Interest Rate Roundup

Tuesday, September 30, 2008

Will FDIC deposit insurance limits rise? And will mark to market accounting be suspended?

These seem to be the latest angles of attack for the government, which is wrestling with how to amend or replace the bailout bill. From a New York Times item:

"As they worked to make the government bailout plan more palatable, Senators John McCain and Barack Obama on Tuesday both proposed raising the federal insurance limit to $250,000 in an effort to help small businesses and restore public confidence in the American financial system.

"The presidential candidates discussed the idea in separate telephone calls with President Bush on Tuesday, aides said, as they began working to build support for the $700 billion economic package that failed on Monday in the House. Their tones – so far, at least, more measured from one day earlier – underscored the complicated politics at work for both men.

“Given the progress we have made, I believe we are unlikely to succeed if we start from scratch or reopen negotiations about the core elements of the agreement,” Mr. Obama said in a statement. “But in order to pass this plan, we must do more.”

Reuters is also reporting that the FDIC will soon formally request authority to insure deposits above the current $100,000 threshold.

As for mark to market accounting, here is an argument for suspending it. Here is an argument against doing so. Meanwhile, a recent survey from the CFA Institute shows that its members largely oppose (73% against) eliminating the accounting standard.

The thing that I have a hard time with: Those in favor of suspending the standard say that today's prices are "fire sale" prices. They say it's forced selling that is driving the value of these assets down, and that they are really worth a lot more.

I say: Says who? How do we KNOW the intrinsic value is higher -- or that prices will be higher, later if banks are just allowed to hold to maturity? If home prices keep falling, the economy deteriorates, and so on, the value of these assets could just keep slumping.

Even if prices eventually recover, my other point would be "So what!" The price of something -- any good, asset, service, or what have you -- is what you can sell it for at any given time. Period. I bet GM would love to sell its Hummers for $200,000 each today based on the idea that gas prices will be lower down the road, and therefore the "real, intrinsic value" of its gas guzzlers is higher than what people are paying today. But it can't. The price is what it is.

Or here's another example: For the first year/year and a half of the housing market downturn, sales volume started dropping sharply and for-sale inventories started surging, but home prices really didn't decline. Ignorant observers said: "Look, there's no downturn. Prices are still up!"

But what was really happening? Sellers were clinging to unrealistic views of the long-term, intrinsic value of their homes. They were saying: "I'm right. The market is wrong. I'm not going to GIVE my house away." They refused to mark their homes to market. Result: The housing downturn was prolonged.

Now, thankfully, that attitude has been tossed out the window. Sellers ARE coming to grips with reality. They are marking their homes to market. And you know what? It's helping to clear the backlog of inventory in certain hard-hit markets. I think what we have here isn't a case of they're being NO market for this paper, and therefore artificially low "marks." It's that sellers and policymakers don't want to acknowledge just how far the market value of these assets has fallen.

UPDATE: SEC guidance on MTM accounting is now online. MTM accounting is not being suspended. Instead, the SEC is giving companies more latitude when it comes to determining fair value of certain assets.


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