Eliminating Mark-to-Market is a Stupid Idea

MarketWatch reported yesterday (11 March 2009) that the "Republican Study Committee", a group of conservative Republican lawmakers, is recommending the elimination of mark-to-market, or fair value, rules which require financial institutions to value their assets at the price they would currently fetch in the market. They seem to believe that banks will be considered well-capitalized if only they can continue overstating their net assets.

Their argument relies on the perception that the market for asset-backed securities is "frozen". This term is a smoke-screen. The reason that banks consider the market frozen is that they cannot get bids for their assets at anywhere near what they want for them. There is capital on the sidelines that would seek to acquire these assets, but the continuing recession makes the revenue stream for them, mortgage payments, less and less certain. So in this highly risky scenario the assets are worth only pennies on the dollar. Banks don't like that answer, so they're saying the market is frozen.

What is their alternative, though? If they admit that the long-term prospects for getting value out of their assets is very low, they concede that their balance sheet is teetering toward insolvency. If they contend that those assets have greater intrinsic value than the market currently recognizes, they get to keep their jobs for a little longer.

That is not how investors are protected, however. Companies are required to report the financial state in quarterly filings. Auditors are required to sign off on those results. And ratings agencies are supposed to look at the filings and render objective opinions about the likelihood of that institution's being able to make good on their obligations. It all starts with what the banks report on themselves. The end-run around mark-to-market rules leaves auditors and ratings agencies little regulatory justification for disputing a company's inflated opinion of the value of its assets, and therefore leaves potential investors and lenders open to greater losses.

The weakening of mark-to-market rules is corporate welfare, plain and simple. For all Republicans' moaning about entitlements and bailouts, here they're tossing a great multi-trillion dollar bone to banks at the expense of investors and future economic growth.

posted 10:58:04 on 03/12/09 by blucas - General - comments

Merit Pay for Teachers

President Obama today (10 Mar 2009), as part of his call for renewed focus on education in the United States, repeated his call for using merit pay to reward teachers.

Teachers' unions have consistently opposed merit pay provisions in their contract negotiations. Perhaps they mistrust who will be passing judgment on the merit of each teacher. Considering that favoritism is a potential problem in all areas of economic relations, that is a valid concern.

We can no longer ignore, however, that some teachers are vastly superior to some of their counterparts and deserve to be financially rewarded for that excellence. The question of how excellence measured should be reduced to students' performance on tests. The question of which tests should be used for this can be left up to individual states, districts or even schools, but it has to be something quantifiable.

It is not enough to say that teachers with the highest performing students should be rewarded the most. They could have inherited a smarter group or, more likely, been assigned a smarter group based on their seniority or personal connections with other school personnel. When money is at stake, people will cheat, teachers included. Instead, merit pay should be based on the average improvement of each student's score over the prior year's assessment. This means that is a particular student does not have both a current and prior year assessment, there is no improvement to be measured and that score is removed from the improvement calculation. (For math geeks ...) There may be situations where the level of improvement is identical across different teachers' student bodies. In this case it may make sense to compare the current's year's improvement with the student's previous year improvement (in essence, taking the second derivative of improvement), rewarding those teachers who helped students improve more than they did the prior year.

The old arguments against merit pay are a useless barrier to engendering excellence in teaching. A simple computer spreadsheet is all the technology needed to distill all the information necessary to find out who's doing the best job with our students. The only question left should be by how much the best teachers' pay raises should exceed the worst.

posted 14:36:25 on 03/10/09 by blucas - General - comments

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