House Panel Sets Hearing on Mark-to-Market Accounting
A House Financial Services subcomittee has scheduled a March 12 hearing on mark-to-market accounting rules -- a dry-sounding topic that likely would have a massive impact on the struggling big banks and the wider economy if it were altered.
Simply put, mark-to-market accounting rules, enforced by the SEC and the government's designated accounting oversight group, require a company to value -- or "mark" -- assets on its books based on the price they would bring if they were sold today.
In theory, mark-to-market provides good information for potential investors and prevents businesses from assigning any value they choose -- likely a higher one -- to things they own.
But mark-to-market can cripple businesses when no market for an asset exists, like now.
Big banks are struggling to survive -- shares of Citigroup, once the world's largest bank, closed at $1.02 today -- because their balance sheets are poisoned with assets for which no market exists. Chiefly, the mortgage-backed securities based on lousy mortgages. No one wants to buy them right now, so that means no market exists.
Some day, there will be a market for those securities. But until there is, banks have to account for them at fire-sale prices, and that's what's making the banks sick.
Many in financial services sector have argued for a relaxation, or temporary suspension, of mark-to-market as a way to help out the sick banks.
In theory, if banks no longer had to account for these valueless assets on their books, their balance sheets would suddenly improve and -- this is the important part -- private capital would start to flow back into the banks. Right now, an estimated $9 trillion to $10 trillion of private capital is sitting on the sidelines because it doesn't want to invest in sick companies.
Again, in theory, if mark-to-market were temporarily lifted, the big banks could get well almost overnight. (Another way to achieve this goal is the creation of a "bad bank" that would take all the toxic assets off the books of private banks and put them in one federally run bank, possibly called The Worst Bank In the World.)
The downside? If mark-to-market is lifted for good, or is made too lax, companies could create balance sheets that are pure fiction, giving potential investors zero insight into the health of companies.
So this is why, next Thursday at 10 a.m., Rep. Paul Kanjorski (D-Penn.), will convene a hearing of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises to talk about mark-to-market.
"Illiquid markets have resulted in great difficulty in valuing sizable assets," Kanjorski said in a statement. "Some have therefore complained about fair value accounting and sought to eliminate it. While companies need stability, investors still need accurate information. We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them.”
March 5, 2009; 6:16 PM ET
Categories: The Ticker | Tags: FASB, SEC, mark to market
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