The SEC’s new “interpretation” of mark-to-market accounting rules allows banks to avoid valuing their holdings at liquidation or “fire sale” values for thinly traded assets. This should allow banks to hold off on making huge writedowns by simply not selling assets, an odd move when almost everyone has been complaining about how impossible it is to find a market for toxic mortgage related securities. Why suspend mark-to-market now? Won’t this make the market even more illiquid?
Hedge funds that invest in distrssed assets have already been screaming, in that sotto voce whisper scream that hedge fund managers have perfected, that anticipation of the bailout has made it impossible for them to buy portfolios of mortgage backed securities. (They didn’t particularly like mark-to-market rules, either; they thought these also made banks reluctant to sell assets for fear of triggering cascading downward marks.) Banks have been reluctant to sell in recent weeks because they assume they’ll be able to get a better price from what James Pinkerton calls the Securitized Housing Insurance Trust.
It occurs to us that this assumption might be wrong. We still don’t know exactly how the Treasury Department plans to administer the bailout plan. We definitely don’t know how it plans to price assets it acquires. One thing that easing mark-to-market accounting rules would allow the government to do would be to purchase illiquid assets at low prices without triggering writedowns. In short, the government could inject capital into banks through asset purchases, pay market prices, and yet leave the capital positions of banks relatively intact.
This is all just speculation, of course. And even if a plan like this is in the works, we don’t exactly expect the government won’t wind up paying too much for assets once the lobbyists for the banks get to work on the bureaucrats administering the program.
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