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  • Mark-to-Market: Accountants Steal Spotlight From London

    For days, President Obama and 19 other world leaders have been meeting in London — with an occasional side visit with the Queen — to discuss the world’s finances. But today, the real action was in the implausible city of Norwalk, Connecticut for a meeting of the Financial Accounting Standards Board – the private organization that sets accounting standards This gathering of accountants may have lacked the celebrity appeal of the London to-do, but may do more to ease the financial crisis than any communiqué out of Europe. At issue was the “mark-to-market” system of accounting – whereby certain assets are required to be entered on a firm’s accounting at current “fair market value,” rather than book value based on the original purchase price.

    As a general principle, mark-to-market is good policy. But current market values are not always easy to measure. And in today’s climate, with many “toxic” securities not trading, and others being sold at fire sale rates, a too strict application of mark-to-market can dramatically reduce reported values, and force firms into (artificial) financial trouble. Recognizing this, FASB issued guidance late last year allowing firms greater ability to avoid such mark-downs when markets are distressed. Today’s decisions expand further the ability of firms to avoid misleading or inaccurate valuations.

    FASB’s action was in large part a response to pressure put on FASB by Congress, and were rushed through in record time (the proposals were only released for comment a few weeks ago). That is worrisome – accounting rules should, as a rule, not be subject to political influences. Nevertheless, substance of the change is a good one – recognizing the reality that the markets for many securities are impaired and do not provide reliable price signals. And, at the same time, FASB resisted pressure to repeal mark-to-market altogether. It would be wrong to abandon the principle that assets should be accounted for at their fair market value. The challenge is to accurately assess that value, and to acknowledge when it can’t be determined.

    Some have also raised concerned that today’s decision will undermine Treasury Secretary Tim Geithner’s plan for a government program to buy toxic assets from banks. If the assets don’t have to be marked down, then – goes the argument, banks will be reluctant to sell. That argument misses the point. If accounting changes show the assets actually are less “toxic” than previously thought, then there’s less reason for a buyout. That’s good news – not bad – for the economy and for taxpayers.

    Forget the Queen. Today, let’s give a cheer to the accountants.

    Posted in Economics [slideshow_deploy]

    4 Responses to Mark-to-Market: Accountants Steal Spotlight From London

    1. Jamey, Central Calif says:

      AMEN! Kudos from a middle class conservative that realize big business needs more tax breaks than I do! The only thing that I wish is that you further this, to apply this same principle to individuals.

    2. Peter Asher, Oregon says:

      These decisions do not appear to deal with the policy that was the major source of the horrendous market value meltdown.

      Performing assets such as a mortgage apparently must be valued based on the prices of mortgages in default rather than on their investment yield ratio. Logically, a mortgage that is current in payments should be valued as a bond is, the principle, altered by the ratio of its yield as compared to the yield that would be available if executed on the day of evaluation.

      It seems that tens of thousands of performing mortgages were devalued by tens or hundreds of mortgages that were liquidated for collateral.

      Not very logical but then, accounting seems to have a good bit of mysticism in it.

    3. John Cox - Chicago says:

      You understate the mark to market problem. In the context of a trading firm, marking to market is appropriate for assessing its health. However, in the case of a highly regulated bank or an investment firm with counterparties and investing clients, marking to market destroyed their capital, ruined their reputations and ultimately destroyed the confidence needed to transact business. That then mushroomed into a full blown meltdown. Wiping out Bear and Lehman, not to mention WAMU and Wachovia took down consumer confidence, froze lending and almost took down the entire financial system, which is based upon confidence. All because of theoretical ideas that current marking takes precedence over sober assessment that these loans will be paid off at some point and if there is a foreclosure, the lender will get most, if not all of their money back.

    4. Mike, Winston-Salem, says:

      Here! Here! A toast to the Accountants!

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