From CNBC's
Fast Money today. The segment was titled "Death to Mark-to-Market?"
Brad Hintz
Brokerage Analyst
Sanford Bernstein
#1 financial analyst on the street
Melissa: "Let's go through some of the estimates floating around out there. If you overhaul mark-to-market, it could boost Citigroup's profits by 20 percent. ... (Is) this right on?"
Hintz: "Well, what happens is all the major capital market firms, this is good for. JP Morgan, Citi, Goldman, Bank of America, Wells, Jeffries even. So, this is one where you're taking rules that were well designed. I don't want to say mark-to-market accounting was flawed. It's just that it was designed with the idea that markets don't stay illiquid for long periods of time, so it's really caused some major problems for the firms this time, right, because they've had to mark their balance sheet to distress trades, chaotic trades in the market place which has caused them to sell. I had a trader tell me, 'I know the assets that I've got are good. I know they're going to be worth more than what I marked. I can't hang on to them because they're Level 3. Headquarters won't let me.' "
Melissa: "In terms of a boost to the profits, Brad, are they baked into the stocks already because we've certainly seen a big rise in the stocks for the past month or so, or is it yet another catalyst to stocks soon?"
Hintz: "It's another catalyst. We've seen the credit markets modestly improve, right? We've got liquidity now in the investment-grade industrials. That's, you know, it's a small part, but it's a step in the right direction. This also reduces the risk that you're going to have, the surprise losses. That means you're going to hang on to losses, you're not being forced to sell. All of these are improving credit."
Guy Adami: "I'm sort of with you on the mark-to-market thing, Brad. We go mark-to-model. Is there going to be a mark-to-model czar? Who at a firm in their right mind would like to take a job of overseeing the mark-to-models at a Citi or at a JP Morgan or at a Wells Fargo, for that matter?"
Hintz: "In the end, actually, that's the external auditor. You know, the external auditor doesn't have a lot of courage at this point, right? And we've seen the SEC come out, what was it, in March, in September of 2008 with letters to CFOs saying, 'You really don't have to mark to market quite as aggressively as you have.' They didn't give them a bright line saying here's a safe harbor. If the markets are totally disrupted, you can go to mark-to-model. Mark-to-model is actually the old way the street modeled their portfolios during illiquid periods. As long as you were using the model that you traded with every day. Not some other type model, but a model that you used for your trading decisions, and if the auditors were comfortable with that, that's what you would use. It was a reasonable way to do it. Now, the 157, the new approach, came in and was much, much more conservative. It said, if there are any trades, we have to look at the trades."
Karen Finerman: "Very quickly, Brad, do you think any chance that we see no change at all since there's so much pressure to change?"
Hintz: "There's pressure for change. Just as there are going to be regulatory changes, you're going to see some sort of a safer harbor coming out on this one. If they don't fix it this time, they'll fix it next time. Because they know that what they're doing is causing pro-cyclicality. They're causing companies to take losses and have to raise capital in difficult environments."
Melissa: "OK, thank you, Brad, thank you for you time. Appreciate it. OK guys on the desk, what names do you buy ahead of that April 2nd meeting. He says it's going to happen. It's going to happen."
Pete Najarian: "I think it's the same old names. Go ahead."
Karen: "You know, Bank of America, I like the preferreds, but I think the XLF if you don't want to make a specific, you know, if you just want to broaden your exposure."
Pete: "If you're looking for a little more bang for your buck out of that XLF because of its beaten-down area, even though it's had its run recently the FAS is another way to get involved in the financials without picking out an individual name."
Guy: "It could line up just as we trade down to that 741 line. The stars could line up and you get some positive news on April 1st, April 2nd and then that may be a chance to really look to that move on 900, so the stars might align on this one."
Pete: "Melissa, to Brad's point, they HAVE to do it this time. They can't say, well, we'll keep talking about it and we'll look for the next meeting. They have to do it this time or we have more issues in front of us and forget 740."
Melissa: "A lot of lobbying pressure in DC, that's for sure."
