How to spare the economy further crippling government intervention by suspending mark-to-market accounting
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Forcing firms to mark assets in the midst of a fire-storm needlessly destroys capital. Everyone knows it. So the question is, why won’t the powers that be change it? There are a number of reasons used to defend inaction.
First, they say that suspending fair value accounting would create less transparency and allow companies to make up whatever values they want. This is a curious argument because activity in this past year has been anything but transparent. In addition, there are many ways to value assets and footnoting with detail about how values were calculated in a financial report would be very transparent.
Second, some say that it is too late—suspending accounting rules at this point would not help. This is almost ridiculous. Because the financial system has priced in a very deep and damaging recession, and many markets have become illiquid, assets values have been pushed well below their fundamental value. This creates a vicious cycle of asset write-downs, capital impairment, a tightening of credit, which then hurts the economy. In turn, this causes credit agencies to lower ratings on more bonds, which in turn causes more asset write-downs. Stopping this is important and suspending mark-to-market accounting is still very important.
Third, those against suspending mark-to-market ask: what will replace it? There are many answers to this question, but as long as liquidation-type, fire-sale prices are not used, and reasonable cash flow values are allowed, it will be better for the economy.
In the end, the real reason accountants, auditors, and regulators won’t push for a change in the law is that they are the ones who put it in place, saying that it would keep things like this from happening. Changing it would be an admission that they were wrong.
Also, the rule exists to protect auditors and regulators. It keeps them from making any judgment calls. As long as they have rules, and they follow them, they can’t get in trouble. The problem is that managing a business takes judgment. Judgment is stifled when fire-sale prices are applied to the management of financial risk.
Finally, there are many who think that enforcing the right rules will take the risk out of economic and financial market activity. This is impossible. An economy without risk is an economy that does not grow. Rules have consequences, and one of the most consequential rules of our lifetime is mark-to-market accounting. Unfortunately, its consequences have created a real crisis for the economy.
Brian Wesbury is chief economist for First Trust Portfolios, L.P. and The American Spectator’s economics editor.
Several months have passed since Treasury Secretary Henry Paulson created the Capital Purchase Program. Under CPP, Paulson allocated $200 billion of taxpayer money to shore up banks’ balance sheets.
Instead of stabilizing the capital markets, many of these banks have used this government hand out to buy up their competitors. The Washington Post reported that JPMorgan Chase, BB&T, and Zions Bancorporation all said that they were considering using “some of their federal money to buy other banks.”
The New York Times quoted an executive of J.P. Morgan bank as stating that the federal money would allow the bank to be “more active on the acquisition side or opportunistic side.” In his own words, “I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Sterns mergers.”
Meanwhile, many regional and smaller banks are still not lending. As Treasury funds are slowly becoming accessible to smaller, regional banks, many of these banks have been forced to record major losses in the valuation of their assets, some of which have experienced no credit losses.
Instead of giving these uber-banks a blank check to conquer their smaller competitors, Congress should push the Securities and Exchange Commission to move toward replacing mark-to-market accounting with an accounting system that reflects a truer picture of economic value than does mark-to-market. William Isaac, former FDIC chairman, has been an early advocate of moving toward historical-cost accounting to better improve the “real economic value” of assets. Washington’s policymakers should follow his lead.
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