Thursday, March 19, 2009

Mark to Market Changes

I'm very interested in other folks' opinions on these, but I do not see the level of changes required to make the market snap back for CMBS. They use a CDO in one of the examples, and that may be a different story, but nothing I see in the proposed revisions help CMBS without some less-than-truthful presumptions made by the reporting entities.

At the risk of making our readers dumberer, Jonathan Weil, of Bloomberg, believes the proposed changes will create an STD-ridden cathouse (his analogy) out of the market, but most of the points he highlights are not changes - they're part of the current rules. His example hiding losses on stock holdings of AIG (Average Daily Volume: 80+ million shares) and Fannie Mae (Average Daily Volume: 20 million shares) fails both tests in both the current and proposed set of rules, and companies would still have to report these losses as usual.

Mr. Weil also notes that two members of the panel "opposed" the changes. In reality, the "opposing" proposal was also included in the FSP as an alternative view. They actually agree with the FSP 157-e in regards to determing whether or not a market is active and a transaction is distressed. The big difference in their argument is that A) FASB should work with IASB and come up with a joint agreement to avoid accounting arbitrage, and B) Other-than-temporary impairements should be reflected as an unrealized loss to earnings.

Outside of the journalistic bubble, market particpants realize that FASB's fair value accounting standards are obviously broken (and were broken when they were created). The current environment has highlighted the problem. I don't think it's fair to say FAS 157 created the current problems, but it is contributing to them. I'm biased towards CMBS, so its easy to walk over to the loan trading desk and look at a pool of senior mortgages trading at 80 cents on the dollar, and then walk over to the CMBS desk and see a pool of mortgages with a CUSIP attached (but otherwise identical) trading at sub 50 cents... well, something is wrong there. The 80 cent pool is being priced with some credit concern factored in, and the CUSIP'd pool is factoring credit concerns, but is mostly factoring in liquidity concerns. If you plan to hold both until they mature in 8 years, why should you price them differently?

He probably isn't a fan of "Secret Diary of a Call Girl" either

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