Obama Policy on Mark-to-Market: A Hint?

There is a lot of interest in policy initiatives from the Obama Administration.  Circumstances have changed the prospects for many of the ideas mentioned in the campaign.  Investors should be watching what policies can be changed very quickly.  We are monitoring the first 100 days at ElectionStocks.com, where we focus on how politics and public policy affect stocks.

Various observers have labeled a change in the mark-to-market accounting rules as the biggest immediate action affecting stocks.  My RealMoney colleague Jason Schwarz thinks that a change is imminent.  New rules could preserve visibility for investors in the individual stocks, while providing relief in the calculation of required regulatory capital.  Regular readers know that we share this viewpoint.

We believe that neither the TARP method of adding capital, nor the quest for private investment, can work until and unless we stop the death spiral.  The marks are exacerbating and continuing the problem in a pro-cyclical fashion.

Whether or not an investor agrees with the correctness of the current policy, it is wise to have a healthy interest in the prospects for change.  We have been looking for hints on this subject from anyone in the Obama administration.  Since the SEC has authority over FASB in setting accounting rules, the confirmation hearings for Obama’s nominee as SEC chair, Mary Schapiro, promised to be a useful source.  Some of the questions and responses were in written form.  Below is her response to a question from Sen. Carl Levin (D, Mich).

10. The SEC recently issued a report supporting the existing mark-to-market valuation rules, but recommending some improvements. What is your view of the current mark-to-market valuation rules?

Response: We know that certain banks were not presenting investors with the full picture of their financial health, utilizing off-balance sheet vehicles and other accounting methods. This was a disservice to investors as the integrity of the numbers is critical to their making smart investment decisions and to the smooth functioning of our markets. While there are a lot of different views on whether mark-to-market accounting contributed to this crisis, my personal view is that it was not a significant factor. As Chair, I will read the recent SEC report on this matter fully, talk with other regulators, and get their views as we move forward.

Conclusion

She promises to consider the evidence with an open mind.  There is no suggestion that this has been an important topic for the transition team or that change is imminent.  Readers can get the full text of the written questions and responses from both Schapiro and Tim Geithner at Sen. Levin’s site.

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Comment by housam jarrar

2009-01-24 01:18:45

The only thing I could agree with you is the fact that removing the mark to market rules will aleviate the pressure on banks which is good.That is where my agreement slowly dies.It is of the atmost irresponsibility to remove such rules simply because it is not suitable to the banks.One of capitalisms core beliefs is that something is only worth what someone is willing to pay for it now,not tomorrow and not in 2 years.If such a rule is to be revised then who will evaluate these assets(the banks themselves?).I think the hole that will be created from such a move will destroy whatever little integrity the banking system still enjoys.No one knows whats on the banks balance sheets and yet you agree with the assertion that the mark to market rules are either unreliably(I doubt) or are too much for the banks to bare.If I where to buy a stock today for 15$ then that is what its worth,regardless of how many trade or how often they do.I cannot simply state that the mark to market rules are incorrect and therefore should claim that my stock is worth 25$.People would laugh at best and never believe a word that comes out of my mouth at worst.What comes around goes around is my mantra.

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