Bank Accounting Rule Fiction
Source: http://www.qvmgroup.com/investPosted on Wednesday, October 1st, 2008 | In Market Commentary
Recording assets at cost can be a fiction, but under extreme conditions such as we have today, recording assets at “market” can be a fiction too.
Mark-to-market becomes fictional when the bids and bid sizes are so low that the assets can’t or won’t be sold. Mark-to-market is based on the assumption of a functioning market, which we do not have at this point.
There is a fundamental difference between loss of worth and loss of liquidity. Market-to-market rules need a liquid and functioning market to work and make sense.
Wouldn’t creating more asset valuation flexibility in this locked-up credit market improve capital ratios and reduce the capital infusion requirements, reducing the size of the needed bailout, and grease the wheels of credit a bit?
At this point, government talk without action may be making markets less liquid.
If a bank holds assets with low bids and has the expectation that the government may agree to buy those assets at a higher price, the bank will delay sales to wait for the higher government bid. That would reduce liquidity further.Â
At this point, the government, not the banks, may be worsening credit market liquidity problems by promising but not delivering relief.
Richard Shaw
QVM Group LLC
Last 5 posts by Richard Shaw
- Hoped for Stocks Bottom Pierced - November 19th, 2008
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- US Stock Market Equity Allocation Weight - November 17th, 2008
- Lower Prices Now - Massive Inflation Later? - November 12th, 2008
 About Richard Shaw (http://www.QVMgroup.com)
Richard is a principal of QVM Group LLC, a fee-based investment advisor based in Connecticut with clients across the country. He provides investment coaching to "do-it-yourself" investors, and manages portfolios for those who prefer not to make their own decisions. His investment approach is based on value, asset allocation, benchmarking, expense control, risk management, customizing portfolios to each client's specific circumstances, and regular communication about strategy and performance. The QVM Group team also provides municipal refinance services, strategic business planning and financial analysis service for new ventures, private acquisition analysis, and custom investment research. Richard's extensive experience, includes serving on the Board of Directors of Aberdeen Asset Management PLC (London Stock Exchange: ADN), membership on the Board of Directors of Phoenix Investment Counsel (renamed Virtus Investment Advisors), a U.S. pension manager and investment advisor to the Phoenix Funds (renamed Virtus Funds), as well as serving as Managing Director of a series of offshore investment funds based in Luxembourg. He has led institutional asset management sales and had overall responsibility for management of a U.S. mutual funds broker-dealer. He was a charter investor and member of the Board of Directors of several internet companies, including Lending Tree prior to its IPO. He is a graduate of Dartmouth College. QVM Group LLC is a Registered Investment Advisor. Visit the QVM Group website http://www.qvmgroup.com/QVMinvest/ |
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October 1st, 2008 at 8:33 am
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