Mark-to-Market: Stop the Madness

by: Vernon Hill

Based on the market’s reaction yesterday to Treasury Secretary Geithner’s “plan” to bolster the banking system, it’s becoming more and more clear that nothing will be resolved until the government addresses a key cause of the whole credit mess: the insanity of mark-to-market accounting.

Almost every experienced observer this side of the Ivory Tower understands that mark-to-market has vastly exacerbated the credit crunch. Virtually every senior banker has seen first-hand the needless financial destruction that mark-to-market, blindly applied (as is now required) can bring to bank balance sheets. It has been a disaster.

We’ve often criticized bankers for their political timidity and reluctance to forcefully lobby the federal government for needed regulatory change. We’ve blasted our industry’s trade groups for their impotence and unwillingness to fight for the industry’s interests.

This is no time to be bashful. Either the industry makes itself heard on mark-to-market, loud and clear, or it might as well stand back and watch the regulators and accountants legislate it out of business.

The solution to the industry’s problems is simple: get rid of this accounting sinkhole. If the past year has proved nothing else, it’s shown that mark-to-market distorts rather than clarifies (at least when applied in unsettled markets like the current ones) and amplifies problems rather than frame them accurately. Somehow, the banking industry survived for decades before market-to-market was mandated at the end of 2007, without running into anything like the crisis it’s going through now.

Repealing mark-to-market is a clear, simple policy step that would bring immediate, tangible benefits. If the top-ten banks want to be investment banks and stick with MTM, go ahead and let them. But there’s no need for the rest of us to follow them over the cliff.

It’s time for bankers to arise, and to stop whining and start acting.

Call your Congressman!