Federal aid. On this news, the financials and the entire stock market rallied. So it’s a win-win situation, right?
Not exactly. Anytime you allow a company to somehow obscure the value of an asset, you create a scenario where no one can be exactly sure what exactly those assets are worth. Although the markets are celebrating now, I can envision a scenario somewhere down the line where investors will shy away from all financial companies that utilize this method. However, the market is up for the time being, so the bulls are happy.
The stock market has now staged a 4 week rally, one which has taken the Dow from a low of 6440 to a close of over 8000. We have shrugged off the continuing poor economic news. According to Yahoo Finance, this has been the best 4 week rally since 1933. The NASDAQ composite is now actually in positive territory for the year. I believe we are once again close to a crossroads in the market, where we will either rally past 850 on the S & P, or pull back hard. I do not believe we will continue to trade at this level for more than a few days. Over the weekend, IBM decided to drop its’ previously announced bid for Sun Microsystems. This may put a damper on the rally Monday, but we shall see.
