Wilbur Ross: Mark-to-market was a mistake
By Emily Chasan
NEW YORK (Reuters) – Rules requiring financial companies to value assets at current market prices were a mistake and their implementation was botched, billionaire investor Wilbur Ross said on Monday.
“I think it was a huge mistake — both the general concept of it and more specifically the way that it was implemented,” Ross said at the Reuters Restructuring Summit in New York on Monday.
He said the main problems with the rules, were that accounting treatments for the exact same security can be different for different companies, based on whether they decide to hold them to maturity, or mark-them-to market as part of a trading portfolio.
Similar inconsistencies also affect mark-to-market rules about the valuation of complex securities, like credit default swaps, Ross said.
“If I write credit protection as a credit default swap I have to mark it to market,” Ross said. “But if I write it as a monoline insurer there is no mark-to-market, even though I’m taking precisely the same risk.”
Ross is one of the world’s best-known turnaround specialists, having helped restructure more than $200 billion of defaulted companies’ assets globally.
While Ross said the market does need more transparency about hard-to-value assets that have triggered billions in write downs at financial institutions over the last year, he felt that the mark-to-market, or “fair value” accounting rules, did not always reflect the substance of transactions.
“I think it was well intentioned and horribly botched,” Ross said of the mark-to-market rules.
For example, for credit default swaps, Ross suggested more transparency could come from a clearing mechanism that would improve the ability of various parties to trade them.
Mark-to-market rules, which force banks to figure out the market values of their assets each quarter, took effect last November, though some banks adopted them earlier.
Prior to the adoption of the rules, banks were allowed to account for those assets at historical values.
As credit markets seized last year, the mark-to-market rules forced Wall Street banks to become increasingly dependent on their valuation models to come up with figures for their hardest-to-value assets.
Under new mark-to-market rules, a “Level 1” asset can be marked-to-market based on a simple price quote in an active market. However, the price of a “Level 2” asset is “mark-to-model” and is estimated based on observable market prices and inputs.
A “Level 3” asset is so illiquid that its value is based entirely on management’s best estimate derived from complex mathematical models.
Level 3 assets have been written down by banks over and over again this year.