The problem, IMO, with FASB 157 is that it attempts to hold debt valuations (presumably in good standing) to the same standards as equities/commodities. And this is primarily due to the craziness of mortgage and debt securitizations.
For example, our family has loaned $50K to my cousin, in order to get him out from under a 10% ARM. So what's the value of that loan so long as payments are made on a regular basis?
Is that note worth $50K, or is it worth what I can re-sell if for to another party?
Well, we value it as $50K and we believe the collateral value of the home is sufficient to protect that note in the event of a default.
But if that loan was securitized, it would be valued as an equity (ie: Mark to Market).
But since it's not, and we're confident it will be repaid, we can value it at $50K.
So the REAL problem is securitization of debt. If a bank holds that debt on its books, as many regional banks have elected to do, they should have flexibility in assessing the value of their debt portfolio since they ARE the market.. They extended the loan, and until they sell it off to someone else, they should have the ability to determine the ability of the borrower to pay it off, and therefore, it's ultimate value.
Now.. for loans outstanding where the collateral is impaired below the value of the debt, then the loan value should be marked down to the best assessed value of the collateral.
Hawk |
