Remember Mark-to-Market?

It could be a new name of a sauce made by President’s Choice, but the raft of blow-out U.S. bank earnings last week justifiably turns the mind to “Memories of mark-to-market”. How long ago was it that our accounting Lords decided that M-T-M was the way to go? Not very long at all.

Did they listen to industry professionals when they professed that Fair Market Value accounting treatment was misguided (see prior representative posts “Accountants are failing investors with ‘fair value’ accounting” Aug 6-07 and “D’Alessandro: fair market value accounting is ‘perverse’” Sept 30-08)? Nope.

Yet with the quick return to massive profits at Goldman Sachs (NYSE: GS) and JP Morgan (NYSE: JPM), just seven months after staring down the rifle barrel of an economic depression, one might feel a little morose about the irony of that little understood Law of Unintended Consequences. Sure, the U.S. Congress was bang-on when it jaw-boned the Accounting Standards Board to amend the M-T-M treatment of illiquid bank SIVs, conduits and otherwise icky mortgage assets. But to not tie that to anything…?

Having achieved what we all needed last March (by avoiding a Depression), Congress set up many of the staff at the large U.S. banks (and i-banks hiding within a commercial bank’s chainmail) for what could be their most financially rewarding year ever. If they were mad about large bonuses in the face of a declining financial market, just think how cross our elected officials will be to find out that by waving their magic wand over the accounting industry, they’ve only restocked the coffers of the folks in the red suspenders.

Comments

[chinooking:]

throw them all in jail

Oct 18 12:33 PM

[armny:]

Kudos to the bankers for doing whatever makes sense for their companies! A Pox on the morons in Congress for dinking with what they are too ignorant to understand!

Oct 18 12:43 PM

[Tack:]

"Fair-value" accounting isn't accounting at all; it's quarterly books valued at the prevailing hysteria/euphoria of traders.

Proper accounting focuses on cashflows actually generated by amortizing assets, not the daily market manipulations of traders and a easily-spooked marketplace. Unless such assets are subject to forced sale, their short-term market values mean little.

The huge dislocation between discounted-cashflow values of debt assets and the highly-manipulated mark-to-market values explains, almost entirely, the financial crisis from which we are slowly emerging. Indices representing market values of debt assets are steadily rising, and eventually the disparity between market values and book values will be reduced to "noise" or disappear.

Oct 18 02:47 PM

[Albert Meyer:]

"Fair-value" accounting isn't accounting at all; it's quarterly books valued at the prevailing hysteria/euphoria of traders.” Tack

Correct. Those in favor of "fair-value” accounting, approach it from a purely theoretical construct. For a market to produce fair values, it has to be transparent, liquid and deep. You can no doubt add more characteristics, without which one cannot trust or rely on the fair values produced. FASB failed to see that Mark-to-Make Believe was a doomsday device. The world is a better place without FASB and the SEC. Both bodies engender a false sense of security.

FASB is an enigma full of contradictions. The fair value of an employee stock option is the difference between the current market value and the strike price. Yet, FASB threw out the intrinsic value approach, which, take note, is the cost that companies deduct as stock-based compensation on their tax returns, and, instead, gave us a 280-page rule-book to calculate the cost of an employee stock options. That way, the obfuscation is so surreal that nobody bothers to question the whole system that essentially transfers wealth from hardworking Americans into the bank accounts of the executive elite who, in turn, bankrolled our members of Congress…. who, in turn, protect the system. Ask yourself the question: Where did the $470 million come from that Countrywide’s Mozilo banked after exercising his stock options? Mostly from people who invested in Index funds, because Countrywide was part of the S&P 500 and Nasdaq. Legalized theft. I could go on…

Oct 19 10:13 AM