Mark-to-Market Accounting Makes Speculators of Us All - And That's Bad

by: Vernon Hill

I recently had the pleasure of doing a joint interview with Jack Bogle, the legendary founder of Vanguard Funds. Jack reminded me of his belief that the U.S. has become a country of speculators rather than investors, and that this change was one of the causes of the current malaise.

I agree with Jack. In the financial markets, the traditional investment mentality has been replaced by a speculative one. While investors’ goal is to realize the value of their holdings over the long term, speculators believe everything can be instantly priced. Nothing has intrinsic value, and the object is the transaction itself. 

Nothing reflects this speculative mindset more clearly than rulemakers’ insane obsession with market-to-market accounting, embodied by the FASB’s insistence that companies use market prices to value their financial assets, regardless of the asset’s type, maturity—and whether or not it even trades in a market active enough to even generate a meaningful price in the first place. The rationale behind the rule is that every loan and asset has an instant value, and that banks should run their businesses to maximize those instant values rather than build value for customers and shareholders over the long term.

This view is reinforced by Wall Street firms’ habit of funding themselves with 24-hour paper rather than the more stable deposits of real banks. 

How many banks would have survived the 1990's credit crisis if they’d have been forced to mark every loan to market? We now know that the OCC’s own, early attempt at market-pricing assets, in the form of  "performing non-performing” loans, severely aggravated the problem.

Regulators’ mark-to-market hysteria is just another instance of how the psychology of Wall Street’s "shadow banking system" has seeped beyond Wall Street, and has begun to destroy the country’s core banking system. 

Yes, assets and liabilities that have readily obtainable market prices should be reflected on companies’ balance sheets at those prices. But the vast majority of a commercial bank’s assets--loans to individuals and business—can’t and shouldn’t be subject to the instant pricing whims of a speculative market.

If you commercial bankers agree with me, as you often tell me you do, get on the phone with your lawmakers and exercise your political muscle. You may never get another chance.