Don't Blame Mark-to-Market for This Crisis

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Includes: AIG, BAC, C
by: Adrienne Gonzalez

It is not only ignorant but irresponsible to blame the current economic downturn (or downward spiral, depending on how you look at it) on mark-to-market's inherent faults. To say that MTM is to blame for the financial crisis before us is not only misinformed but incorrect. And yet, here is Forbes.com saying just before a Congressional hearing on accounting rules that MTM is to blame for the collapse of the financial system as we know it today. Sure, if we knock out mark-to-market we eliminate the toxic assets. But what about the responsibilities of the institutions (hello Citigroup (NYSE:C), AIG (NYSE:AIG), BofA (NYSE:BAC), et al) who allowed their off balance sheet risks to bloat to the gills with exotic credit instruments? Blaming the accounting?! That's an awfully low blow to the industry if you ask me.

We have been accused of beating a dead horse when it comes to our support for either suspension of, or targeted relief from, market-to-market accounting.

And we suppose after writing thousands of words, producing videos and giving speeches about the issue, some might be tempted to let it go. But we can't do that, especially when the government continues to spend trillions of dollars and is coming very close to bank nationalization.

This is a real shame. Suspending mark-to-market accounting could fix major problems at no cost. Unfortunately, many people dismiss this issue without really understanding its impact on the economy.

We are economists, not accountants or bank analysts. We really don't think a debate about how big the housing bubble was, or whether a certain bank is viable or not, is worthwhile when it comes to accounting rules. That misses the point. Mark-to-market accounting rules affect the economy and amplify financial market problems.

The history seems clear. Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.

Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.

Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away.

Dear Forbes,

With all due respect... are you f#$%ing retarded?!

Mark to market, as I have said 1000 times, is not the problem. It is not that the accounting rules did the finance world wrong - it is that irresponsible idiots with less than two brain cells to rub together (hello, AIG!) who hedged their bets on debt hoping that the boom would last forever. Sure, ridding the world of mark-to-market might make the lives of pricks like John Thain a whole lot easier, but that also risks the legitimacy of accountants everywhere by saying it is the rules and not the actions that caused this spiral down the toilet.

Of course getting rid of mark to market could solve all of Wall Street's problems... for the time being. But ridding Wall Street of its current issues will not solve the inherent issue of irresponsibility by the financial powers-that-be. It is not mark to market's problem that firms found themselves over their heads in exotic credit instruments which they did not understand.

While the Forbes article says mark to market is to blame, I cannot possibly, as a member of the accounting crew (if peripherally through my work in accounting education) endorse their view since solving the immediate crisis does not serve to address the larger issue of irresponsibility on the part of the financial institutions who engaged in reckless behavior. Blaming MTM for your own risk management problems? Real cute, guys.

And as mark to market faces a revamp on Capitol Hill (where the keepers of accounting rules do not dwell), we shall see what results.

I've said it before and I will say it again: stop blaming the accounting and accept responsibility for your own reckless behavior.

Congress is not in the business of dictating accounting rules. Nor is the Federal Reserve. And if either have the absolute audacity to imply that they have the authority or right to do so, I might as well pack up my desk and leave the industry for good after today's appearance on Capitol Hill. It's over as soon as either start dictating what is appropriate for CPAs across the country. The SEC has failed us. But we are still fighting the good fight for sound accounting rules. It isn't our fault that derivatives were allowed to exist off balance sheet. You f#$%ers deal with that yourselves. Don't blame the CPAs. They were just doing their jobs.

If these agencies and/or interests are allowed to present their case in Washington today and rewrite accounting rules as they see fit to allow "forgiveness" for their own sins against due care, I grieve for my industry.

Accounting will forever be changed by this and I'm sorry but I will lose faith in all which I hold dear - the regulatory bodies charged with dictating accounting rules to U.S. CPAs will be violated, the rules trivialized, and the world of accounting absolutely raped and pillaged for the convenience of a chosen few irresponsible financial bodies for their own convenience. That, above all else, *I* cannot stand for.