“The reason banks are unable to sell equity now is that investors do not trust their financial statements.”

Investors don’t trust the GOVERNMENT and what it will do to the banking sector. Where investors distrust the financial statements of banks, it is because banks have been forced to mark their assets to market, even though the vast majority of them have cash flow. Would YOU buy into assets that were being force-devalued by the government, even though they were making money?

Who died and made mark-to-market God?

It isn’t. It is sufficient, but not necessary.

The necessary condition for transparency is MTM disclosure.

The necessary and sufficient condition for transparency is MTM disclosure without MTM accounting.

Disclosure is different than accounting. Accounting affects capital. Disclosure doesn’t necessarily affect capital. Disclosure without MTM allows the matching of time horizons between the life of assets and their effect on capital. And it allows shareholders to make an independent judgement on the effect of MTM disclosure on the market value of equity. In this sense, MTM accounting forces a double-up valuation of MTM in both the book value and market value of equity. This redundancy is absolutely dysfunctional.

As to exactly what the best complementary accounting to MTM disclosure might be, I don’t know precisely.

But the more critical point is to understand at the outset that MTM accounting is not necessary for transparency, and that it is accordingly suboptimal for accounting and capital measurement.

I think this logical imbroglio may be why there is such a division of opinion between two groups of thinking on the issue, both of which include reasonably intelligent and experienced people.

There has always been, and always will be, an “inability to calculate the true worth” of an asset. This is why we have markets in the first place. The expression “true worth” has no meaning – as if there’s some magic number that you only have to find that truly reflects the asset’s value.

Goldman wants to mark down their liabilities.

The balance sheet change wouldn’t equal the income statement net income (forget dividends for now). The “answer” is another item called other comprehensive income(loss).

Sometimes this is very useful and totally appropriate.

For everyone that is totally enamored with m2m, C and BAC’s preferred stock’s MARKET VALUE is now about 50% of par. This the the NYSE listed stuff — not some Markit estimate/index/matrix. Should they write it down and book the profit? After all — markets are markets, no?

This is a very complicated, but most of what Tyler was discussing amounts to very little. That is, GAAP capital is identical whether fair value losses are run through net income or AOCI. It’s disclosed, and the only impact is on regulatory capital.

The impact of this is to reduce regulatory capital requirements without stating that you are doing it.

This is no different then C’s loan loss provisions for 3rd world losses in the 80’s, that still counted (due to a waiver from the Fed/Volker) as regulatory capital.

The entire rationale of spitting earnings into “normal” or net earnings and other comprehensive income is to segregate the “noise” from unrealized capital gains/losses. The numbers are still there, staring anyone in the face that cares to look.

Mark to market is required for all derivative books and is totally appropriate for investment banks. Traditional banks should stick to whole loans. There is a mechanism for the inherent mismatch in assets and liabilities — regulation and deposit insurance.

Stall tactics to delay filing insolvency papers. If banks can stretch this out to…say….the year 2020, they might stand a chance of recovery as long as they start bulldozing all the excess housing tomorrow.