PrefBlog

There’s a scuffle brewing over FASB’s proposal that bank loans be marked-to-market:

A U.S. accounting board’s proposal that would require banks to report the fair value of loans on their books will lead to reduced lending, a former chairman of the Federal Deposit Insurance Corp. said.

“This is a terribly destructive idea to even propose,” William Isaac said in a telephone interview today. Just by making the proposal, the Financial Accounting Standards Board will lead banks to quit making loans without an easily discernable market value, and keep the ones they do make to shorter maturities, Isaac said.
…
The proposal comes “in the face of worldwide condemnation,” Isaac said. It conflicts with the recommendations of the Group of 20 nations, the Basel Committee on Banking Supervision and the International Accounting Standards Board, according to the American Bankers Association, which also opposes the plan.

David Larsen, who serves on FASB’s Valuation Resource Group, said the volatility created by markets and fair value “is there whether or not it is measured.”

“It comes down to the question, is greater transparency of help to users of financial statements?” said Larsen, a managing director at New York-based Duff & Phelps Corp.

Mark-to-market accounting destroyed $500 billion of bank capital as traders marked down all assets during the crisis by a total of 27 percent, and many of those values have now returned to near par, Isaac said. “Now FASB is going to spread this disease throughout the system,” he said.

The trouble with mark-to-market is that it assumes an infinitely liquid market. Sometimes, this embedded assumption gets a little frayed around the edges.

Congrats to my nephew Sam Arfin:

TORONTO INVITATIONAL

Rowing – Champions … Boys’ – 1000 m T1x – Sam Arfin, Birchmount Park, 4:39; 1000 m T2x – Sam Arfin and Oscar Kahu, Birchmount Park, 4:15;

It was a quiet but positive day for Canadian preferred shares, with PerpetualDiscounts gaining 15bp and FixedResets up 8bp.

PerpetualDiscounts now yield 6.29%, equivalent to 8.81% interest at the standard equivalency factor of 1.4x. Long corporates now yield 5.65% (maybe a hair more?) after scoring a total return of +0.46% for the month, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at 315bp, a 10bp tightening from the 325bp recorded on May 26.

And that’s it for another month!

This entry was posted on Monday, May 31st, 2010 at 8:12 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.