Putting A Price On Toxic Assets The mark to market accounting rule requires banks to price assets according to how they could be sold on the open market. The obscure rule may be leveraged in order to finally price the toxic assets that banks have on their balance sheets.
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Putting A Price On Toxic Assets

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Putting A Price On Toxic Assets

Putting A Price On Toxic Assets

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JACKI LYDEN, Host:

This past week, the mark-to-market rule was put under congressional scrutiny, not to mention the eagle eye of NPR correspondent David Kestenbaum, and he joins us now. Thanks for loading yet one more opaque financial term on us, David.

DAVID KESTENBAUM: Sure, not my fault, you know.

(SOUNDBITE OF LAUGHTER)

LYDEN: So, let's take a look at this. Why does this accounting rule matter?

KESTENBAUM: This rule, how it's interpreted, that's the difference between whether some of these banks on paper appear to be totally fine or completely insolvent. So, it is just a huge, huge issue.

LYDEN: Wow, it sounds like a little, sleeping, ticking time bomb. Could you please explain it?

KESTENBAUM: Well, the rule says that whenever you can, you have to go out and look around and see what these things are selling for in the marketplace. So, if they're going for 50 cents today, then you've got to write that it's worth 50 cents.

LYDEN: Okay.

KESTENBAUM: You've got to mark it, you know, price it, to the market value, mark to market. The problem today is that there just is not an active market for a lot of these toxic assets. People just aren't buying and selling them. That's one reason why they're toxic assets.

LYDEN: Well, what are the banks lobbying for? You said it could make such a dramatic difference for them.

KESTENBAUM: So, banking lobbyists say - you know, what they say is, we want clarification. And I think what that really means is they want more flexibility to use the prices that they would argue, at least, are more accurate.

LYDEN: Well, who is coming around to the banking industry's position?

KESTENBAUM: So, for instance, here is the second richest man in the world, Warren Buffett, investor, on CNBC.

(SOUNDBITE OF TELEVISION PROGRAM)

KESTENBAUM: I've always been suspicious when you give a CEO a pen and tell him it's the honor system, and anything other than mark to market works in that direction. Now, it's true, I think, that mark to market has had a - it's been some gasoline on the fire in terms of financial institutions.

KESTENBAUM: You know, the good news about that is that it would finally establish a real price for these toxic assets. And that, you know, that is just at the core of this problem. And I think a lot of people feel like it would really help if we just had some agreed-upon sense for what these things are worth.

LYDEN: So at least they could start to get bought and sold.

KESTENBAUM: We could know which banks were good, which banks were in trouble. You know, it would just clarify things.

LYDEN: Well, thanks for yet another piece of financial arcane.

(SOUNDBITE OF LAUGHTER)

KESTENBAUM: You're welcome.

LYDEN: David Kestenbaum is a correspondent for NPR. And you can find him at NPR's Planet Money blog and podcast; that's at npr.org/money. Thank you, David.

KESTENBAUM: You're welcome.

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