Amid the highly volatile global securities market, the requirement that companies be evaluated on the current value of their assets is crippling the U.S. economy. Known as mark-to-market, this system of “fair value measurements” assumes orderly markets with observable information to provide consumers and investors with timely, accurate assessments of a company’s worth.
In fact, orderly markets do not exist currently for mortgage-backed securities and in many markets for residential and commercial real estate.
In a time when real estate, mortgage-backed securities and related markets are in complete disarray, once-reasonable benchmarks lose their effectiveness as a guide for prudent investment decisions. Unfortunately, the public accounting oversight board has imposed the most conservative accounting judgments on the financial statements of their clients, depressing market liquidity.
The total elimination of mark-to-market is the simplest, fastest and least expensive way for the federal government to cure the financial bloodshed now occurring in the economic system.
By insisting entities not ignore any available market data, including fire-sale prices, interest rates and default rates, mark-to-market creates higher highs and lower lows than other fair value or cost-based accounting measures. Further, the enormous infusion of capital reserves required to offset write-downs mandated by mark-to-market accounting quickly consumes liquidity banks and borrowers desperately need.
Earlier this month the Financial Accounting Standards Board (FASB) eased mark-to-market accounting rules for mortgage-backed securities. That is a step in the right direction, but one that only benefits the largest financial institutions and not local banks, employers, property owners or the millions of unemployed U.S. citizens. These modifications do not free the kind of significant liquidity banks could use to provide loans that will spur improvements in the private sector.
Many bankers are so pessimistic and fearful of continuing economic decline that credit markets are still frozen while values continue to erode, businesses go under, and more workers lose their jobs and their life’s savings. Banks either need to be encouraged to lend or have their charters discontinued.
TARP funds were provided to many major banks for loans to the private sector. Yet these funds are being held for future possible loan-loss reserve requirements or for utilization in the acquisition of other financial institutions. Additionally loans, when provided, are at or near record spreads between interest cost to the financial institutions and the quoted rates to customers, thus providing higher profitability to financial institutions at the expense of borrowers and industries that are struggling.
Allowing cost-based accounting valuations for assets until their sale determines profit or loss is entirely acceptable and urgently necessary. Everything else is a guess for which a lot of time, energy and expense are incurred unnecessarily.
The argument that mark-to-market accounting protects the investor no longer holds true. In fact, mark-to-market is destroying the stock market, our investors and individual consumers economically by forcing valuations based on extraordinary circumstances.
Instead of requiring enormous capital reserves in U.S. Treasuries and other securities earning minimal returns, banks could be investing reserves in much more profitable and productive ways while providing the necessary liquidity to the private sector, the purpose for which these institutions received their government charters.
Eliminating mark-to-market would solve our economic woes without costing current or future taxpayers a dime.