More on mark-to-market

Allan Sloan's column in today's Washington Post - Don't Blame Mark-to-Market Accounting:

Mark-to-market is a business rarity -- an accounting term that draws reactions from people who don't know spreadsheets from bedsheets. Mark-to-market, which we'll call MTM, evokes images of Enron's made-up profits and the other corporate scandals that marred the first years of this decade. Not pretty.

Now MTM -- which means valuing marketable securities at market prices -- is a hot item again, but for the opposite reason. This time financial companies and their allies are claiming it's too strict. They argue that marking the value of complex, illiquid securities to artificially low market prices has unnecessarily crippled the U.S. and world financial systems by creating billions of illusory losses on perfectly fine (albeit illiquid) securities, such as collateralized debt obligations linked to mortgages. Markets for these things, the argument goes, are depressed way below true economic value.

. . .

Credit markets have been frozen much of the past 15 months largely because banks haven't trusted the balance sheets of other banks and have thus been afraid to lend to them. I can't imagine that confidence problem being resolved by changing MTM.

There are problems with MTM: It's relatively new, and parts of it seem arbitrary. But its problems have been exaggerated. It's easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn't understand. Ironically, many of today's whiners adopted MTM a year before they had to, partly because of an arcane provision that let them count as profit the decline in the market value of their publicly traded debt.

The bottom line: Despite MTM's flaws, blaming it for the world's financial problems isn't the answer. Neither is shooting the messenger -- or, in this case, the accountant.

Amen. The way to deal with thinly traded markets (including intangibles) is to work out acceptable methodologies which mimic the market. The folks who are pressing for a repeal/suspension of mark-to-market don't want to mimic the market; they want to ignore it all together. Why? Because, as Sloan notes, the market is telling them that their assets are actually worth a lot less than what they paid for them. So rather than face up to that fact, they want to hide behind an accounting change.

Now, tell me again how "cooking the books" is going to make things better?