This is the sixth installment of “Providing Relief
from the Crisis.” Read editor-in-chief R. Emmett Tyrrell, Jr.’s
introduction
here.
The last time I looked I couldn’t find mark-to-market accounting
in the Constitution of the United States. It must be the eleventh
commandment because it’s obviously sacred. I understand the
President has the authority under the Emergency Powers Act, or
some such legislation, to suspend the Bill of Rights in case of a
national emergency. Well, we have a national emergency, so mark
to market must be more important than the Bill of Rights.
If a foreign power destroyed a fraction of the wealth that
mark-to-market accounting has in the past year, we’d go to war.
I’m no accountant, but, as I understand it, mark to market is
part of what they call “fair-value” accounting; so it must be
fair.
If so, I have a couple of questions. What’s fair about a
financial institution being put out of business because a small
portion of its bundled assets become impaired and the whole
bundle must be treated as a loss? How is it fair that an expected
loss of a few thousand dollars a few years from now, in some
cases, must be treated as a loss of millions in the here and now?
If a small number of mortgages behind a mortgage-backed security
become impaired, or potentially impaired, why must the whole
bundle be written off? If I have a sack of apples with a couple
of bad ones, I throw the bad ones away — not the whole sack.
More questions: If the “impairment” results from lack of
liquidity because markets aren’t working, why can’t banks simply
hold on to their securities — until maturity if necessary? Why
must they assume a fire sale at fire-sale prices for something
they don’t have to sell? If some of the impairment results from
actual losses on the underlying mortgages, why can’t they write
off only that portion of the impairment? Does it really make
sense to force write-offs of the whole bundle of mortgages when
only a few would have to be written off if the mortgages were
held individually?
What makes the answers so crucial is that these write-offs we’re
talking about reduce the banks’ regulatory capital dollar for
dollar. That used to mean failure or a forced marriage when
capital reaches zero. These days it only has to approach zero, to
preserve insurance funds and stretch bail-out money.
The answers to my questions apparently have to do with
transparency — investors and creditors need to see exactly what
you’ve got in your portfolio. Well, show them. Surely, you can
show them what’s in the sack without having to throw the sack
away. Surely, transparency can be achieved without throwing
common sense out the door.
In a recent blog
posting, I described a variant, the PWC
proposal, which would count only the markdowns attributable to
credit impairment against regulatory capital and would treat
those attributable to illiquidity in another manner. Show it all;
let it all hang out; just don’t crucify our financial system and
economy on the cross of mark-to-market accounting.
Now is the time for all good accountants to come to the aid of
their country, and put some fairness in fair value.
