The Mark-To-Market Horse Race

The horses are off and running at Santa Anita. Banks cannot wait to get their hands on a new set of accounting rules that will almost certainly make their earnings look better. Taken to the extreme, the new regulations may help them stay out of the capital-raising game.

The CPAs are saying "not so fast."  Rules are made to be enforced, and even pressed to their limits.

According to The Wall Street Journal, "the Financial Accounting Standards Board formally placed on its agenda a project to study the accounting for financial instruments."

Mark-to-market cuts both ways. Banks do not want their bad assets to be viewed as being too bad. They argue that the value of that paper may rebound as the housing and credit markets improve. They say they are being improperly penalized because of arcane rules written up by monastery monks during the 13th century.

But, banks want to keep their ability to hold loans on their books at their initial cost. Financial firms show reserves against the loans which may have gone bad, but the reserves are often based on a fiction created by optimism. Accountants want the value of those loans to be shown as compromised and audited to show they really should be posted at great discounts.

Banks will lose this argument because the overwhelming sentiment among regulators and investors is that transparency is good. By the nature of wanting to keep bad news in a closet, the banks have used the accounting rules as best they can and want them altered again in their favor. That is only natural. Tilt the field your way if you can.

The accounting profession wants revenge for having its rules ridiculed in public. The yield of that revenge will be standards which could make past write-offs look modest.

Douglas A. McIntyre