Sanders Shaffer, Director of Accounting Policy and Analysis at the Boston Fed maintains that:

Capital destruction was due to deterioration in loan portfolios and was further depleted by items such as proprietary trading losses and common stock dividends. These are a result of lending practices and the actions of bank management, not accounting rules.

Mr. Shaffer, who studied banks with at least $100 billion in assets, did not find any evidence that mark-to-market rules drove banks to sell assets at distressed prices. Instead, to raise the capital they desperately needed, institutions mostly tapped government programs and the debt and equity markets.

For most banks in the sample, fair value adjustments had only a small percentage impact on regulatory capital. Mr. Shaffer did not ascertain any link between fair value and capital destruction.



In The Great Money Binge, Mr. Melloan blames mark-to-market accounting rules required by the Financial Accounting Standards Board in 2007 for adding gasoline to the fire of the financial crisis.

Mr. Melloan says that requiring companies to adjust their books every time an asset changed value resulted in showing paper losses that had a cascading effect. Companies were forced to sell assets that they had intended to hold and thereby lowered prices further.

“Since uncertainty had locked up the market for [mortgage-backed securities], the mark-to-market rule exacerbated the problem. How do you mark something to market if there is no market?”

The Great Money Binge is published by Threshold Editions.

To balance this increase in power, the G20 has called for the creation of an independent monitoring body. This was necessary, said David Wright, deputy head at the EU’s European Commission internal market unit, to “depoliticize” accounting standard setters.

This follows from the G20’s agreement last September that mark-to-market rules needed to be resolutely and quickly reformed – although the aggressiveness of this stance alarmed certain parties.

“Full respect to due process is a must,” said Fernando Restoy, chairman of the Committee of European Securities Regulators and quoted by Reuters.  ”The monitoring board is a very big step forward but there is room to think a bit more about the right governance structure.”

Critics in the US and worldwide blame market-to-market rules for amplifying the impact of the credit crunch by forcing banks to price assets at depressed prices, triggering fire sales to replenish capital. These rules were subsequently eased by in the US by the Financial Accounting Standards Board in April 2009.

The play captures the euphoria of the boom times and juxtaposes them with the collapse of the company. It shows how Jeffrey Skilling turns an old, quaint company into a place driven by ideas. He has the audience cheering his success. “America doesn’t have natural resources any more,” Skilling announces in the show. “We have intellectual capital and the best of it in the world.”

The show is about the personalities. It shows how smart “the smartest guys in the room” really were. And it makes you want to be part of the Enron team.

Enron also explains, in an audience-friendly way, the central accounting scam — selling off its mounting debts to subsidiary companies owned, almost entirely, by Enron — to keep its market value high while simultaneously building up a tsunami of debt.

Reviewers praise the play’s lucidity and ability to convey complex and often arcane accounting principals and practices. As one reviewer observed, “if you don’t know what mark-to-market accounting is beforehand, you soon will.”

The show will open on Broadway in April with an all American cast.

Admittedly, liberals and conservatives have their own reasons for drawing the same conclusion, but they agree that Citigroup, Bank of America, JPMorgan Chase, and others that are too big. And the sentiment is shared on the other side of the Atlantic as well. European politicians are pushing for the break-ups of ING, KBC and Lloyds.

The bankers are understandably not so keen on the idea of being broken up.  They do present the valid argument that their size makes them a powerful force in the world market.  If forced to break up, they maintain, banks in countries that are not forced to downsize (Possibly themselves after they move?) will have the advantage.

The option to a break up is more regulation — so much regulation, in fact, that these banks would function as quasi-public institutions like AIG, Fannie Mae or Freddie Mac.

So what will happen? That’s easy. When you have two unpleasant options and banks pushing millions into campaign coffers to keep the status quo, all the consensus in the world is useless.  Not only will nothing happen, these mega banks will have less incentive than ever to avoid staggering risks … because they’re “too big to fail.”

And we’d all like to be thinner, younger, and richer.

That’s not to say it can’t be done, but given that our policies over the last 30 years have all but outsourced our manufacturing sector and of hundreds of industries, about all that we have left to export are agricultural products and bulldozers.

The US was once the world’s leading manufacturer of near everything but chopsticks. We have traded that to be the world’s biggest shopping mall.

With that said, the goal is ambitious. To rebuild America’s manufacturing infrastructure implementing 21^st century technology to effectively compete with clumsy labor-intensive manufacturing from the third world is exciting. This may be more than the Economic Recovery Advisory Board had in mind, but Americans have never been known for thinking small. As the oft-quoted architect Daniel Burnham once encouraged, “Make no little plans; they have no magic to stir men’s blood…Make big plans, aim high in hope and work.”

The inconvenience of more expensive European vacations aside, the precipitous slide is something that needs to be stopped. The idea that a weak dollar is good for American exporters is a fallacy. Except for agricultural commodities, we export virtually nothing. All a weak dollar will do is exacerbate our trade deficit, bring on inflation, lead foreigners to sell off US investments, and make it more difficult to pay down our debt.

A weaker dollar devalues everything — our assets, our incomes, and particularly our nation’s role as the preeminent economy. The dollar is still the reserve currency for investors, but the pace at which it is falling means it will be only a matter of time until the Euro has the critical mass,  or investors start to become comfortable with a communist Yuan, and the dollar will lose its position as the world’s currency of choice. Every administration has pledged to hold our currency strong since Nixon devalued the dollar in 1971.

Assets and liabilities can both be held at cost on the balance sheet while current market value is disclosed. Investors will get the fair value number they need to determine current shareholder value, and the FASB gets their market value. Maybe we also disclose a weighted average rate and term for bonds, loans and the like. We can even post the margin based on fair value.

Well, maybe the FASB will be happy. The critical piece is that assets need to be held at cost. The balance of the information is simply disclosed.

No matter how fishy mark to market prices may be, there is no mistaking it. They do force real world investment and credit decisions that have painful and unnecessary consequences. When mark-to-market losses reach “stop loss” levels, solid AAA-rated securities are dumped at steep discounts for accounting reasons that are purely contrived.

Good for the guy who buys the assets, of course. Not so good for the guy forced to sell. And the FASB is smug in its thinking that they have done the world a service. Let’s make everyone happy instead.

To elaborate, in volatile times, money moves toward rock-solid investments. Specifically the Federal Government  (Have you seen the short-term Treasuries recently?). In more stable times it moves toward investments that deliver a better return.

The last year or so can hardly be called stable. Predictably, money fled the markets, depressing the value of everything. When compounded by the housing collapse and the problems that rating agencies have had assessing bonds, long-term assets held to mark to market accounting rules got hammered.

But these are all temporary events that are impacting long-term investments in the short-term. Nonetheless these are the criteria mark to market uses to evaluate an investment. It’s a bit like valuing the convertible you bought yesterday at 10% of its purchase price because it’s raining today.

There will again be a sunny day. And as bizarre as it sounds, the FASB should take advice from Mr. Milken. Liquidity will return. When we need it least, of course, but it will return nevertheless. We need accounting rules that acknowledge this.

Let’s assume this asset is in year one of rock-solid, 30-year investment with absolutely no chance of failing. And it pays 5%. Now let’s say the market makes a dramatic short-term shift so rates are now suddenly at 10%. Do I lose a corresponding percentage of the value of my capitalization because some mope – who only wants to buy my rock-solid investment to flip it when rates fall again, says so?  Even if I have no intention of selling it for another 29 years?

That is crazy. That is mark to market accounting.

Markets go up. They go down. Over the next 29 years, the true value of that bond can only be determined by its performance. Market value changes should be disclosed, and are for transparency. But don’t focus capital reallocation for short-term price changes. The price of “transparency” is volalitility. Trying to value long-term assets to a tiny sliver of time and a price measured by something as capricious as the market is more than goofy given the damage it does not just to corporate balance sheets but also to peoples’ lives and careers. It is immoral.