Chillin' out till it needs to be funded
How MTM can be overdone!
Marking to Market is a highly cveted practice, conventional bankers love to hate. Goldman Sachs itself made quite a reputation
for itself as their Financial statements marked all items to market and thence investors were always sure to what they saw in figures and could depend on exposures being known (unlike at others that fell thru int he 2008 crisis at AIG who had no idea how much of their portfolio was held where and at which rating grade/basket etc.
In the case of asset classes virtually untradeable, thence conventional bankers stay with face value or historical cost , predominantly with insurers balance sheets. However tradeing dominated Goldman Sachs and most of the Accounting regulator folks have been tweaking all Accounting standards to Mark to market in the recent years esp till 2005. Since that period however in the home stretch to the crisis, like any good thing we have seen accounting standards topple over each other in trying to find the fine line between having done right and having asked for too much assumption, for one. Many revenue recognition standards, and similar valuation and haircut standards for untraded investments fall through without a standard and use prorietary math and modelling for risk management and thence financial reporting
Liabilities on Loan commitments to rated borrowers
Goldman Sachs has $55 bln and Morgan Stanley an equally small amount of unfunded /funded commitments for their investment grade Borrowers. e.g. (Reuters Insider) GS counts AT&T as customer and gives credit line to AT&T – as loan commitment to $5 bln. This loan commitment will never be traded away by the bank and when the valuation for MTM terms is made, an automatic assumption of a not worthwhile risk situation is made as AT&T must have suddenly used it etc. The debilitation of value of the debt as MT is thus unjustified and even unreasonable but for some reasons of Fair Value accounting beyond its first principles of accuracy, it stayed on as a practice at the banks ( also what the banks state as their stand)
Such liabilities can easily be carried at Face value with any funding provisions made and thence Capital also set aside on them for the same. to that motive, the two GS and MS have changed their accounting for Investment Grade Loan commitments as per todays reports. Please also refer to Reuters Breaking views (Breakingviews: Goldman, Morgan Stanley’s accounting change, Thomson Reuters: Reuters Insider)