Posted on May 22nd, 2008 in Daily Stock Market / Economic News - The Real Story
Great idea! When this is instituted, they should all ‘historically value’ our homes at 2005 levels and let’s us all do cash-out refinances!
This garbage must stop. Wasn’t marking real estate and incomes at unreasonable levels responsible for much of the meltdown we are seeing today?
It is the banks pushing out and lying about the problem, for well over a year, that is responsible for bringing the credit markets to the brink. Every day, we learn about the underlying asset values deteriorating further and they think it is appropriate to ‘historically value’ their assets?!?
I am willing to bet that for every one ‘asset’ they have written down unjustly, there are five they have not even begun to write down to anywhere close to market levels.
Perhaps after a reasonable period of asset price and broader economic stability, this could help to bring about some loosening of credit noose, but not as asset prices are still in a free-fall. This will just push the problem out longer and make the end all the more painful. –Best, Mr Mortgage
Top banks call for relaxed writedown rules
By Francesco Guerrera in New York and Jennifer Hughes in London
Published: May 21 2008 23:04 | Last updated: May 21 2008 23:04
The world’s leading banks have stepped up pressure to relax controversial accounting rules with a new plan aimed at breaking the “downward spiral” of huge writedowns, emergency fundraisings and fire-sales of assets.
The proposals on “fair value” accounting by the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.
Under the plan, which has been obtained by the Financial Times, banks that decided to keep assets on their balance sheet would also be freed from the requirement to hold them to maturity and would be able to sell them after two years.
The IIF’s proposals, which were sent to US and European central banks, governments and accounting watchdogs, underline financial groups’ view that the credit crunch will inflict long-lasting damage on their business.
The IIF’s paper says: “The writedowns required under current interpretations may be substantially in excess of any actual or reasonably probable loss on many instruments”.
Financial companies around the world have been hit by more than $300bn in writedowns and been forced to raise more than $260bn from outside investors since last year, according to Bank of America analysts.
Senior bankers have long sought a change to the accounting rules, arguing that the requirement to mark the value of assets to the market price even when markets are illiquid or frozen creates a vicious circle of excessive losses, capital depletion and forced asset sales.
“Often dramatic writedowns of sound investments required under the current implementation of fair-value accounting adversely affect market sentiment, in turn leading to further writedowns…in a downward spiral that may lead to large-scale fire sales of assets,” the IIF’s paper argues.
However, accounting standard-setters in the US and Europe so far resisted pressure to relax fair value rules. Other regulators have also criticised financial companies for proposing rule changes that would reduce the impact of a crisis triggered in large part by their aggressive lending and underwriting practices. The IIF declined to comment.
Copyright The Financial Times Limited 2008