FASB and mark to market: A lack of joined-up thinking
With the authorities throwing everything but the kitchen sink at the markets, they need to make sure that the left hand knows what the right hand is doing.
The latest US Treasury announcement on its Public Private Investment programme (PPIP) came as a welcome relief to a market weary of ineffectual and expensive intervention. This seems to be a programme that could actually work, particularly for the ABS market. The problem of establishing a price at which holders of legacy loans will sell remains, but for securities that have already been marked to market bids under the PPIP scheme could be attractive.
There is, however, just one problem. The announcement of the PPIP scheme – together with the news that the existing Talf (Term Asset-Backed Securities Loan Facility) programme will be expanded to incorporate legacy assets – coincides with another initiative designed to kick-start the securitization market. Cognizant of the havoc that mark-to-market accounting has caused during this crisis, the Financial Accounting Standards Board is poised to issue an announcement of its own: changes to the marking-to-market guidelines that will allow banks to avoid marking portfolios to distressed prices. The new rules allow chronically illiquid assets to be marked to models based on future cashflows rather than to prevailing market levels.
Throughout both the boom and the bust, the price paid for ABS securities has never been a reflection of their inherent risk (just a reflection of the number of people that want to buy them) but in this environment there is a clear logic to the establishment of risk-based pricing.