Tuesday, March 4, 2008

Moishe: Let's make an offer

From Bloomberg.

March 4 (Bloomberg) -- Nothing has done more to disturb financial markets in recent months than the huge writedowns in the value of bank assets related to subprime mortgages. Some of them may have gone too far.

Federal Reserve Chairman Ben S. Bernanke said in congressional testimony on Feb. 28 that accounting rules may be forcing banks to put artificially low values on little-traded assets when they mark them to market.

The inability to value such assets on the basis of actual trades, Bernanke said, is ``one of the major problems that we have in the current environment. I don't know how to fix it. I don't know what to do about it.''

Writedowns in the tens of billions of dollars have forced some large institutions, including Citigroup Inc., to raise new capital to offset losses and perhaps made them less willing to extend credit, hurting economic activity.

Some analysts, such as Richard Bove of Punk Ziegel & Co., say the tools banks are using to value their assets ``don't reflect the real world.''

``This mark-to-market accounting forces banks to mark their portfolios against indexes that aren't representative of what's going on in the markets at all,'' Bove said in a Feb. 28 interview.

One index banks use ``shows something like an 8 percent potential loss in commercial real estate in the United States,'' he said. ``Do you know what the actual loss is right now? One quarter of 1 percent.''

`Fallacious Indexes'

In other words, banks are marking their securities against an index that suggests the losses will be 32 times worse than the actual loss experience, Bove said.

``We're marking against fallacious indexes,'' he said, ``and that's creating more problems than necessary.''

A key issue is that with many investors shunning risk, an asset that in the future might have substantial value may have few if any buyers now.

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