The Banks - The “Stress Tests” and Re-Paying TARP

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Considerable e-mail correspondence has been received from our members on the subjects of “toxic assets,” the “mark-to-market” rules, the bank “stress tests” and now this week’s announcement that virtually all of the large banks (except Citibank, Wells Fargo and Bank of America) will be permitted to repay the U.S. government for loans made to them under TARP.

These materials have been posted for everyone to read because “Come Home America” (as well as William Greider’s previous best-selling books) have focused to a considerable extent on economic problems. And because posting them for everyone to see should facilitate our discussion this evening.

Apparently, the reason why so much e-mail has been directed toward me is that I majored in economics in college before attending Harvard Law School and, I am guessing, the authors of the e-mails thought I had sounded knowledgeable in past postings on our bulletin board when we had discussed economic issues. In addition, much of this issue deals with the “mark-to-market” accounting rule and I did receive the Sells Silver Medal for ranking 2d out of 28,788 candidates nationally on the Fall 1971 Uniform CPA Exam.

(I hope readers will NOT assume that this is an attempt to brag, but merely an attempt to re-assure them that my comments can be accepted with some degree of accuracy.)
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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

The Banks - The “Stress Tests” and Re-Paying TARP

Post by johnkarls »

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The first posting in this section of the bulletin board (“Basic Info - ‘Toxic Assets’”) explains the “mark-to-market” rule and why it should not apply when the value of an asset has NOT been impaired but cannot be sold.

The second posting is a Wall Street Journal article reporting that on April 1st, the Financial Accounting Standards Board effectively eliminated the “mark-to-market” rule for the so-called “toxic assets” of banks.

On May 8th, the results of the Federal Reserve’s bank “stress tests” were announced to nearly-universal surprise that most of the nation’s banks are fundamentally sound, though a few of them will be required to raise more capital.

There should have been no mystery!!! The so-called “toxic asset” problem had already been made to disappear a month earlier by the elimination of the “mark-to-market” rule for accounting for investments in portfolios of sub-prime mortgages.

At the same time, the accounting-rule change made unnecessary the Administration’s plan to force the banks to sell their “toxic assets” at distress prices to investor groups.

This week’s announcement that all of the large banks (except Citibank, Wells Fargo and Bank of America) are fundamentally sound and will be repaying their loans from the Federal Government under TARP should be the “final chapter” in the “toxic asset” myth that was created by an accounting rule predicated on markets for assets being functional.

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FULL DISCLOSURE

Readers will see in this first posting in this section (“Basic Info - ‘Toxic Assets’”) and elsewhere on this bulletin board, that “yours truly” has advocated an elmination of the “mark-to-market” rule as the solution to the “toxic asset” myth.

Indeed, in terms of accouting theory, the “mark-to-market” rule was a radical departure from the normal accounting rule of carrying assets on a balance sheet at historical cost less AD&D (amortization, depreciation & depletion) – UNLESS THERE IS A “GOING CONCERN” QUESTION ABOUT WHETHER THE CONTINUED EXISTENCE OF THE ENTERPRISE IS ASSURED. FOR AN ENTERPRISE WHOSE CONTINUED EXISTENCE IS NOT ASSURED, THE AUDITOR’S OPINION WILL CONTAIN A “GOING CONCERN” QUALIFICATION THAT THE HISTORICAL COST (LESS AD&D) IS NO LONGER APPROPRIATE BECAUSE THE ASSETS WILL PROBABLY HAVE TO BE LIQUIDATED IN A “FIRE SALE”!!!

However, since its adoption, the mark-to-market rule for financial assets has been universally applied regardless of whether there is a “going concern” issue whether the owner of the assets will be forced to liquidate them in a “fire sale”!!!

Accordingly, the mark-to-market rule for financial assets created a myth that there is a problem with the nation’s banks – which, except for a handful of banks for which the “going concern” issue is actually applicable, is nothing more than a myth!!!

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