Edgelings

Will Obama End Mark-to-Market?

Will Obama End Mark-To-Market? by Rich Karlgaard

So thinks Jason Schwarz on Seeking Alpha Wednesday. Schwarz writes:

Investors in financials (XLF) were initially racked with fear at the thought of losing the remaining $350 billion in TARP funds to distressed homeowners and small businesses but I don’t think this is a negative for financials at all. I have a variant view on TARP 2. I think this move suggests that mark-to-market is about to be repealed by the new SEC, which will pave the way for a sustained financial recovery.

Gosh, I hope Schwarz is right. If today’s M2M accounting rules had been applied during the 1980s savings and loan crisis and the 1990 recession, every major U.S. financial institution would have gone down.

Wikipedia has a good description of M2M accounting here. Scroll down until you read the section on FAS 157. Here are the key paragraphs:

Related to the entire discussion is the effect of the issuance of Financial Accounting Standards Board (FASB) Statement No. 157 “Fair Value Measurements,” which became effective for entities with fiscal years beginning after November 15, 2007.

FAS 157 defines “fair value” as: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Two points, or rather questions:

One, the 2003-07 bull market ended at precisely when FAS 157 became effective. Coincidence?

Two, if “fair value” is the price to be received in an “orderly market,” then what happens when the market is panicked and disordered? Did the SEC not think to ask FASB?

The Security and Exchange Commission’s stubborn stupidity on M2M accounting, which the SEC has the power to change, boils Schwarz’s blood.

This decision to hang on while the confidence of the American people dwindled was the single dumbest decision our government made. Trillions of dollars would have been saved from government bailouts and market losses, not to mention the millions of jobs that would have been preserved, had the SEC correctly managed this crisis. Americans should be furious at the fact that our own government misdiagnosed again and again the root cause of the financial crisis. For some unknown reason they didn’t listen to those, like Steve Forbes, who gave common sense suggestion after common sense suggestion to get rid of this thing; they didn’t listen to former FDIC Chairman William Isaac; and they certainly didn’t listen to me when I recommended it back in July of last year. Before I get too worked up on this issue it’s important to remember that 2009 isn’t 2008. Leadership is about to change. Obama has selected Mary Schapiro as the new chairwoman of the SEC, and if you read into Obama’s TARP 2 announcement, mark-to-market is about to get tossed.

I agree. I would go even further. Before the September meltdown, I might have given George W. Bush a “B” grade (on the Reagan scale) for his two-term presidency. Bad appointments (Don Rumsfeld, Mike Brown and the near disaster of Harriet Miers) and poor communication skills prevented a higher grade.

But the Bush administration’s horrible handling of the 2008 financial crisis knocks George W. down to a “C” at best, and then only if the economy recovers in 2009. If we slip into a 1930s Depression, Bush gets an F. Either way, Bush wrecked his presidency with his appointment of Hank Paulson and Christopher Cox.

Next week brings a new era. If Barack Obama ends M2M accounting, credit will flow once more, and the U.S. economy will recover in some fashion this year. So thinks Schwarz, and I agree.

Do it, Mr. Obama! Be a hero. End or amend M2M accounting immediately.