Bye Bye Mark To Market?

Speaking at an American Bankers Association conference in Washington this morning, Democrat Barney Frank, chairman of the House Financial Services Committee indicated that he wants to see more “flexibility” by regulators in the application of the SEC/FASB “mark to market” rule, that has forced the nation’s banks to take huge, and often unnecessary write downs on so-called “toxic assets” and brought some institutions to the brink of bankruptcy. There is even a likelihood that the changes, long sought by the financial services industry, could be applied retroactively, erasing some of the banks’ previous losses and replenishing their capital accounts.

Whether the changes will be retroactive has yet to be determined, Frank said. He said he would ask the Securities and Exchange Commission to consider a mechanism whereby banks could apply to roll back certain write-downs for some types of assets. Additionally, he said he expects the SEC to soon reinstate the uptick rule, which limits the stock market actions of “short sellers” in driving down the price of a particular stock.
Frank’s mark-to-market comments were echoed by Comptroller of the Currency John Dugan, whose agency oversees national banks. He said some of the write-downs banks have been forced to take do not reflect the true credit risks of the underlying assets and are “inappropriate.”
“I totally believe that mark-to-market accounting does not work with illiquid banking assets,” Dugan said in a speech at the same conference where Frank spoke.

At the root of the “credit crisis” are the so-called “toxic assets” mortgage-backed bonds purchased by financial institutions, who were then ordered by regulators to mark down the value of those assets on their books, often causing severe losses and ultimately eroding their capital base. What has been apparent for a long time, however, is that those bonds are worth considerably more than the discounted value at which banks have been forced to carry them.
The Obama administration has finally come up with a plan, albeit a convoluted and expensive one, to sell off those assets to private investors. And while the prospective buyers want to acquire the assets at the lowest price possible, the current holders, the banks, know all too will that those bonds, held to maturity, are worth far more than the discounted value at which they’re now carried.
With mortgage delinquencies running at 8% of the total outstanding, there is no realistic justification for marking down a portfolio of MBS to between $.10 and $.25 on the dollar. So while it may be difficult enough to find willing buyers, given the Democrats’ recent witless tantrums of ex post facto belligerence, it may be every bit as hard to get the banks to part with the “toxic assets” at the government mandated price.
The answer is to modify the mark to market rule, and allow the banks holding these assets to mark them back up to a more reasonable value, recouping some of their earlier capital losses in the process.
Barney Frank is hardly a friend of free market capitalism, and the coordinated addressing of the problem by both Frank and Dugan tells us that this isn’t Frank’s own idea by any means. But it does indicate that there may actually be a grownup or two on the Obama finance and economics team… a small ray of light at the end of a tunnel made longer, and darker, by Geithner, Dodd, and the rest of the Democrats’ financial illiterati.