Wednesday, October 1, 2008

M2M and Wall Street

Mark-to-market, which is part of fair-value accounting, simply means that companies assigning values to assets they hold must value them at current market levels. If something is trading right around $10, it’s given a value of $10, regardless of whether it was bought for $2 or $20.

That sounds logical, right? The problem, though, and the reason M2M is getting so many opponents, is that the credit markets are in such a bind now that a lot of securities aren’t selling at all. So, technically, you might have a “market” of $0 for a security.

Because of that, there has been a huge movement in recent weeks to repeal, or at least suspend, the mark-to-market accounting standards, which some say are too onerous and have contributed to massive writedowns on banks’ balance sheets.


M2M opponents got a bit of what they wanted on Tuesday night, when the Securities and Exchange Commission issued an interpretation of Financial Accounting Standard 157, which contains M2M provisions.

Just in time for banks to start reporting third-quarter earnings, the SEC and the Financial Accounting Standards Board issued a clarification of the rules to say that “when an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.”

It added that “the results of disorderly transactions are not determinative when measuring fair value,” which could mollify concerns about assets being marked down to fire-sale prices.

That assuaged some concerns, at least. The American Bankers Association commended the clarification, with ABA President and CEO Edward L. Yingling saying he “applauds” the SEC for its move and that a recent meeting on the topic was “productive.”

for the whole story:

(removing the M2M rule altogether would revert to Enron style accounting, this rule gives corporations better transparency)