Mark-to-Market does not impede banks forclosing houses

Per Chuck Ponzi:
Jace,

I’m wholly aware of the changes to MTM, which have little to do with bank processing REOs. Unfortunatly you must have heard this from someone else or read the FASB statement incorrectly, or misunderstand the interplay between banks, regulators, and accounting pronouncements. Luckily, Economics is not my forte’, as my undergrad is accounting with an MBA.

Let’s do a banking 101:

1. Accounting realization has little to do with captitalization requirements. Indeed, one can regonize losses on accounting without impinging on capitalization requirements. FASB governs recognition on Financial Statements only. Most banks maintain several asset ledgers, and accrue for asset non-performance without individual write-downs. This is the essence of MTM.

2. Capitalization requirements are set by banking regulators (FDIC), not by FASB. Write-offs do not directly impair individual assets (which are reviewed by banking regulators).

3. MTM has previously only applied to “held for trade” securities, and not for “held to maturity”. The new rules are largely the same as the old rules; unless the bank is actually trading the loans as securities, mark to market accounting is irrelevant. Individual assets are not impaired until substantial doubt arises that the value has declined when it comes to held-to-maturity loans. Most Alt-A and Option Arm loans are not securitized so MTM does not apply. This is why Golden West and Wells Fargo are able to largely avoid write-downs despite having significant recognized/unrealized revenue assets that made their balance sheets look great. However, regulators only concern themselves with performing/nonperforming assets in computing capitalization. The world could be going to hell in a handbasket and the company could be underreserving and as long as the bank had performing assets, the regulators could do nothing.

You’re actually incorrect on your assumption that the 600M “loss” showed up on the books because under MTM, only tier 1 assets were completely marked to market. Hence, we saw Lehman Brothers (not a bank) implode while Wells Fargo and Citibank did not (banks). Banks don’t go bankrupt, they go insolvent. Companies do not go insolvent, they go bankrupt. There’s a subtle but key difference. Insolvency is determined by banking regulators, bankruptcy is petitioned for by the company when its debts exceed its assets.

I’m not meaning to be rude, but your view is the 100K foot view without understanding the basics of how the system works. I’ll break it down simply:

We’ll assume that a bank is insolvent. That is determined by nonperforming assets vs. capitalization ratios and a whole lot of assumptions. Indeed, Wamu had shown huge amounts of income on Option-Arms prior to being deemed insolvent, though one could argue that the FASB treatment of accrued interest on Neg-am products is less than spectacular and I would agree. (I’d rather see corresponding liability or contra-asset booked than revenue, but I digress).

So, regulators see non-performing assets an(d?) order the bank to foreclose and sell those non performing assets. (adhering to applicable laws and moratoria). However, the FDIC has been charged to forestall foreclosures (thanks, Sheila!) and local moratoria in California have largely hampered the ability of the regulator to force the bank to foreclose and liquidate. Contrary to popular belief, banks cannot “sit on inventory” because the regulator would normally not let them do that unless their boss (Sheila) told them to. Largely, though, the delay in processing foreclosures has largely been because of inept management and poorly prepared staff. Just ask someone who has gone through a short sale!

So, in short… you said I was wrong, when in fact I am exactly correct in the basis of the model (admittedly there are some unknowns that I pulled out above, and there might be more), but Mark to Market and Capitalization Requirements are reason for MORE foreclosures, not less.

Chuck Ponzi

in reference to:

"Jace,
...
Chuck Ponzi"
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