Can You Profit from the Changes in Mark to Market?

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The FASB, or Financial Accounting Standards Board, has decided that banks will no longer have to mark the value of their assets to the market, pending that there is no liquid or actual market for the assets themselves. Under the old system, assets that weren’t regularly traded or did not have a market were generally undervalued. Banks were required to price these assets at a market price that simply didn’t exist, undermining the value of the security.

New FASB Changes

With the new changes to accounting rules, banks will be able to mark assets at a value that is deemed appropriate by the institution and financial auditors; however, the institutions won’t be able to do so for all assets. Most assets like stocks and bonds and mutual funds have a solid market where investors buy and sell at a market price, thus these instruments have little to gain when the mark to market rule change happens. However, assets like mortgage-backed securities and credit-default swaps have no regular market and very little volume. Thus, alternative assets that the average investor does not own, as well as assets that are without any real market, are the only investments to be affected.

Putting a Price on an Asset

The banking industry, as a whole, is absorbing criticism regarding the mark-to-market rule and the potential that the rule may be abused. Banks certainly get the better end of the stick in the ability to value assets how they please, but the FASB had to act to help the fledgling industry. For the FASB, the better solution is to allow banks to value assets as they would be on the market, except when there is no market. In such case, the banks would value assets at an appropriate level. Though there is some chance of balance sheet manipulation and banks showing huge unrealized paper profits, the mark to market changes just might be what the financial industry needed all along.

Huge Change with Little Effect

From here, banking stocks have very little to gain from the change in mark to market. The new change affects the amount of money that banks will have to write down on future loan losses; chances are they won’t be writing down an additional dime ever again. With the flexibility to revalue their own unsold assets, banks will be able to potentially post a quick profit as values, change but fall back into losses as expectations don’t work out as planned.

Buy Banking Stocks, if Only Short Term

In the first few months of the accounting rule change, the financial industry is sure to show huge profits after quick revisions of their previous mark to market losses. Write downs will be removed, and bank stocks might show profits after they can put their write down reserves into the general account and start lending further. Mark to market changes are also sure to bring about higher prices for mortgage-backed securities as a whole because banks will demand mostly higher prices for the securities.

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