Taxpayers Lose: Mark To Market
April 3, 2009, 7:42AM

The Financial accounting Standards Board caved to pressure by the banks and has loosened mark to market standards for banks reporting capital for regulatory purposes. Though these banks are still leveraged institutions who might have too sell assets unwillingly in order to meet their debt obligations, they no longer have to confront the reality of the current market place for the complicated mortgage and asset backed securities on their balance sheets.

At the same time, Timothy Geithner has launched his Public/Private Investment Partnerships as an attempt to create a new buyer's market for these securities. The deal is: the government gives private investors a non-recourse loan worth 93% of the auction price of these securities. The government then buys an equal amount of securities alongside a private buyer like PIMCO or Blackstone. Since we're giving the private investors free money to play with, the hope is that the investors will be willng to pay higher prices for the assets.

The hope is that investors and the government will pay prices that are high enough that the banks can sell at a slight mark-up to current prices but that aren't so high that the buyers overpay and take a bath. Since the private investors only put up 7% of the capital, they don't have much to worry about. But the Treasury risks losing much more if it overpays -- the loan made to the pirvate investor plus the equal investment made by Treasury. Overpayment can mean a bloodbath for the taxpayer.

Now back to mark to market -- free from the realities of the market place, bankers can now hire auditors to develop sophisticated models for what these securities might be worth in fantasy land. This frees the banks up to hold out for higher auction prices from Geithner's partnerships.

The Treasury plan was always meant to inflate these asset prices a bit. But ending mark to market will inflate them as well. Put the two together and one of two things will happen: Banks will simply hang onto the securities, happily mark them to fantasy and then "shockingly" fail when reality intrudes or they will use this leeway to demand ever higher prices from Geithner and his pals, causing the partnerships to overpay and once again leaving the taxpayer with the bag.

Sucks.


http://tpmcafe.talkingpointsmemo.com/tal...ef=reccafe

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Mark-to-Market Changes May Have Muted Impact on Banks

By MATTHIAS RIEKER
NEW YORK -- Bank analysts are warning that the accounting change approved Thursday morning might be a case of too little, too late.

Bank stocks early in the day rallied as the Financial Accounting Standards Board approved giving bankers more leeway in valuing securities in their investment portfolio. By midday, bank shares had retraced some of their gains, though they remained generally higher.

The rules that forced bankers to mark those securities to market has caused much pain because there were no buyers, and therefore no prices, for collateralized debt obligations and other securities backed by certain mortgages.

The change would not be applied retroactively, and securities on banks' books have been written down aggressively. So, much of the damage has already occurred.

Meanwhile, the biggest issues for banks now are not securities write-downs but delinquent loans, the money banks have to set aside to cover them and these companies' earnings power.

Bank of America Chairman and Chief Executive Ken Lewis, speaking Thursday morning on CNBC, said the issue has been, "at least in our case, maybe a little overblown and not quite as big a deal as some would think."

Robert B. Albertson, chief strategist at Sandler O'Neill, said, "By the time you look at the substance and consider the potential ambiguity of what [FASB] says .. it may not bring closure" to the dispute over mark-to-market accounting.

The changes could be good for banks, or "dead on arrival," he added.

Sanford Bernstein analyst John McDonald said in an email to Dow Jones Newswires, "In our view, it's a modest interpretive change and comes too late in the cycle to materially move the needle for banks."

Robert Willens, a former Lehman Brothers Holdings Inc. tax and accounting analyst who now runs a corporate tax advisory firm in New York, had estimated that the change could lift earnings by as much as 20%. Several analysts and even some bankers find that estimate aggressive.

Mr. Lewis said on CNBC the change might add "a penny or two" to earnings per share, "but not 20%."

The CEO said about $700 billion of Bank of America's approximately $2.4 trillion in assets "are actually marked to market, and marked pretty severely."

Richard X. Bove of Rochdale Securities said he believes that the change might add between 5% and 10% to the earnings of some banks, but it is unclear who would benefit most because details about which banks have not written down securities aggressively is unclear. Those who will benefit are likely to be the nation's largest banks, like J.P. Morgan Chase & Co., Citigroup, Bank of America, and Wells Fargo & Co., while even large regionals may see little if any earnings lift.

The rule change is going to have an impact on future write-downs, but Mr. Bove agreed with Mr. McDonald that bankers "reduced the size of the securities portfolios where future write-downs must be smaller" and prices have moved up for "a good portion of the securities. The big problems that banks have suffered from are over," Mr. Bove said.

But the talk about the accounting change might have another effect: Investors might look at the actual earnings power of companies.

Mr. Bove said, "There is a growing recognition that most of the big banks are profitable," including Bank of America.

"If you want to boil" Lewis' comments on CNBC "down to one metric, it is that the earnings power of the company is $30 billion," Mr. Bove said. "Which means that he implied that Bank of America has $5 [a share] in earnings power."

Some regional banks that hold securities backed by mortgages that do not comply with the standards of Fannie Mae and Freddie Mac may benefit, Standard & Poor's equity analyst Erik Oja wrote in a research note. But he too remained cautious about banks' loan losses.

Mr. Albertson warned: "All I know is that we are not through the credit cycle, and there is no clarity as to how long it is going to last."

http://online.wsj.com/article/SB12386967...outset-box