Why We Need to Keep Mark to Market
Excellent analysis from the Center for American Progress about the end of “mark to market” accounting to a system where banks get to make up their own valuations of their toxic assets.
Why should we fear the end of mark-to-market accounting?
First, [such moves] would likely undermine investor confidence, decreasing transparency and increasing concerns about the accuracy of bank financial statements. This could have the effect of prolonging or worsening the credit crisis.
Second, the temporary or permanent cessation of fair-value accounting would set an unbelievably bad precedent—one that could wreak major damage to the integrity of U.S. securities markets. The setting of U.S. accounting standards has long been an independent nonpartisan process, free from political pressure. This is no small part of the success of the U.S. capital markets as it has created strong investor confidence that the rules of the game—the standards by which U.S. reporting companies disclose their financial results—are fair and will not change suddenly and arbitrarily.
Unfortunately, after a more than year-long drumbeat of criticism that mark-to-market accounting was causing the credit crisis, FASB acquiesced, offering two proposals for comment that would provide additional flexibility in avoiding the recognition of losses related to fair-value accounting. The first proposal would provide additional guidance on when it is acceptable to use “mark-to-model” accounting instead of “mark-to-market” accounting. The second proposal would provide companies more leeway in avoiding the recognition of losses that would be required under fair-value accounting.
These proposals are extremely troubling insofar as they appear to represent capitulation to political pressure, even though they are fairly innocuous on their own terms absent the political pressure. As former SEC Chairman Arthur Levitt put it in a recent Washington Post editorial:
Investors once believed that U.S. markets were sufficiently protected from political pressure and manipulation by a system of interlocking independent agencies and rule-making bodies—some government-run, some not. That system is being dismantled, piece by piece, by political jawboning and rushed rule rewrites. Now, investors find themselves with fewer protections and weakened protectors.
Given the feckless financial supervision of our financial markets under President George W. Bush that led to today’s financial crisis, now is certainly not the time for FASB to be seen playing politics. But if the accounting board does adopt its two new proposals, then it will be up to the Obama administration’s financial regulators to ensure that these new twists to fair-value accounting are not abused by financial institutions—to the detriment of our financial markets.
