Changes in the FASB mark-to-market accounting rules will be beneficial for the plethora of financial institutions whose solvency problems were exacerbated by the write-downs they were required to take. If the mark-to-market provision is changed by the FASB, banks and other financial institutions will finally be able to limit write downs resulting from the current financial malaise.
The largest banks/financial institutions standing to benefit from the reversal of mark-to-market are Citigroup (NYSE ticker symbol C) , Bank of America (NYSE ticker symbol BAC) and American International Group (NYSE ticker symbol AIG). Nearly nationalized (except in the case of AIG) following solvency concerns (solvency concerns exacerbated by forced write-downs), these firms were nearly destroyed by mark-to-market accounting, which reduced the value of their assets on the balance to the point of violating reserve requirements. Violating these reserve requirement caused them to need billions in new capital to prop up the balance sheet. This capital ending up coming from the taxpayer, in the form of government bailouts. These bailouts, ironically, were government responses to problems caused by the government.
Citigroup (NYSE ticker C), now 40 percent owned by the US government, will be able to clean up house, de-leveraging the balance sheet, allowing it to put the whole credit crisis/great recession of 2008 in the past. Limiting further losses on its mortgage assets, coupled with capital infusion and divestitures, should enable the company to rebound and therefore appreciate in share price. Trading in the single digits, Citigroup shares could appreciate exponentially thanks to the rescinding of mark-to-market.
Bank of America (NYSE ticker BAC), another big money center bank bailed out by the taxpayers, is bound to benefit from the end of mark-to-market. Ending mark to market should allow Bank of America to stabilize its capital levels, clean up its balance sheet, and return to profitability. Still restructuring following the takeover of Merill Lynch & Co. in late 2008, Bank of America should be able in the next few years to consolidate Merill Lynch into its network of companies to create a streamlined global financial supermarket that can survive and thrive in the more global financial market.
American International Group (NYSE ticker AIG), now basically a subsidiary of the United States Government, is now free from continued write-downs related to mark-to-market. Stabilizing the company’s balance sheet, the moribund company is set to sell off its disparate but profitable “good” assets (Asian life insurance unit, aircraft lessor International Lease Finance) and pay off both the government and its creditors. AIG’s financial products unit, the infamous unit at the root of the destruction, will be able to fully liquidate, allowing the whole credit default swap/financial derivatives debacle to recede into the past.
Mark to market was more or less a big mistake that exacerbated the financial malaise and nearly bankrupted financial powerhouses. Recinding this draconian provision should be beneficial not just for the three financial firms listed above, but also for the hundreds of other firms decimated by mark to market.