I am no expert on "mark to market" accounting rules, which means that this pretextual throat clearing is my introduction to an "expert" post about.... "mark to market" accounting rules. My actual interest is the intersection of what government wants to do and what the market is willing to bear. The Treasury's toxic asset / "legacy asset" program, PPIP, is predicated on the reasonable assumption that banks want liposuction to remove ungainly bulges of hardened mortgage fat, and the government has found a way to pay for it.
Yesterday, the Federal
Accounting Standards Board voted to relax mark-to-market rules for
mortgage-backed securities. The banks liked this move, because it
allows them to hold off on writing down some of their assets and
provides the near-term illusion of more liquidity. I asked a Treasury
official if this wouldn't reduce incentives for bigger banks to
participate in PPIP. It shouldn't, the official replied, "because the
actual value of the asset is not changing. It allows them to change
their accounting practices, but the market value of the asset doesn't
That's definitely true from the standpoint of the buyers. They don't care what value the banks put on these assets. They care about the intrinsic value. But the uncertainty creeps to the seller's point of view. A big part of their sale decision will relate to what their own internal view is of an asset's intrinsic value regardless of accounting treatment too.