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Other Voices: How can we mark-to-market when there is no market? `Let`s call the loans` and other aberrations

Monday, March 09, 2009

This is an excerpt from Bedrock Groupís latest newsletter:

...We feel like expanding our witch-hunt of last week; We had pointed our finger at Basel (II) and now point it at the accounting rules- FASB115 in particular, the one that sets the rules for mark-to-market. Whilst written in good faith in what had been reasonably good and stable times, it simply wrecks havoc in times such as these! How can we mark-to-market when there is no market?

Here are some aberrations which occur: A bank holds perfectly good bonds which pay their interest regularly, never missing a beat. These are held in a category ďAvailable For SaleĒ. Normally, these are held at cost or market, the lower of the two. The diligent accountants/auditors check for valuation and get indicated bids at $0.60 so the Bank is forced to mark-down these perfectly good securities by 40%. This markdown does not pass through the Profit & Loss accounts, but does hit the companyís equity. So we could see a bank with a positive P&L and then a huge impairment of capital. The operation is fine, the stock is destroyed based on the collapsed book-value.

It may make sense in the semi virtual world of banks, but letís extrapolate to an airline: They bought a 747 Boeing for say $400 million two years ago. The plane flies well, with reasonable occupancy and generates a positive cash-flow. Now, the companyís Auditor reads that airplane prices have co......................

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