Wednesday, March 05, 2008

Mark to Market?

Holman Jenkins wanders into the arcane field of accounting in writing about the mark to market rules for banks. In short, banks have to value securities at their current market value rather than their cost. This makes some sense when there are functioning markets, but what about now when there is no market for many of the loans on the banks' books? And what happens when the market starts to recover? Will banks be booking gains?

Start with Merrill Lynch's giant $15 billion write-down of mortgage-related securities in January, which CEO John Thain introduced with a curiously contradictory "I think we're being conservative, but I don't think that we're likely to get much back on these things." Mmm. Either Merrill's write-downs are conservative, in which case many of the assets will come back, or they aren't. Is it any wonder Wall Streeters kibitzing about possible spectacular "write-ups" once the credit crisis passes point to Merrill as a top candidate?

Or take AIG's unexpectedly large write-down of subprime paper on Friday, blamed for the market's sell-off. Its chief told the world that its mortgages on paper had lost $11 billion in value, but sotto voce predicted these "unrealized" losses would eventually correct themselves.

Or take Sam Zell, a real-estate investor whose pronouncements are given great weight in the markets. He pooh-poohed the red ink being liberally spilled on Wall Street, saying, "It's not a cash crisis, it's a 'mark' crisis," and predicted that write-ups would undo much of the damage once the "panic" subsides.

In a couple of years I suspect banks will be crowing about gains in their portfolios as they mark these things back up. It won't mean any more then than the mark downs do now.

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