Mark to Market Sanity

Jan.27.11 | About: Financial Select (XLF)

In 2008 and 2009, I probably blogged-- more than anything else-- about needlessly destroying bank capital with a strict application of mark to market accounting. The frozen market for mortgage back securities was triggering massive write-downs, i.e. destroying capital, even while the underlying mortgages were still performing. Probably my most effective, or least ineffective, post was a piece of satire called “My Mark to Market Nightmare.”

That post, along with numerous rants on the subject on CNBC, apparently led to my invitation to testify on the subject before a Congressional Subcommittee in March 2009, which I did alongside my comrade in arms, Bill Isaac, former Chairman of the FDIC. Bill has since written an excellent book about the mark to market debacle and other aspects of the financial crisis, titled “Senseless Panic: How Washington Failed America,” with a forward by Paul Volcker.

I’d like to think our testimony made a difference, but by that time the Committee members were pretty much fed up with the Financial Standards Accounting Board’s (FASB) intransigence on that issue and read them the riot act. This brought about a token retreat by FASB, which made some helpful, but minor, changes but inexplicably didn’t make them retroactive. It was enough, however, to spark a stock market rally off the lows, led by financials. It was too little, too late, but something.

Apparently stung from having been pressured by Congress (how dare they?) and probably embarrassed over their defeat within the professional accounting community, FASB decided to double down a few months ago. They proposed mark to market accounting, not only for bank holdings of securities, but of loans as well — indeed, the whole balance sheet. That will show them!

That overreach made so little sense that it was hard even to discuss it. Well, the good news is that the proposal, which ran counter not only to common sense but counter to the views of the international counterpart of FASB, has apparently collapsed of its own weight. FASB has apparently dropped the proposal and is moving on—pulling a Hank Snow, so to speak.

An important postscript to the M2M saga is that having had to over-reserve for losses not likely to occur, many banks are now able to reduce provisions for losses, boosting their profits. Unfortunately, investors that didn’t understand the earlier over-reserving are suspicious that there is something fishy about the reversal—making some bank stocks the buy of the decade.

Disclosure: No positions