There has been discussion of the possibility of suspension of the "Mark-to-Market" accounting rule. This has contributed to the current euphoria surrounding financial stocks. The logic is that this would stop the death spiral in the capital base of many of the banks and other financial companies, an action that is at the root cause of our current financial crisis.
A suspension of "Mark-to-Market" accounting would definitely give breathing room to banks. However, there are other alternatives, such as suspending financial regulatory requirements, which could have the same effect.
The important item to remember is that this is temporary in nature. It does not matter if the suspension is permanent or not. Eventually, the solvency of the financial assets will have to be addressed.
In Japan, the government never actually dealt with the solvency of its bank assets until much later in its crisis. This resulted in "zombie" banks and a dysfunctional financial system which contributed to Japan's lost decade. We will need to deal with the solvency issue much sooner to avoid a similar result.
Many believe that these assets will recover over time. Others including myself believe that this outcome is by no means certain or even likely. Until this issue is resolved, credit, which is the lifeblood of our financial system, will be constrained and still dependent upon the government.
Many people who are dieting seek out "friendly" bathroom scales which tend to understate the actual true weight. School wrestlers often do the same in trying to qualify for a lower weight class in a competition. However, a rigged scale may generate positive results in the short-term but does not change the facts as to what the true weight actually is.
Any change in "Mark-to-Market" will only be another form of government triage which may help to stabilize the patient, in this case our financial system. It will not cure the underlying problem.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com. He is the author of Follow the Fed® to Investment Success and an expert on FreePassers™. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
3-16-2009 @ 6:16PM
A. Marshall said...
Suspension of the mark to market, while seemingly solving the short term problems of financial institutions, would be a disaster. In this environment, it would only increase liquidity in these banks and cause them to indulge in more of the behavior that has caused this problem. The CEO's and officiers would not be satisfied until they found a way to put that liquidity into their own pockets.
3-17-2009 @ 10:50AM
Iridium said...
A lot has been said about suspending Mark-to-Market becuase assets that are worth something are being marked as worthless.
That is not the case. If an asset with a $100k price tag has $90k of good assets and $10k bad but can't be seperated to get rid of the bad $10k then it is still a worthless asset and should be marked that way.
The banks want to add worthless assets to the books to boost thier bottom line. A suspension of Mark-to-Market would allow them to do that.
They say but but but the assets are worth something, we just don't know how much. If you can't put a value on something you can't count it.