Jose D. Roncal
Last October we wrote an article explainingMark-to-Market Accounting. The article gave a basic overview about what Mark to Market means, how it works, and the pros and cons. It was a heads up for our readers because we knew the day was coming when these accounting rules would come under closer scrutiny and possibly be changed—and that would make big news. That time has arrived.
This week Bloomberg released an item with this headline: Bernanke Says Mark-to-Market Accounting Rule Should Be Improved. Improved? That might be an understatement.
Just to recap, the Mark to Market (MTM) accounting rule requires companies to write down assets every quarter to reflect the actual market value of those assets. There has been a long-running debate over MTM rules because they also govern how banks handle all the toxic mortgage-related bonds and derivatives that are eating holes in their balance sheets.
Some say MTM is making banks’ problems appear much worse than they really are, while others believe these rules are essential for transparency and to keep shareholders informed about financial institutions’ true health. There is a consensus on one thing however: changing the rule would wipe out a major portion of the banks’ problems. It’s just that not everybody agrees whether that would be a good thing or not.
It’s been a good rule in principle, and probably shouldn’t be totally tossed out, but the MTM has been blamed for much of the global financial crisis. Those toxic assets are not traded in liquid markets, and that’s a problem.
We’ve all heard that extraordinary times require extraordinary measures. It would be hard to imagine times getting any more extraordinary than they already are. Clearly, suspension of MTM accounting would be an extraordinary change of events, but maybe it would also lead to an extraordinary stock market rally.
Let’s take a closer look at this. Suspending MTM would cause banks to instantly book a revised value of their assets, clean up their balance sheets, and greatly reduce the need for the government (taxpayers) to continue injecting vast sums of our money into the banks.
Banks would have more resources to start lending again, which would unlock the credit crisis and create more liquidity . . . and the more liquidity there is in the market, the more efficient it becomes.
There has been a lot of discussion about nationalizing banks. And indeed, the Treasury Department and Citi announced a new plan in which the government will convert up to $25 billion of its loan money into common stock. In effect, the government will now own up to 36 percent of the company, making it the largest shareholder.
We’ve doled out a lot of money in an attempt to bail out banks, but maybe the government could save taxpayers a lot of money by simply suspending MTM accounting. There were already provisions included in a document entitled Statement No. 157 from the Financial Accounting Standards Board (FASB 157) that gave the SEC the authority to suspend MTM accounting, but so far, nothing has been done.
The expensive bailouts haven’t solved anything and it’s possible that suspending MTM might restore investor confidence. It seems there are other economists that agree. Forbes magazine ran an article this week by Brian S. Wesbury and Robert Stein, economists for First Trust, an investment firm.
“Suspending mark-to-market accounting could fix major problems at no cost,” they wrote, later adding, “In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting.”
The debate isn’t over yet, but when it is, we’ll be giving you our opinion. Your own opinion will depend on whether you believe changing an accounting rule can make a problem disappear or if it just sweeps it under the rug. If you’re not sure, we invite you to read our earlier article abouthow MTM works.
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