After trading down in the morning, the major financials are all solidly in the black today. Supposedly, there’s enthusiasm over tomorrow’s likely relaxation of mark-to-market rules.
Citigroup (C) is up over 5% and Bank of America (BAC) is up over 3%.
One trader we talked to thinks this is a classic buy-the-rumour-sell-the-news kind of deal. You’ve got retail investors who think a major change is coming, but after it’s over, investors will realise there’s no there there.
David Merkel at Aleph Blog has a good discussion of what changes to accounting mean and what they don’t. His first point may be all you need to know:
Accounting rules have little impact on stock prices. Almost every academic study on accounting rules supports that idea. Why? Investors attempt to estimate the stream of free cash flows that an asset will throw off. Accounting rules can help or hinder that. Because SFAS 157 attempts to calculate a present value of cash flows for level 2 and 3 assets, it aids in that estimation.
And he adds this:
What foes of SFAS 157 are unwilling to admit, is that lenders lent money near the peak of an amazing bull market, and now the collateral values lent against are far less than imagined at the time of lending.
It’s like the FRAM oil filter ad — “you can pay me now or pay me later.” There is a great deal of hubris involved in arguing that the market as a whole is out-of-whack. (Much as I had hubris toward the end of the bull phase… let me stab myself.) In ordinary bear markets, there is some strength somewhere to support asset values. That is not true now. We are dealing with something not normal over the last 70 years, and overall market values are reflecting that. Eventually accounting values will get there, as they did in the thirties.
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