Mark-to-market forebearance will increase market uncertainty

Bloomberg reports:

The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more.

So much for transparency. I'd prefer capital ratio forbearance, which is much more transparent.

For the brilliant allegory, check out John Carney:

You have two cows.

You paid $100 for each cow. You write that down.

Lightning strikes one of your cows, an unlikely event that should only happen once every 10,000 years.

Lightning strikes the other cow.

You notice the cows are on fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows are dead from fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the dead cows.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98. You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each.

They light your paper on fire.

You ask the government to buy the dead cows at $98 each.

Tim Geithner tells you about the public-private investment partnership, which will encourage BlackRock and Pimco to buy the dead cows. Pimco puts in $5 and the Treasury puts in $5, and the FDIC lends $60 to a new entity called Pimcows, LLC. They buy the cow for $70. Tim whispers that he expects you'll buy a new cow with the $70.

You have two dead cows, $70 and $200 in debt to your investors. You have no plans to buy new cows.