Eliminating Mark-to-Market is a Stupid Idea

Submitted by Bill Lucas on Thu, 03/12/2009 - 14:58

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 <b>is</b> 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.