Tuesday, April 28, 2009

Mark-to-market accounting III


On April 9 the FASB issued its final staff positions "to improve guidance and disclosures on fair value measurements and impairments," i.e. the modifications to mark-to-market.

You can see the relevant press release here.

Effects were felt immediately. Indeed, the changes were beginning to have an impact before they were finalized. I was at the Manhattan office of Kaye Scholer on April 2, the day the prelimary draft was under discussion by the FASB.

Kaye Scholer, a law firm prominent in the alt-invest world, was hosting a seminar on
“Using Private Equity and Hedge Fund Structures and Strategies to Invest in Distressed Assets.”

The consensus at the seminar was that the government, by pressuring the FASB in this direction, had cut off its nose to spite its face. For the same government was trying -- still is trying -- the get private party participation in what it calls the PPIP (public-private investment program), in which a government-organized consortium is supposed to buy 'toxic assets' from banks in order to hold them until their toxicity wears off ans re-sell them then at a profit.

In the meantime (so runs the theory) the sale of these assets by the banks will improve the balance sheets of said banks, making them more willing to make loans, and getting the wheels of commerce rolling again.

But for PPIP to work, mark-to-market accounting should still be in force. The significance of M2M is precisely that it gives banks an incentive to sell assets they aren't prepared to hold, and let somebody else, somebody more daring and speculative, perhaps a hedge fund, (or perhaps PPIP, a nineteenth century Brit lit figure in the form of a 21st century acronym) hold them instead.

The FASB decision, and other ongoing efforts by elected officials and regulators to relax mark-to-market accounting rules, would reduce banks’ incentives to sell distressed assets at prices that would make them attractive to private investor participants in the PPIP, and would thus undermining the viability of the program.

We haven't heard much from PPIP since. He's expecting a fortune from Miss Haversham but she no longer has any incentive to bestow it. (Okay, I've got the plot a bit wrong there, but I'm working with the 21st century template as best I can.)

Final thoughts on mark-to-market tomorrow.

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