ETF Expert

Has mark-to-market accounting been replaced or overhauled? We all remember the cry for suspension in 2008 and 2009, but if it received an official “fare-thee-well,” I certainly missed it.

In a mark-to-market accounting world, the 4 bank beasts (i.e., Wells, Citi, JP Morgan and B of A) are collectively insolvent. Those are the findings of Garrett Jones at George Mason University. And yet, the SPDR KBW Bank Index Fund (KBE) has vaulted 21% in just 6 weeks!

Hedge funds, speculators and sure… some investors… are betting that the biggest loan losses are a thing of “yesteryear.” After all, how else could the banks pay back TARP, let alone hint at restoring dividends.

There’s just a few irksome concerns that Mr. Market appears to be neglecting. (Yeah, I know… don’t fight the “tape” or the Fed!)

If the big banks still hold trillions in loans — ARMs, commercial real estate, credit card, home equity, construction, miscellaneous –  how are the losses/writedowns being “accounted for?” If it’s still “mark-to-market,” and if those losses are greater than the tangible equity plus reserves of the banks, why isn’t Wall Street shorting financial stocks all over again?

Granted, banks argue that accounting rules should be changed. Yet, if they haven’t actually changed, how do investors value the “books” of the banks?

Perhaps the investing public simply gets the sense that “too big to fail” will indeed continue; perhaps the government will always be there to protect your investment in Citigroup or Wells Fargo or B of A.

Nevertheless, I guess I’m rather hesitant to ride the SPDR KBW Bank Index Fund (KBE) wave. The escalating number of foreclosures is a sign that bank losses are not going to be off the books, regardless of the accounting method employed. 

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