When Moses came down from the mount and showed his commandments, as I recall, there were TEN of them not eleven.
There was no commandment saying 'Mark thy securities to the prices prevailing in markets or suffer the wrath of God'.
Mark to market is not a idea that has been sainted, knighted or carved in stone.
If there were ONE THING that could take the pressure off of markets it would be changing that one simple rule to let holders of securities use discretion to mark what they hold.
It was precisely this provision that been the law of the land in 1982 when banks were so capital impaired that some S&Ls were operating with certificates of capital a fiction that allowed them to keep on keeping on. The economy was punch drunk after more than two years of nearly constant recession that battered bank capital. Still that enfeebled financial sector was able to pull the economy up into recovery because as asset prices fell banks did not have to take hit after hit to capital. .
Right now mark to market creates a vicious circle vortex that drags securities prices into the abyss and threatens the viability of the financial system itself.
It is not clear that the rule even is good one.
At the time it was adopted the rule seemed to be good, but only after testing a rule in a variety of circumstances can we really evaluated it. This one has failed. It has failed the test of a down market by making it worse.
The idea originally was to keep firms from marking securities to their own firm's advantage by ignoring the prices markets put on securities. Indeed the rule did stop that. But now it is starting to create its own distortion.
At a time that no one wants more real estate exposure, troubled firms can't find buyers and as they try to sell their real estate assets they drive the prices down more. Each new sale fetches a lower price and every bank then must mark to the new lower price.
I think there is good reason to step way from this rule. There is no reason in this environment to glorify the market price.
The government (Fed) seizure (deal, wink, wink) of AIG makes it clear that there is no risk capital out there. That means distressed assets are NOT getting a fair bid. That means their prices are distressed beyond true market value. And that means that every bank is being forced to mark to a price that is too low.
In short THE RULE is creating distortions at the MACRO level instead of preventing them at the MICRO level.
Change the RULE and much of the pressure in the market and many of the fears about counter-party risk will go away. Fears about counter-parties are the real reason for the markets odd behavior This fear results in illiquidity, but its not the kind of illiquidity that the central bank can fix. The Fed can flood the market with dollar reserves and set up liquidity facilities and still not get firms to transact with each other . Change the rule and truly re-liquify the system.
Under the current accounting rules firms are just too worried that the ongoing real estate decline -- a decline that will come to and end some day and from which prices will some day rebound- could make someone else bankrupt and drag them down with it.
And after seeing how it treats them, no bank wants to be a sinner in the hands of an angry Fed.
Think about it.
There was no commandment saying 'Mark thy securities to the prices prevailing in markets or suffer the wrath of God'.
Mark to market is not a idea that has been sainted, knighted or carved in stone.
If there were ONE THING that could take the pressure off of markets it would be changing that one simple rule to let holders of securities use discretion to mark what they hold.
It was precisely this provision that been the law of the land in 1982 when banks were so capital impaired that some S&Ls were operating with certificates of capital a fiction that allowed them to keep on keeping on. The economy was punch drunk after more than two years of nearly constant recession that battered bank capital. Still that enfeebled financial sector was able to pull the economy up into recovery because as asset prices fell banks did not have to take hit after hit to capital. .
Right now mark to market creates a vicious circle vortex that drags securities prices into the abyss and threatens the viability of the financial system itself.
It is not clear that the rule even is good one.
At the time it was adopted the rule seemed to be good, but only after testing a rule in a variety of circumstances can we really evaluated it. This one has failed. It has failed the test of a down market by making it worse.
The idea originally was to keep firms from marking securities to their own firm's advantage by ignoring the prices markets put on securities. Indeed the rule did stop that. But now it is starting to create its own distortion.
At a time that no one wants more real estate exposure, troubled firms can't find buyers and as they try to sell their real estate assets they drive the prices down more. Each new sale fetches a lower price and every bank then must mark to the new lower price.
I think there is good reason to step way from this rule. There is no reason in this environment to glorify the market price.
The government (Fed) seizure (deal, wink, wink) of AIG makes it clear that there is no risk capital out there. That means distressed assets are NOT getting a fair bid. That means their prices are distressed beyond true market value. And that means that every bank is being forced to mark to a price that is too low.
In short THE RULE is creating distortions at the MACRO level instead of preventing them at the MICRO level.
Change the RULE and much of the pressure in the market and many of the fears about counter-party risk will go away. Fears about counter-parties are the real reason for the markets odd behavior This fear results in illiquidity, but its not the kind of illiquidity that the central bank can fix. The Fed can flood the market with dollar reserves and set up liquidity facilities and still not get firms to transact with each other . Change the rule and truly re-liquify the system.
Under the current accounting rules firms are just too worried that the ongoing real estate decline -- a decline that will come to and end some day and from which prices will some day rebound- could make someone else bankrupt and drag them down with it.
And after seeing how it treats them, no bank wants to be a sinner in the hands of an angry Fed.
Think about it.
1 comment:
Nice passage.
Post a Comment