October 01, 2008.

Regulators

SEC & FASB

modify

securities

valuation concepts

Mark-to-market

Following the Saving-and-Loan (S&L) rescue of the late 1980s and early 1990s the Financial Accounting Standards Board (FASB) and the Securities & Exchange Commission (SEC) adopted a new method for valuing securities used by banks in day to day trading. These rules are known as "mark-to-market accounting." Securities held by financial institutions for investment purposes are not subject to these guidelines. The SEC has the authority to suspend the mark-to-market accounting method.  The SEC and the FASB sought to rescue the financing markets by modifying that valuation method. The mark-to-market method requires banks to use current market value for securities rather than the price originally paid for them. However, the market for mortgage securities and derivatives were frozen effectively making it impossible to assign a value to them. Banks were forced to write-down billions of dollars in toxic mortgage securities in order to comply with the mark-to-market accounting rule.  This in turn required these institutions to search for additional capital to shore up weakened balance sheets.

Subject fire-sale valuation

Going forward the SEC and FASB will allow bank managements to use their own judgment if (a) no market exists for the securities being valued or (b) if the securities are being sold for fire sale value.  The hope is that this change in accounting practice will boost affected balance sheets with trillions of dollars that can be used for lending and hopefully will free up credit markets.

Confidence undermined

Investors who buy securities and the accounting firms that audit securities firms and banks argue that by diluting the mark-to-market rule they are unable to properly value the securities being traded. They argue that by separating the value of a security from its current market price will overstate the value of assets in company that would otherwise require additional capital to remain solvent opening the way for an eventual repeat of the 1980s S&L crisis. 

AviationRegister   E-Xpert Witness Journal

Global developments presenting risks and rewards for the aircraft trading and financing market

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Headline News was last updated: September 17, 2009

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