Will Mark-To-Market Changes Torpedo PPIP?

Bloomberg has a longish article on the coming revisions to mark-to-market accounting rules. It’s worth a read if you have an interest in the subject.

One particular piece of the article caught my attention. It points out one of the unintended consequences of the changes.

While helping lenders report higher earnings, FASB’s changes may hurt Treasury Secretary Timothy Geithner’s plan to remove distressed assets from bank balance sheets, Dietrich said. Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasury’s objective to resuscitate markets, he said.

I personally can’t imagine that these changes are truly going to fool many investors into believing that the banks have suddenly regained profitability. But maybe I’m naive and after a few months all this fades into the background, investors begin taking bank earning reports at face value and we all live happily ever after.

But what if indeed the banks say no way to the offers that come forth for their assets simply because we’ve redefined accounting. Would we be any worse off? I’m not sure about that one.

At heart, Geithner’s plan seeks to transfer bad assets from banks to newly created investment vehicles. The banks are relieved of the threat posed by the assets presumably at a price they can live with and the taxpayer directly assumes the risk that these assets are not worth the money paid for them. The cushion represented by the banks capital and debt holders — those who would absorb some of the loss in the event of failure — is lost. 

If the banks decide not to sell, perhaps motivated by the accounting changes, then it could be argued that the taxpayer has seen its position improved. It doesn’t mean the potential for failure has disappeared but it does mean that in the event of failure the taxpayer might not be the first called upon to make up the losses. There is no certainty that the government would force the creditors to assume their share of the loss — so far they have seemed to be very reluctant to do that — but it at least leaves the option open. At that point any attempt to make the taxpayer shoulder the entire loss would be much more transparent and require a public defense of that position.

Maybe this is a good unintended consequence.

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