The American Spectator

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 bailout 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. 

Bob McTeer is the former president of the Dallas Federal Reserve Bank.