It's Not Mark-to-Market, but it's a start!

The Financial Accounting Standards Board (FASB) has just announced a new rule that will make it tougher for the likes of MBIA, and other bond insurers, to hide losses  until it's too late. Many have criticized the insurers following dramatic declines that saw MBIA, as an example, fall by more than half in less than one-quarter; the new rule will force such insurers to recognize faltering claim liabilities as soon as there is evidence of credit deterioration - not just waiting for a default.

As someone sitting on the side lines, I immediately thought that FASB issued the rule in response to the recent fallout from the CDOs and mortgage-backed securities, but ...apparently... FASB has been working on this for the past 3-years. This is particularly good news because it implies that the system works; everything takes time and the design of such rules is no different, but it's good to see the regualtory agencies adapting to the changing financial landscape.

I had mentioned before the simple power of marking-to-market and how this little task ensures that financial securities are recorded at their fair value. While the new rule doesn't go so far as requiring the bond insurers to mark their liabilities to market on an on-going basis, this is certainly a step in the right direction and will shed more light on what is actually taking place with these complex securities.