Monday, March 30, 2009

Mark to Market, Boston Real Estate.

Look for the mark to market debate to re-enter the conversation later this week as FASB (the financial accounting standards board) reluctantly caves to congressional pressure and allows banks to make a judgement call as to the value of their assets.

This could provide a sharp artificial boost for banking stocks because they may not have to realize substantial Q1 losses. However, the long-term ramifications of this move are very negative. I don't know how anyone could invest in stock where the asset values are subject to the company's interpretation. The CFA Institute (I'm a card carrying member since 2001!) and a number of the smartest analysts on the street think this is a terrible idea. However, the lobbyists have steamrolled FASB and Congress so reason has left the building.

This article probably provides a great overview of the situation and more accounting talk than any one human should ever be exposed to - sorry.

The strangest twist in the story though is that while it may change the real losses into artificial gains for a short time, the more lasting impact may be on the financial system as a whole. Remember way back when Sec Geithner announced the PPIP (7 days ago) and the markets soared because the banks might be able to unload some of their bad loans? Well, that plan is premised on private investors getting a fair price for the bad loans. If the banks are able to show the bad loans as not quite so bad on their books, this means the banks aren't going to sell the loans and there will be no change in lending. When Sec. Geithner said there is no other plan and the PPIP is the last plan to stimulate lending I'm not sure he realized that this plan might be DOA if FASB changes it's rules. Ooops.

"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.

“It’s one of the unintended consequences of having the FASB bow to political pressure,” Dietrich said."

The Hancock building in Boston is about to go up for auction and might sell for HALF of it's selling price in 2006. This is clearly a distressed sale by a bankrupt firm, but selling the premier commercial property in Boston for half it's price just 3 years ago seems a bit extreme.

This fits with my thinking that commercial real estate values are going to continue their steep decline in 2009-10 and this will ultimately lead to another wave of credit defaults and banking woes.


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