FMV and M-T-M with Negative Interest Rates (for Wonks Only): More Confusion for the Already Confused

Einstein said,  “Only two things are unlimited:  the universe and human stupidity. And I am not too sure about the first.”   What could be scarier than adding more confusion to already confused thinking?  Let’s face it: revaluing already illiquid securities in the midst fo a financial crisis when all willing buyers and sellers have gone shopping for new underwear confirms Einstein’s instincts about unlimited human stupidity.

screen-shot-2016-10-07-at-12-34-28-am

 

Even a three-year old can see the problem with the following scenario.     Imagine a moment of market contagion.  Based on seasoning and performance, holding onto illiquid securities would generate an expected  loss of $100 million.  But when the accounting and the regs require using  “exit values”  rather than the price set by “willing buyers and willing sellers”  the result is a mandated mark-to-market loss resulting in an immediate impairment of $900 million. OTTI (other than temporary impairment ) .

Read more of the ABA’s thinking on FMV and MTM…

Leave a Comment

Your email address will not be published. Required fields are marked *