December 23, 2008
FASB and Mark-to-Market
The FASB has begun a review of the mark-to-market rules that have attracted the ire of so many in the financial community. The major complaint -- financial institutions have to write down assets that they do not intend to sell and the write downs adversely affect required capital ratios (both in legal regulations and in financial covenants in debt instruments requiring collateral). If the capital ratios slip under limits, the financial institution must sell assets to raise cash (a distress sale), further lowering asset values. The standard financial institutions want -- no forced write downs unless the holders are going to trade -- is unworkable. Any standard must depend on the nature of the market for the assets. If the assets are illiquid, there is an argument for not applying mark-to-market rules; if the assets are liquid and an established market is deep, there is no argument. FASB must then set market definition rules for write downs. This will not be easy. If financial institutions to not like the affect of write downs on assets traded in liquid and deep markets they should 1) argue for exemptions in regulatory capital requirements in tough times and 2) not agree to silly financial covenants in their negotiated agreements with creditors. FASB should not bail them out.
December 23, 2008 | Permalink
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