Contrary to Gary Townsend’s article at Seeking Alpha on March 10th, I am relieved to see Ben Bernanke looking to hold the line on mark-to-market accounting rules.
I first discussed ‘Mark-to-Market’ Rules in October when the SEC provided new guidance on the ‘mark-to-market’ rules for, at least, the financial industry. Among the several points I made then were:
- ‘Mark-to-Market’ accounting rules were put in place to subject company management to financial reporting rules and reduce their ‘reporting latitude’, and to let investors and others to better measure management performance and know sooner than later whether a company’s net asset values (and hence capital) had been eroded by prevailing open market conditions.
- If implemented, the SEC guidance would be ‘letting the camel in the tent’ as company managements would have more latitude when deciding whether or not to write down underperforming assets based on their subjective views as to whether ‘relevant market evidence exists’, and whether the assets they hold are subject to ‘distressed or forced liquidation sales and (hence) are not orderly transactions’;
- Importantly, improving balance sheets and income statements through changes to accounting treatments likely would result in less sophisticated investors assuming a business that did not mark its assets to market conventionally was in better financial shape than would be shown if they adopted conventional mark-to-market principles; and,
- Accounting rules and their application can change balance sheet and income statement ‘cosmetics’, but they do not change the ultimate valuation fundamental which is ‘how much cash does a company have in its coffers to operate its business day to day, and will its prospective cash flow sustain the business and result in appropriate after-tax free cash flow returns on invested capital’.
Back in early February I wrote:
In yet other developments that strike me as inconsistent, there are reports this morning that “U.S. officials are examining ways to convert government stakes in banks into ordinary shares as banks accumulate losses” and that (paraphrased) “a senior U.S. Senator yesterday said it might be possible to modify ‘mark-to-market’ accounting rules for U.S. banks facing steep write-downs of troubled assets without abandoning the underlying accounting standard."
I concluded then that if the U.S. government converted its preferred shares in the ‘bail-out banks’ to common shares it likely would do that at prevailing stock market prices. I further concluded that if the U.S. government did that, and purchased bank common shares as it proceeds with its ‘bail-out’ packages while simultaneously pushing for and getting revisions to the mark-to-market rules, it will almost certainly end up overpaying for those common shares.
I was heartened by a Bloomberg article ‘Nobody Says Mark to Market Doesn’t Matter as GE Falls’ which reported that Fed Chairman Bernanke said on Tuesday he wouldn’t support any suspension of mark-to-market accounting. The article discusses GE and its stock price at length, but look at the broader picture. The article says that:
- Banks say the mark-to-market rule requires them to report losses from falling values even if they don’t expect to incur penalties because the assets aren’t for sale, and that resultant lower asset valuations can force them to raise capital to comply with federal regulations; and;
- The Blackstone Group LP Chairman, the American Bankers Association, and 65 lawmakers in the House of Representatives urged that mark-to-market rule be suspended last September (see above), that William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, has called fair value (i.e. mark-to-market) “extremely and needlessly destructive” and “a major cause” of the credit crisis, and that Robert Rubin, the former Citigroup Inc. senior counselor and Treasury secretary, said in January that the rule has done “a great deal of damage.”
The time to have complained about the mark-to-market rule was when it was in the discussion stage, or even as the rules were being applied over the past several years. The banks knew, or ought to have known, about the rule when they made the loans during the ‘Bush/Greenspan’ years that they did. For the banks to now say “gosh, these rules are causing us problems” in my view makes no sense. For government representatives to support this position to the possible detriment of U.S. taxpayers likewise to me makes no sense. To Ben Bernanke I say ‘Good on You’, and stick to your guns.
