CNN Parrots Dubious Wall Street Talking Points On "Mark-To-Market"

05/04/2009 05:12 am ET | Updated May 25, 2011

Do you ever get the feeling that as your media professionals "explain" why the "financial system" seems to be "crapping its pants in public" that their simple explanations seem to come from flash cards, handed up by a producer, who got it from a banker, so that it can be read aloud, insensately? Because I get that feeling all the time! And it's no wonder, too. Why, here's an example of what I'm talking about, from CNN this morning. Watch as these two talking heads attempt to explain the concept of "mark-to-market."


TALKING HEAD: You know, it really, once again, sort of displays this whole idea that we have been talking about regarding the financial side of things and the economic side of things. Because all that being said, we look at the Dow and right now it's down a tiny bit but yesterday it was up, it's up for the year. How much of that optimism on Wall Street yesterday is due to this phenomenon -- it's probably not a "phenomenon" -- but we're trying to explain to people "mark-to-market" accounting rules, the toxic assets, getting them off the books?

OTHER TALKING HEAD: That is a very good point and this is something we've been talking about the last couple of days. The people who regulate or who oversee how we account for things, how the banks account for things have some new different kinds of rules or treatment for the toxic assets for the banks that is going to allow them to show a little more clearly those toxic assets on their books and maybe help them a little bit in the position for accounting for those. It's the mark-to-market accounting. We use this scenario, like you bought your house and now your house is worth $70,000 less than it was before and you have to take that hit right away or do you hold on to your house and wait later until maybe you're able to sell it for a higher price? The same thing with the banks. They are forced to account right away for the bad assets on their books when maybe if they held on to them for a little but longer or could show you, look, I'm going to put them over here and I'm going to hold on to them for a little bit longer and maybe we're gonna get more value for it. You know, it's just a new way that it might give breathing space for the banks and something Wall Street has been paying attention to the last couple of days.

That's one explanation for "mark-to-market," anyway! In fact, it's sort of the kind of definition you'd likely get from an executive at a major financial institution who's holding a ton of toxic assets.

See, where one person might say that these "different kinds of rules" for the "treatment for the toxic assets" is going to "allow them to show a little more clearly those toxic assets on their books," another person might point out that these new mark-to-market accounting rules might allow these banks to OBSCURE the value of these toxic assets on their books, on the unbacked promise that value might return. Here's one person who might say that, in fact, in today's Wall Street Journal:

Patrick Finnegan, director of financial reporting policy for the CFA Institute, said the move gives managers too much room to fudge the truth. "Financial statements are not there to reflect management's assumptions," said Mr. Finnegan, whose group runs a self-study program for financial analysts.

Or, say Representative Alan Grayson:

"That's representative of exactly the kind of thing that's put us in this position in general," he told the Huffington Post afterwards. "We have people who break every rule in the book and then they think that the answer to their problems is to break more rules. It's given us some real insight into the human nature and the pathology of the people who have created these problems for America."

The Huffington Post's Stuart Whatley had a good metaphor for these rule changes as well: " other words, it is as if we are leaving it up to a drug addict to arrange his own intervention."

As long as banks are allowed to continue denying the true toxicity of their toxic assets, the longer the current financial impasse will continue. But if these banks are all of a sudden forced to eat huge losses, their balance sheets will resemble Swiss cheese, and Timothy Geithner will be forced into the highly unfashionable position of groveling before an ever-more populist Congress for more funds.


And so, in the tradition of the financial industry during years past, short-term gains are trumping long-term sustainability. Investors relished the retreat from "mark-to-market" this week, and the market enjoyed moderate gains. But it could very well drop again. And the more long-term demand for finally biting the bullet and ridding the banks of their toxic waste could be shunted aside yet again. Geithner's plan surely wasn't perfect to begin with, but it had its merits. The government's power to manage the PPIP asset sell-off has been handed back to the bankers, whose argument foments fear of more bailout funds and further financial collapse. As it stands now, this argument is prevailing. The junkie in the room is calling the shots with the claim that rehab will hurt more than continued dysfunction. And the prospects for finally breaking the impasse are kicked ever further down the road.

On the other hand, given enough trips to the toilet, I might start crapping golden Spanish doubloons, who knows? So just wait, we'll see, and in the meantime, please give my bathroom a triple-A bond rating, KTHXBAI!

Stuart Whatley: It's Like Trusting A Drug Addict To Arrange His Own Intervention
Ryan Grim: Frank And Bachus Applaud Mark-To-Market Rule Change