From FT’s Alphaville…
~~~~ “Analysts at Dresdner, meanwhile, are rather less sanguine.
“On the positive side, the new accounting methodology could mean higher asset valuations and short term relief of capital pressures, and could subsequently have a positive effect on 2Q 2009 earnings.
However, we think a number of negatives outweigh the positives! First of all, giving banks’ greater flexibility to use their own valuation methodologies likely implies a mark-up of prices and could in our view endanger the effectiveness of the Geithner plan. So far, investors have been unwilling to buy these toxic assets at market prices, and at likely higher prices under internal model valuations, there is even less incentive for investors to buy these assets. Also, the incentive for banks to participate in the plan and to shed their toxic asset exposures could be reduced.
We have repeatedly argued that an important prerequisite for ending a banking crisis is that banks have to come clean and start recognising their losses. We don’t think this plan contributes to that. A reduced incentive for banks to sell toxic assets, and lower visibility in the quality of the balance sheet, if internal valuation models are allowed to be used, could distract much needed outside investors, and could also make 2Q 2009 earnings harder to read.
Although the markets may react positively on the short term benefits of the change in accounting methodology, we think the negatives of a possibly less effective Geithner plan and reduced incentive for banks to crystallise their losses outweigh these positives and could drag out the length of the banking crisis.” ~~~~
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