Mark to Market Suspension vs Bank Nationalization

by | Mar 3, 2009 | Asset Management, Stock Market Comments

Mark to Market is a topic I have written about previously.

You can read about them here. I don’t like changing the rules of the game in mid-stream, but something drastic needs to be done.  A terrific opinion piece was written in the Wall Street Journal recently by Peter Wallison.  If you click on his name, you can see his very impressive resume.  Graduate of Harvard Law, adviser to Nelson Rockefeller, adviser to President Reagan, General Counsel to the US Treasury, Wallison has the credentials.

The Obama Administration has still not come up with a plan to remove troubled assets from the balance sheets at banks.  Therefore, their solution appears to be “semi-nationalization,” as evidenced recently when the US Government and Citigroup agreed to convert the preferred shares held by the government into common shares.  The US Government will soon own approximately 36% of Citigroup, which is about as aclose as you can get to nationalizing a bank without coming right out and saying it.

Wallison asks a very important question as the thesis of his article.  Accounting rules are very important, and should not be bent.  This situation appears exceptional, but that does not mean there will be other exceptions in the future.  It is a dangerous precedent.  What most commentators and other media are missing is this important twist.  Wallison writes:

What happens, then, when there is virtually no market for these assets — as has been true for at least a year? In that case, accounting rules require the banks use whatever market indicators are available.

What will this imply for other banks that are in trouble, or soon fall into trouble?  How endless is the money supply?

I agree with Wallison’s approach…nationalizing the banks is a terrible solution.  Revisiting mark to the market needs to become a priority.  And Wallison writes:

…Both taxpayers and banks could come out well — and so would our economy — if the government were to buy the assets at their “net realizable value,” which is based on an assessment of their current cash flows, discounted by their expected credit losses over time.

Take a look at the article here (printed in the Wall Street Journal February 25, 2009).  Additionally, suspending mark to market can effectively replace another cash infusion from the Government.  It is worthy of consideration.

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