Word: bankses
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One reason is an obscure accounting rule that is the subject of intense lobbying by representatives of the banking industry ahead of congressional hearings on Thursday on the matter. A change to that rule could drain some of the banks' red ink and possibly make it easier for them to...
Fair-value accounting, also known as mark-to-market accounting, requires banks to price assets on their balance sheets according to what you can sell them for on the open market. Seems logical enough. But how do you mark to market when the market is effectively shut down?
At the moment, there are few buyers for the toxic assets that are poisoning Citigroup, Bank of America and other major financial players. The unsellable loans sit on the banks' balance sheets at a huge loss, priced from zero to an optimistic 60% of what they might have sold for...
It's not clear where the banks are getting their prices. Some of the firms derive the asset values from financial models. Others try to gauge how much a group of subprime mortgage loans might be worth by looking at a price index, called the ABX, of related credit-default...
That's why the banking industry has been lobbying furiously to alter the accounting requirement that forces it to continue to lower the value of those assets, even though many of the loans that back those bonds have yet to default and perhaps never will. Those losses are amplifying the...