All about ideas…

Trying to understand True Value vs Fair Value (mark to market) rules

with 3 comments

After hearing many House Republicans say they voted no on the Stabilization Bill because they wanted to change mark-to-market evaluation rules to True Value evaluation, I decided to do a wee bit of research.

I’m not an accountant and these concepts are well above my knowledge. However, I believed that understanding those concepts would help me know what various House members are arguing about and help me decide if they were arguing in my favor or the banking industry’s favor.

I have to admit, I’ll still a little confused. As I said, I’m not an accountant. But my take is that fair value or mark to market means that assets are valued at the sale price of today rather than the day they were purchased or at some time in the future. True value on the other hand allows banks to state an evaluation of what they think the price should be at maturity.

The following article in WebCPA by Ben Bernanke regarding both accounting methods explains why he is against True Value accounting for the current Stabilization Bill.

The article states,

“I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets,” he said.

Bernanke noted that the assets have both a “fire sale” price and a “hold-to-maturity” price. As the fire sale price falls in comparison to the banks’ traditional hold-to-maturity price, it is leading to huge writedowns, sending the fire sale prices even lower. However, he objected to the notion of eliminating mark-to-market accounting and just relying on banks’ internal estimates.

Despite opposition from accounting regulators, banking groups have been calling for scaling back fair value rules. The Financial Services Roundtable is asking the Securities and Exchange Commission to issue a temporary order to “negate the negative impact” of fair value rules when the economy slumps, according to Bloomberg News. The American Bankers Association has also called for suspending fair value rules, with ABA president Edward Yingling calling them a “complete disaster.” The ABA plans to meet with the SEC to discuss the matter and is sending a letter to the SEC with its recommendations.

Today the SEC and FASB began looking into changing the rules from mark to market (fair value) to true value. It looks like the SEC will be making the change, at least for the securities which Paulson want to buy.

I’m not sure what that’s going to do price that Treasury will pay if the bill passes with the Republican’s true value accounting method included. Will it mean the American public will end up paying more for mortgage securities may never create a equal or better return on the investment? Will the purchases just be another way for banks to bilk the people in order to make up for their free-wheeling? Or will it actually stabilize the banks while being fiscally conservative for the American public?

I’m not sure. But I suspect I fall in with the majority of the American people who no longer believe anything Bankers tell us. I think if a poll were taken today of Americans bankers would fall below Congress in levels of confidence.

Or perhaps I’m just cynical.


Written by Valerie Curl

October 1, 2008 at 12:52 AM

3 Responses

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  1. Your right not to have confidence in either – however a higher book value gives the asset holder more leverage and this gives them more borrowing power. Mark to market means the borrowing power of ANYONE in a devaluing market loses its borrowing power. This creates the need for a greater infusion of money. It’s best for Joe Public to get away from it.

    If you want the whole list of how every Rep voted check my site. SandySays1.wordpress.com


    October 1, 2008 at 1:24 AM

  2. Hi! I was surfing and found your blog post… nice! I love your blog. 🙂 Cheers! Sandra. R.

    Sandra R

    September 9, 2009 at 9:39 AM

    • Thanks, Sandra. Come back again and bring your friends. Ok, I know, a shameless self promotion. But I like to think that what I write might cause people to think just a bit more.

      Valerie Curl

      September 9, 2009 at 10:01 PM

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