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How Mark-to-Model Rules Are Killing The Government's Plan to Buy Banks Bad Assets

Posted by: Adrienne Carter on June 04

Is the government putting off the day of reckoning?

The Wall Street Journal has a great story yesterday on how lobbyists pushed Congress to change the accounting rules. According to the WSJ, the financial services industry spent $27.6 million pushing lawmakers to help them relax the mark-to-market rules, which had forced banks and other financial firms to value bad assets at distressed prices. The rules have been at the center of huge losses at banks throughout the financial crisis. The lobbying paid off in the form of bigger profits in the past quarter and Wells Fargo, Citigroup, and other big banks. The whole story painted a pretty grim picture of what’s happening in Washington, as Felix Salmon notes in a recent blog post.

But the WSJ seems to miss the bigger picture, or at least a related issue. All of this lobbying was happening at the same time the government was setting up the Public-Private Investment Program or what’s affectionately known as PPIP. The two efforts fight each other. Banks don’t need to sell their bad assets if they can simply apply different accounting standards to the investments. By using mark-to-model accounting, they can increase the value of the assets. That way they’re no long a drag on the balance sheet—the whole reason the government set up PPIP in the first place. I don’t see how or why PPIP will ever work.

Of course, all this raises questions: If banks are holding on to their bad assets, does that mean there will be more trouble ahead? Or is it inhibiting their lending, thereby stifling the economy?

Either way, it’s probably not a good thing. If banks keep their bad assets and the economy continues to deteriorate, the investments may still sour (new accounting rules or not). When that happens, they’ll have to take more writedowns and losses. Even if the economy doesn’t get worse from here, the bad assets may be a drag on their books. Without those investments, the banks may be able to lend more freely. That, in turn, could help the economy recover.

All that makes me wonder why the government isn’t forcing them to get rid of their bad assets. Even if they’re not a drag on the banks’ books, they may be a drag on the economy.

Reader Comments

June 4, 2009 03:10 PM

bank based assests l

Don Bryant

June 4, 2009 03:45 PM

Maybe you miss the big picture. If banks "get rid of" their bad assets at bargain prices, all the similar type assets all of us hold (like homes in particular) will be further devalued.

Hugo van Randwyck

June 4, 2009 04:22 PM

The biggest problem with changing the mark to market and setting up TARP is that is takes away market forces that would shake out the execesses of the banking industry, including: over capacity, excessive pay for senior managers, and incompetent managers, banks too big, irresponsible home loans above 3 times earnings. The system that caused the mess is still in place. They tried this in Japan in the '90s - and their economy didn't really go anywhere for more than a decade, and resulted in massive government/taxpayer debts. The same process that GM and Chrysler are using for eliminating dealerships, ought to be used for TARP bank branch profitability. Let the TARP banks show the mark-to-market profitability of each bank branch - and a demerger plan to split them up to 100-150 separate businesses with shares. GM found out that having a 'jobs bank' for it's employees and dealerships is poor use of shareholder funds, same for TARP banks with over-capapcity in branches, and unprofitable branches. Faster shaking out of execesses will help speed up the recovery, and create jobs and help families.


June 4, 2009 04:42 PM

this is all a scam. people are so comfortably numb these days it's amazing. i guess i'll just go back to watching the TV and usint the net. good luck to the world economy. i hope these financial games work out somehow.


June 4, 2009 06:52 PM

So the myth that computers playing with money, sucking wealth from the economy is perpetuated.
Money for nothing is just another tax. BTW. People have also forgotten that running a war in such a corrupt fashion for years is *very* expensive. US has been bankrupt by huge military and management bills


June 4, 2009 08:25 PM

We are all going to be dragged through a prolonged period of negative growth and we can thank Wall Street, the banks and our feckless politicians.


June 4, 2009 09:11 PM

Hugo, Have you read the recent Rip Off Reports at at the- 'BANK OF AMERICA' page of that site lately? Did you watch the documentary on the web entitled- THE OBAMA DECEPTION, which can be 'Googled'? What about the other documentary entitled- 9/11 PRESS FOR TRUTH, which can be 'Googled'? And don't forget to 'Google' this & watch it on the web- INSIDE THE MELTDOWN. Have a nice evening.

Thank you for your interest. This blog is no longer active.



BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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