Apparently Buffett, during his CNBC interview the other day, was trying to highlight mark-to-market’s drawbacks not for disclosure purposes, but for regulatory accounting purposes. It seems that CNBC edited this out of the clips they played on air, but it is an important note coming from a money manager of Buffett’s stature.
The point is not that marking down assets based on similar assets falling in price creates a problem for investors looking for value. The problem is when the markdown brings the bank below a regulatory minimum capital requirement, at which point regulators force them to raise capital, often at steep prices. This added expense puts a major strain on the banks.
In other words, the government gets them coming and going. First they are required to mark down their assets, and then to recapitalize because their assets have been marked down. As Buffett put it, it’s like throwing gasoline on a burning building. It does not seem like the effects the accounting system has on regulatory capital requirements is given enough consideration. There are no quick fixes, but if this could improve the balance sheets of banks with simple changes to the accounting requirements, isn’t it worth a shot?
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