The potential changes to the mark-to-market accounting rules could hurt the government’s plans to entice private investors into buying toxic assets, but as long as the problems with bank capital are being fixed, it doesn’t matter, Robert McTeer, former president of Dallas Federal Reserve, told CNBC.
“The objective is to stop the destruction of bank capital, it's not to get toxic assets off banks' balance sheets. That's a means to an ends,” McTeer said, adding that there could be numerous ways to achieve the result
It turns out that we didn't actually have to spend $1 trillion in order to resolve the issue of the toxic assets. At the risk of sounding too wonky, the issue of the "toxic assets" was essentially an accounting issue. They were constantly in decline. This created an ever declining asset base on their (the bank's) balance sheets. As such, they had to raise capital elsewhere just to make things equal.
Solving this problem essentially comes down to an accounting issue. This is where mark to market comes in. Mark to market forced these banks to assign current market value to these Mortgage Backed Securities. As such, to solve the issue, what we really needed to do was allow these banks to assign a more long term value to these same assets. Today, FASB did just that.
The independent Financial Accounting Standards Board voted to adopt new guidelines under the so-called mark-to-market accounting rules, which require companies to value assets at prices reflecting current market conditions. The board was meeting at its headquarters in Norwalk, Conn.
The changes will allow the assets to be valued at what they would go for in an "orderly" sale, as opposed to a forced or distressed sale. The new guidelines will apply to the second quarter that began this month.
Now banks will be allowed to give a long term value. Not only will it be higher than a current value but that value won't change each and every day. The other thing this does is render moot Geithner's plan to sell these assets. Now banks don't need to sell them. The tax payers don't need to over pay them. The Treasury doesn't need to bribe private players with great deals to buy them. This accounting problem was solved using accounting and it will now cost the taxpayers about $1 trillion less than it was about to.