Thursday, April 2, 2009
I'm not so sure about the news today regarding mark to market changes to help the banks. For those that are not aware of mark-to-market rules, it basically forces a company to revalue its assets appropriately to its true value in the market. Take for example the Pontiac Aztek. GM's vivid creation of beauty. Let's say you owned one of these babies. At some point you probably want to find out the value of the car. You want to do this because you realize you aren't picking up many chicks with it. You could head over to ebay Motors website, or edmunds.com and do a quick search to find out the market value. Now let's say the NHTSA came out with a really bad report that the car explodes on impact when hitting a shopping cart at the local grocery market. Suddenly no one wants to buy this beloved Aztek anymore. The market for this car essentially dries up. You now have a bad situation in that you don't really know what to sell your car for anymore. But you have to mark to market with a best guess. So you list it for $100 hoping someone will feel sympathetic for your situation. This write-down in value is basically what the banks have had to do. The banks have millions of Aztek's on hand that people do not want... the market for these assets are not free flowing so pricing them is much harder (toxic assets such as mortgage backed securities you hear in the news a lot). The banks have had to repeatedly mark these assets down, which shows up as a massive expense on the Income statement. This creates a series of other problems for the banks as they have specific thresholds to maintain. Once these thresholds are broken credit agencies start to adjust the banks credit rating (similar to your neighbor who suddenly can't pay their bills, resulting in a deterioration of their credit score which causes serious problems down the road). The benefit as an investor, is that you at least have some sense of visibility into the bank's problems. A change in this rule, even if only temporary, reduces your visibility into the banks' problems. Sure, it may help prevent credit downgrades, and thus cause more lending to occur... but this change undermines the fundamental principle of visibility and efficiency in the markets. Losing that degree of visibility is dangerous.