Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery

Includes: BAC, C, XLF
by: Jason Schwarz
As an investor, you should always be on the lookout for unintended consequences of government regulation. This Congressional grilling of the SEC is long, long, long overdue. The mark to market accounting regulation that was officially put into practice in November of 2007 has been a disaster since day one. I’m not going to blame the entire recession on this piece of bad regulation but I am going to say that its impact has been far greater than most have realized. The only thing worse than no regulation is bad regulation.
It’s one thing to force our banks to value fur coats in August, it’s quite another thing to ask them to raise capital because of it. Imagine if you bought a fur coat for 20k and the following summer you could only get 5k for it because of the 100 degree weather. That kind of short term devaluation is expected, but the real injustice comes when you find out that you are required to raise 15k in capital to supplement that August writedown! This mark to market regulation is worthy in its effort to give investors a current glimpse at bank balance sheet valuation regarding these mortgage backed securities but it crosses the line into utter ridiculousness when the regulations require capital to be raised because of it.
Ever since November of 2007, the stock market has turned into a group of daytraders because of this new obsession with short term marks. It’s time to end this absurdity. It’s time to return to a financial system that has some long term viability. For the past 18 months the market has been unable to rally because of weak financials. If Congress is able to push the SEC and the FASB into action, it will lead to the first sustainable market rally since this rule was implemented.
The big story here is the fact that the SEC has had their feet stuck in cement for so long. While the financial system has experienced a crisis because of this regulation, the SEC has been too chicken to fix it because it would be an admission that they were wrong for implementing it in the first place. Where would we be if mark to market had been altered a year ago?
The answer to that question will make you want to throw up. None of the so called troubled banks would have been forced to close their doors , none of the taxpayer funded bailouts would have been needed, and Bear Stearns, Lehman Brothers, Freddie, Fannie, AIG, Washington Mutual, Wachovia, Merrill Lynch, etc. would still be operating as private, stand alone institutions while all of their employees would still have jobs. Our stock market would never have sold off 50% like it has, it probably would have sold off a more typical 5%-15%, and the huge surge in fear that led to the freeze in credit and the collapse of consumer spending would never have been so profound. 2008 still would have been a bad year but it wouldn’t have been anything like it was.
The mark to market regulation is the biggest economic blunder of our generation. Altering this law will do wonders for the remaining banks. As I’ve written in previous articles, I believe this paves the way for Bank of America (NYSE:BAC) to go back to $20 a share by next year, it paves the way for the XLF to return to $20. It paves the way for the stock market to heal. It paves the way for private equity to resume operations. It paves the way for lending to expand. It paves the way for housing and unemployment to stabilize. If you had to choose one trigger for this recession it would be the implementation date of mark to market in November of 2007, if you have to pick one trigger for a recovery to begin it will be the end date of mark to market in April 2009. Our own regulators caused this. Unintended consequences of government regulation is one of many reasons why the stock market environment of the past has changed, and why buy and hold no longer is a viable strategy for investors.