How Congress helped dump mark-to-market rules

Posted Jun 3rd 2009 11:40AM by Zac Bissonnette
Filed under: Law, Scandals

The Wall Street Journal reports (subscription required) on the lengths financial institutions went to to get mark-to-market accounting rules tossed out in April, paving the way for them to value illiquid securities at unrealistically high prices -- padding their bottom lines, and potentially adding millions in value to the options held by company insiders.

According to the Journal, "Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."

Following that barrage of bull, Congress exerted unprecedented pressure on the Financial Accounting Standards Board (FASB) to change the rules. In effect, a bunch of politicians told accountants how accounting rules should work. If that doesn't terrify you, it should. If the fact that this only happened after corporate insiders with huge stakes in the outcome donated millions to elected officials doesn't outrage you, it should.

The result of this Congressional pressure is that banks are now producing balance sheets that values securities at prices that have literally nothing to do with what any third party would ever dream of paying for them. Of course the offices for various Congressman deny that donations had any influence on their decisions, but that raises a question: Why would the American Bankers Association and other lobbying groups donate money if it had no impact on anything? It just doesn't make sense.

The Congress and the FASB have worked together to harm investors by eliminating the only fair and transparent way of valuing securities. That they did it under financial pressure from lobbyists raises grave ethical questions.

Tags: Accounting, Mark to Market, MarkToMarket