Wednesday, March 5, 2008

more on overjealous mark to market accounting

mark to market accounting is failing us. that is, if the goal were curing market uncertainty through "improved" accounting practices, then the atmospherics around the big subprime write-downs currently roiling the street tell the story.

let's start with mer's $15 billion write-down of mortgage-related securities in january, which was described by their ceo as being conservative. or take aig's unexpectedly large write-down of subprime paper on friday, blamed for the market's sell-off. its chief told the world that its mortgages on paper had lost $11 billion in value, but also predicted these "unrealized" losses would eventually correct themselves.

sam zell has also weighted in, saying that it's not a cash crisis, it's a mark crisis, and predicted that write-ups would undo much of the damage once the panic subsides.

none of this is surprising. i fear that exaggerated writedowns in the current credit crunch are rapidly chewing through the banking system's capital cushion. banks may be forced to dump assets at fire-sale prices, leading to yet more writedowns and more fire sales. at best, banks will have to keep shopping cheap equity to foreign potentates to keep themselves afloat; at worst, massive regulatory insolvency lies ahead.

are investors being misled? i doubt it, as evidenced by the debate about what bank-held loans are really worth. probably the "best" solution at this late date is for a federal housing bailout. it's a shame it had to come to this. the fed is certainly doing its part by trying to inflate away mortgage debt. it looks like capital adequacy standards may have to be comprised as well, if that's what it takes. of course, as i've written here before, had the morons at the fed and in the treasury acted in a substantial manner last summer/fall, all these months of pain and now the surely increased cost to us all would have been averted.

it's certainly too bad that speculators, who provide much of the market's day-to-day liquidity, have gone on strike just when their services are most needed. mark to market then becomes something else, because markets no longer exist for many of these abstruse securities. banks are left oxymoronically trying to estimate what market prices would be if markets existed.

perception is reality. consistency of accounting treatment is always more useful to managers and investors than the latest fad of accounting aficionados.

No comments: