Mar 14

Mark to Market: Congress Knows Best?

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Currently we have an approach to solving “The Greatest Delveraging in the History of the World” that reminds one of a dysfunctional doctor’s office.

The doctors are financial experts ‘behind the scenes,’ trying to work on solving the problem, while the receptionist is much like the politicians.  The receptionist has an idea about different procedures, but doesn’t fully understand the problem.  Yet, it is the receptionist (and his or her other receptionist friends) who must actually decide what procedures will be done.  Meanwhile, in the waiting room, stories about how someone else did (e.g. Sweden) on their procedure (e.g. bank nationalization) are bandied about, with the result that fears and concerns are either temporarily allayed or grow even further.  And, yes, the folks in the waiting room sure sound like the talking heads and scribes of the press.

Which brings up the idea of mark to market (MTM) accounting rules.  Congress and the SEC, in their finest receptionist outfits, hear testimony from numerous experts with just as numerous ideas about what to do with regards to MTM.  Meanwhile, the press babble on about the good, bad and ugly of it all.  And, when a producer or user of the financials that include MTM appears, the press typically does not have the depth of knowledge to ask questions that would better frame the issue.

So, we have a MTM stalemate of a sort, with the experts (auditors and companies) spouting different ideas that neither the Congress, SEC, nor much of the press can fully grasp in all of its implications.

I have said many times that accounting is basically a branch of sociology (the science of society, social institutions and social relationships), but when it comes to MTM, accounting has become both a branch of sociology and political science.  The solution for MTM is really quite simple, though those two branches of knowledge might keep this result from occuring:

Require both sides of the balance sheet to be MTM – in  a footnote – with excrutiating detail about holdings, assumptions, etc, such that anyone can take those assumptions and other detail and reconstruct the exact numbers.  Then, what the auditors want to put on the balance sheet and income statement should be overshadowed by this transparency and detail.  In other words, the existing manufacturing based accounting model has little use for financial institutions, where transparency can be the cure for reducing the mistrust found between financial counterparties, as well as within the overall financial markets.