Is Elimination Of Mark-To-Market Accounting A Done Deal Already?

I spent some time watching and listening to the House Financial Services Committee meeting on Thursday. It was supposed to be a hearing on the pros and cons of mark-to-market accounting issues. In reality, it was just a forum for Congress to drag in proponents of mark-to-market accounting issues and have them talk into the record about how bad m2m really is. In addition to this, there were accounting industry representatives who were trying to defend the current policy, but it was clear from watching the meeting that Congress wanted no part of that. Congress wants to cut out m2m accounting. It’s definitely part of the “grand plan” to save the world.

Congress basically threatened the industry to make the rule changes and thereby eliminate mark-to-market accounting by 4/1/09 or…and this is a big “or”…

“We will legislate the changes and get back to you.”

When did Congress become knowledgeable about accounting rules and regulations ? It’s clear that highly paid financial industry lobbyists got to the House Financial Services Committee members, with their demands to eliminate m2m accounting.

There was a “non-profit” institutional investment council attorney at the meeting that spoke about how the m2m was bad for America’s pensions and 401k’s retirees….blah blah blah. Like they really care about the ultimate users of the money - the hardworking (barely working) Americans.

The industry is losing income as the assets drop in value. Many of the institutional managers are paid based on assets. So when the assets decline in value, it reduces revenues to the money managers. It’s not really some grandiose benevolent reason that those in the financial industry want m2m banned. It’s all about the Benjamins.

The meeting was really a bit of a circus. When the camera panned to the audience, there weren’t a lot of people in the room, listening to the meeting. It was really a pathetic showing for such a large and important issue to the country. Seems like many had resigned themselves to the fact that it was already a “done” deal. It’s speculation on my part - but I think it’s true.

Kanjorski threatened those responsible for drafting changes. He suggested that the changes had best be done to Congress’ satisfaction or else they would draft the law changes themselves. This is the problem with our government today. They’re into everything. There’s no more independence in anything. The government gets involved way too much on the private side of things. Changes in the m2m will not solve the problem. The assets are tough to value, because of the uncertainty of the future cash flows.

M2M will not make the assets worth more. It will just help to reduce the need for banks to seek additional taxpayer capital. If the economy does not improve, then there is still the issue about how banks are going to earn money by lending - when there’s very little loan demand. Elimination of m2m is not going to make the problem go away.

It also seems like Congress is a day late and a dollar short on this issue. The time to eliminate m2m, if you were going to do it, was 1 year or more ago. Now, most of the taxpayer money has already been allocated out to the banks. Wouldn’t it have made more sense to do this sooner ?

One of the more “entertaining” guests was William Isaacs, former FDIC head. He ranted and raved about he’s been against m2m since the 80’s. He also pointed a finger at those “crazy short sellers” that “thrive” on chaos. Blame it on the short sellers.

Oh well. FASB and SEC has some work to do. I also thought it interesting that the project would be reported to Congress on 4/1, right after the close of the first quarter. Buy the rumor and sell the news. Take that Isaacs.

Speakers at the hearing:

Following testimony from the SEC, OCC and FASB, lawmakers will also hear from industry members. Those witnesses include: Jeff Mahoney, general counsel, Council of Institutional Investors; Cindy Fornelli, executive director, Center for Audit Quality; Thomas Bailey, chairman, Pennsylvania Association of Community Bankers, and president and chief executive of Brentwood Bank; Lee Cotton, past president, Commercial Mortgage Securitization Association; Tanya Beder, chairman, SBCC Group; Robert D. McTeer, Distinguished Fellow, National Center for Policy Analysis; and William Isaac, chairman, The Secura Group of LECG.
Earlier this week, a consortium of trade groups including the U.S. Chamber of Commerce and the American Bankers Association wrote to House Financial Services Chairman Barney Frank, D-Mass., and Ranking Member Spencer Bachus, R-Ala., to express their concerns about mark-to-market accounting ahead of Thursday’s hearing.

Not a lot of people on the list that would be “pro” m2m. :)

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Comment by Ronaldo Ramos

2009-03-16 10:12:03

But mark to market forces long term investments to be valued at short term horizon, without actual loss or conversion or sale. Mark to market is good but not in times where values are irrational. It also makes company valuations too volatile which is not the ideal situation.

Let’s say you own a home and you are able to pay the monthly mortgage but have no other significant savings. Mark to market is like a bank telling you to fork up the difference between the purchase price of your home and its current market value (which is lower than the price) whether you can pay for the mortgage or not, or else they will take your house and sell it at a lower price than the already depressed home values. But you intend to keep the house long term and should retire living in it. Now is that fair? Please correct me if I am wrong.

Also, suspension of mark to market on CERTAIN assets will help stop the downward spiral of market values, it will provide a stop somewhere. They should figure out the “reasonable” or “theoretical” (or whatever you call it) value for these long term-held assets and (not directly related to this) a limit on company leverage for certain types of corporations.

I agree with your point that the US goverment has already provided capital to banks to make up for some of M2M’s effects, but that only means that the US goverment forcefully capitalized/earned from a the whole situation (depressed asset values). Now, is this a conspiracy to get money from wall street?

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