Bipartisan Congressional Panel Calls For Reform Of Mark-To-Market Accounting Rules

A bipartisan panel of legislators pressed for changes to mark-to-market accounting rules on Thursday, telling a trio of regulators that the accounting standard was exacerbating the financial crisis and needed to be reformed.

The call came with the threat of congressional action if unheeded. If the regulators haven't proposed a way to reform the rule within three weeks, the committee chairman told them, he'd call them back before the panel and press for reform at the congressional rather than regulatory level.

"Now they've basically been sent back and we've said, 'Get this damn thing done,'" the subcommittee's top Democrat told the Huffington Post, "'If you don't get it done we're going to take it out of your hands and put it in the hands of other people."

Over the past several weeks, Rep. Paul Kanjorski (D-Penn.) has been working with Rep. Scott Garrett (R-N.J.) to persuade members of the Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises that the accounting rule needs to be modified. The lobbying effort, said Kanjorski, has relied on member-to-member meetings in which the rule is explained and the case for modifying it is made.

Kanjorski is chairman of the subcommittee and Garrett is the highest-ranking Republican. A Garrett aide confirmed the cooperative effort. "They work together as a great team," she said.

Judging by the comments of members of the committee at today's hearing, the effort has been a success. After the hearing, Kanjorski told the Huffington Post that he was pleased at the bipartisan agreement. "It's probably a milestone here in Congress," he said.

Kanjorski called James Kroeker, acting chief accountant for the Securities and Exchange Commission; Robert Herz, chairman of the Financial Accounting Standards Board; and Kevin Bailey, deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency before his subcommittee.

"Unfortunately," Garrett told the regulators, "I believe that during the market turbulence over the last year, fair value or mark-to-market accounting has prevented investors and the general public alike from obtaining the true value of many financial institutions' balance sheets. This method of accounting has its merits when the market is functioning correctly, but it has significant downsides when the market is broken."

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Mark-to-market accounting requires banks to value an asset at its most current market value. In a frozen market, where assets can't be sold for anything more than a fire-sale price, that value is extremely low, forcing banks to write-down a loss on their balance sheets. With a loss on the books, the bank can lend less money and is required to raise capital to meet regulatory lending standards. That necessity can require the sale of more assets, which further drives down values.

"It is this negative feedback loop that is exacerbated by the combination of accounting practices and capital requirements," said Garrett. "I am interested in hearing further from Mr. Bailey about what the OCC and other banking regulators are considering to address how regulatory capital levels are examined during a non-functioning market."

Kanjorski said that none of the regulators have wanted to tackle the issue. "They all have a very difficult time. Both FASB and the SEC have been [saying], 'It's your fault. It's your fault,'" he said.

Asked if he's optimistic that the regulatory bodies will be able to work together to reform the rule, Kanjorski replied, "You never know."

"People with the best of intentions get back out there and sometimes their bureaucracy starts to swallow them up. But if it does, I think we put them on notice that we'll take action."

Comments

[GrooveGrl4]

I just finished my Masters degree in Accounting. In one of my classes, we studied about how Mark-to-Market accounting was one of the major contributors to the downfall of Enron. Another was excessive compensation. Did we really not learn anything at all from Enron? I was shocked when I started working at an accounting firm and found out this type of accounting is still allowed.

The problem with fair value accounting is determining what that fair value is. To a company, the value of an asset is how much someone is willing to pay for that asset. The only time we can know for sure how much someone is willing to pay for an asset is when the asset is actually sold. Until then, the fair value is simply an educated guess. That is the reason historical cost has typically been used for valuing assets. When you record an asset at fair value, you have to record unrealized gains and losses for price fluctuations. These gains or losses are pretty much ficticious, because you don't know how much you will gain or lose until you sell the asset!! Fair value accounting ends up being a means to artificially inflate profits (with recorded gains) or avoid taxes (with recorded losses).

I am glad Congress is doing something about this type of accounting. Now if we could only get them to ban derivatives trading and short selling and limit executive compensation.....

[MEC43]

Let's hope that MTM is only the first accounting rule that gets some attention from regulators. For example, accounting rules that apply to employee outsourcing, executive compensation and mergers and acquisitions should also get a look.

[politicscorner]

Watch out for Kanjorski on this. Don't be fooled by the label "bipartisan." Though a Dem, he is heavily influenced by the banking industry.

The whole MTM issue is a sticky one. How can you set a reasonable value on assets backed by real estate that was at one time way overpriced and is now worth way less.

[RRoadrunner]

market to market, write-down, toxic debt, etc. These yodles will simply change the words and continue bussiness as usual. What we need are enforcable laws.

[Rog49Thomas]

Actually laws exist, it's that we have not had effective regulation.

When one lives in the delusional world of Galt's Gulch, one knows (or should) that the so-called free market always corrects itself before things get out of hand. Equally one knows that the Gubmint is always bad and therefore regulation is always bad.

Paging Ayn, Mr. Greenspan is ready for your close-up.

[armadillious2002]

FDR didn't like MTM accounting and did away with it. Repubs like it because it fuels their investments during boom times. Problem is when the bust comes - it fuels that too. It amazes me that Repubs continue to be so short term oriented.

[5280yogi]

I'm curious about your comments. MTM is a method of accounting that makes information provided to markets more transparent and relevant. What's the alternative? Historical cost based accounting. That's better? I should think not. The question is one of relevance.

[Rog49Thomas]

yes, but like all solutions there are situations where they don't apply

what does mark to market mean in a situation where markets are not functioning - where there is no real demand, lots of distressed sellers dumping assets?

when jfk was assassinated the market fell, a few days later it recovered. which value was the
correct one to use?

when the stock value of amazon was more than all the brick and mortar retailers in the usa, was that the "intrinsic" value of amazon?

the problem is irrational exuberance and irrational pessimism

To quote the old sage Ben, " In the short run the market is a voting machine in the long run a weighing machine."

[joebhed]

"fuels their investments during the boom times".

Exactly.
If you look at all of these financial manifestations of the wildcat free-market era, they are all pro-cyclical and, as you say, they fuel the bad times.

During say 2003, when asset prices were exploding, MTM created ENORMOUS wealth on the balance sheets of all these corporations. These were INFLATED original-cost assets. Inflated by the MTM rule in place for comparable assets.

So, if we do away with MTM because on the downward cycle it is destroying the wealth that was falsely created, what are we left with as the REAL value of assets created during the MTM up-cycle?

I watched the hearing, and I was appalled at the Regulators' lack of backbone.
Any of them could have asked any of the Committee, do you know what you are really asking for?

A "markdown" to pre-MTM accounting would still, IMHO, result in a 75 percent markdown of most of those assets.

The politicians are ignorantly listening to a bunch of self-serving misfits who got us here in the first place.

Changing horses amidstream is another recipe for disaster, in my opinion.
Though it is sure to put a bunch of lawyers' kids through business school.

[vippy]

My question is, did we even learn fromt the Savings and Loan Scandal and now this mess with the
zombie banks, etc.? I figure that anytime the consumers get a little money set aside on their retirement something comes along and takes it all.

[Rich Hosking]

Smells like another Wall Street freebee sponsered by the government....

[rekky]

Without mark-to-market, the banks get to decide how much their assets are worth. They are all so trustworthy and will accurately value them. Yeah, sure. Want to buy a bridge?

[dadw5boys]

BANKS HAVE BEEN WRITTING OFF GOODWILL !!!!!!!

Goodwill is only included on a balance sheet when the company is being sold.

[Gripen]

So the answere on a crisis created by deregulation is more deregulation?

[BlueStateMan]

Didn't read the article, did yo?

It's OK.

[DaCoach]

The modification of MTM rules would be the best first step in bringing the economy back to normal. It was another bad idea that was prompted by the financial high rollers and the regulators who enacted the change will never voluntarily admit their mistake. Now lets bring back the Glass-Steagall Act which allowed banks to be run as brokerage firms. It was a travesty to allow Wall Street to use people's deposits to be used to gambling on derivatives and other high risk instruments.

[DaCoach]

Correction. The Glass-Steagall prevented banks from being run by financial firms. The Act was repealed in 1999 by a Republican House and Senate.

[KQuarksSuperKollider]

Amen to that bring back the old rules so these crisis do not repeat again and again.

[5280yogi]

MTM is a good thing. Really. People who believe otherwise are unaware of it's alternatives and the problems with historical cost accounting.

MTM means financial statements are: (1) relevant (2) accurate and (3) useful. It's really that simple. It's not some evil plot developed by the greedy tycoons of Wall Street. It's really not. I'm a progressive that works everyday in this industry. MTM makes the information content presented in financial statements current.

The problem is with MTM but rather with the 'assets' themselves.

Congress is looking for a boogy-man and MTM is apparently it.

[KQuarksSuperKollider]

YankinCanada

"yep
we need the mark to market now, get the right-downs done, prosecute the frauds and fire all the execs. make it fast and clinical so we can move on...."

LOL if it was that easy we would not have the crisis. These extra losses would only make the banking system more unstable and more in need of taxpayer bailouts. The whole let them fail mentality is pure pure ignorance.

Then Enron situation created this and they cheated even with existing mark to market rules on other securities not covered by the law. Mark to market should be used to value leases which was one main asset Enron manipulated. But to argue let the system fail is foolhardy.

[KQuarksSuperKollider]

Craig Woods

"The banks were hardly innocent parties in this little adventure. The valuation of many of these banks holdings are "marked" worthless because they are worthless. Unless the banks are willing to sit of these securities for 10 years, I don't see how suspending "mark to market" does anything but sweep the problem under the rug for awhile."

Also I'm not saying any real value to these assets. If the banks are foolish enough to try and sell them now they would incur huge losses. The other thing you are not considering it mark to market is making ALL mortgage securities tank not just ones based on bad investments because of the current fear in the market. Most of all this gives these banks added liquidity that does not cost the taxpayer one red cent because it's all paper assets anyway.

[KQuarksSuperKollider]

It's amazing how people are self contradictory.

You all want the Glass-Steagall Act re-enforced because it helped cause the creation of these risky derivatives.

But you don't want to go back to the accounting principles that existed for decades before last year because it benefits the banks balance sheets.

At least I'm consistent. I want a stronger Glass-Steagall Act to regulate the banks and go back to the old accounting rules to attenuate the ups and downs of the mortgage securities market.

THESE ACCOUNTING RULES ARE A LITTLE OVER A YEAR OLD. You are defending a practice that has not shown it adds long term stability to the economy. On the contrary if the old rules are not reinstated we will have a yo yo housing market forever.

Obviously both things contributed to this crisis.

[Pupster]

"Those who forget history are doomed to repeat it." You should read a little financial history before making such judgments.

[KQuarksSuperKollider]

You mean the history of a one year old accounting principle?

They should have closed the Enron loophole "Commodity Futures Modernization Act of 2000" and the just tweaked the MTM rules instead of negatively affecting the whole market. They broadened the MTM rules to apply to too many investments where it only destabilized the markets instead of keeping markets honest.

[KQuarksSuperKollider]

YankinCanada

"nice try and your bullying doesn't work here. As the mortgages are all out of whack and overpriced, now and in the foreseeable future, a mark to market is the only way to get back to reality. You'd like to find a way to keep your pretend money...not gonna work.

The other and best alternative is to revert back to gold as the basis. Honest, dependable and yes, there is plenty of gold to make it work."

Going back to the old rules does nothing to change the value of the assets on anything but the banks balance sheets. This is how it was done for decades. They can sell them at a loss not but they would be better off holding onto them long term if they did not leave a big hole on their balance sheets. By the old rules these banks could hold onto these assets for 10 years until they were valued higher. That's the point.