Monday, March 30, 2009

More On Mark - To - Market = Slipping Away?

In doing more detailed research on the web today, I ran across some interesting tidbits that don't seem to be in the public domain yet.

In spite of the horrid action in financials today, it seems quite possible that the financial stocks see an improvement in earnings this quarter. The US Financial Accounting Standards Board (FASB) did indeed change the mark-to-market rules last week, which many (including your humble analyst) thought was needed. First, they suspended the mark-to-market rules for assets in distressed markets. Second, they widened the definition of “temporary” impairments of troubled assets, which will “allow banks to write up the value of some troubled assets if these have been hit by falling markets without (yet) suffering any significant credit losses.”

And here's the important part. The board decided to make the new changes effective
immediately, prior to full board approval on April 2. Like I wrote earlier, one explanation for today's nasty sell-off could simply be last-minute jitters regarding the vote, as well as quarter-end machinations.

As the esteemed analyst Charles Gave noted, this will allow banks to write up their paper, and it happens before Treasury Secretary Tim Geithner starts putting taxpayer
money at risk. Expect to see a pop in valuations. It will be interesting to see
if Citi and B of A post profits this quarter.

(I should note that the International Accounting Standards Board sent out a scathing press release. I guess from that we should assume that European banks will not be so
fortunate as their US counterparts.) (More European stupidity, in my opinion)

In theory, as I understand it, the information will still be there, but the way it will be recorded will not be reflected in the profit and loss statement. I understand
that this is a very controversial proposal, and I expect many will disagree. The key is whether or not the information is available to investors and how the proposals are put into actual practice. If there is abuse, and regulators should be all over this, then the old rules must quickly go back into place.This could put some strength back into financials, at least until the commercial mortgage and
credit card problems start having to be written off. At the least, it could
make for another solid rise in the stock market until we start to get what I
expect to be very bad 1 and 2 quarter earnings.

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