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Mark-To-Market Makes Its Mark

Optimism prevailed in the stock market on Thursday with many investors more hopeful than they’ve been in a long time that the financial system may soon stabilize.

The positive tone stemmed from a decision to relax rules on how banks price assets, know as mark-to-market rules. As you well know, mark-to-market has been widely criticized a key factor that forced institutions to take hefty write-downs.

"Psychologically it's a big boost," says Bucky Hellwig, senior vice president at Morgan Asset Management "What it does is probably takes away the fear of imminent bank collapse."

Mark-to-market accounting requires assets to be valued at current market prices. Banks had complained that it forced them to mark down assets to artificially low prices in the current financial crisis, even if they intended to hold the assets past the current reporting period.

The five-member Financial Accounting Standards Board voted unanimously for the new guidance on valuing assets, but split 3-2 in backing new guidance on how to write-down impaired assets.

The changes to mark-to-market accounting will take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results.

Advocates of the changes argue that pricing assets to firesale prices during a time of inactive markets has exacerbated the financial crisis through writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend.

However, opponents counter that more flexibility with the rules will just create more opaque assets and allow banks to hide the real value of their toxic assets.

Joe LaVorgna, Deutsche Bank Chief U.S. Economist is among the opponents. He tells Fast Money, “the irony is that this shelves the Geithner plan because banks can now hold these assets if they’re able to mark to model (in stead of mark to market).

In other words, private investors will be less likely to get involved with the toxic assets, as the Geithner plan intends, because they’re more likely to question how the assets are being valued.

What’s the trade?

I think the trade is longWell Fargo, says Jeff Macke. They should benefit greatly by not having to mark down assets. (They're widely believed to hold a large number of real estate assets in California which has been hard hit by foreclosures.)

It seems to me the landscape has changed, adds Guy Adami. Now I’d look for long opportunities and buy banks on the dip.

I’m long preferred bank shares and short bank common stock against it, reminds Karen Finerman.

I’d get long Wells Fargo and JP Morgan, adds JJ Kinahan. They seem to understand their businesses quite well.

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Trader disclosure: On Apr 2nd, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (WFC), (AAPL), (GE), (GS), (MOS), (WMT); Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Kinahan Owns (AA), (BAC), (C), (MSFT), (YHOO); Finerman's Firm Is Short (IJR), (MDY), (SPY), (USO), (IWM), (BAC), (BBT), (WFC); Finerman's Firm Owns (MSFT), (PBR), (RIG), (AXYS), (SRS); Finerman's Firm Owns (WFC) Preferred, (BAC) Preferred, (BAC) Preferred

Terranova Owns (JOYG), (X), (IBM), (XOM), (COP), (HES), (POT)