The Mark-to-Myth battle continues

It appears that the issue of mark-to-market (fair-market) accounting being replaced by mark-to-myth accounting is still very much alive. As you may recall, earlier this year (under pressure), the Financial Accounting Standards Board (FASB) changed the accounting rules to allow banks to basically say their hard-to-value loans are worth whatever they want to say they are worth - essential worth what they paid for them in the overvalued bubble market rather than what anyone would pay for them today (see many earlier postings).

However, Jonathan Weil reports on Bloomberg, Accountants Gain Courage to Stand Up to Bankers that things might be shifting back toward fair market valuation:

Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month.

(See the FASB website for a summary of the Board decision and background materials).

Last week, Floyd Norris reported in his NY Times column (Politicians Accused of Meddling in Bank Rules) on activity on the international front:

Accounting rules did not cause the financial crisis, and they still allow banks to overstate the value of their assets, an international group composed of current and former regulators and corporate officials said in a report to be released Tuesday. The report, from the Financial Crisis Advisory Group, also deplored successful efforts by politicians to force changes in accounting rules and said that accounting standards should be kept separate from regulatory standards, contrary to the desire of large banks.

The report and a summary press release is available on the FASB website.

On the other side, there are folks who continue to believe account rules were the cause of the financial meltdown -- such as Brian S. Wesbury and Robert Stein's recent piece in Forbes - Suspend Mark-To-Market--Now:

In late 2007, the Financial Accounting Standards Board (FASB) changed the definition of mark-to-market accounting rules as they applied to the U.S. financial industry. The board forced financial firms and auditors to use "observable," market prices to value securities rather than models or cash flow. Within a year, the U.S. was in the middle of the worst pure financial panic in a hundred years. Coincidence? We think not

I must say I find it rather hard to believe that someone can state that the financial meltdown was due to an accounting change. I guess Messrs Wersbury and Stein haven't heard of subprime mortgages, under-water home loans, over-leverage, synthetic CDOs, credit default swaps, etc. It seems their argument was everything was fine until the building inspectors forced us to look at all the termite damage. As long as we didn't look, nothing bad was going to happen.

Of course, bad things did happen. And we are still not facing up to the need to clean up the mess (see earlier posting).

The ostrich approach to asset valuation is bad for banks, bad for investors, bad for the economy. It is bad for intangible assets - and the ability to bring intangibles into mainstream finance. It is just bad - period.

The sooner we deal with these over-valued hard-to-price loans, the better. Let's hope the new FASB rules will help in that process.