There was actually movement today. Speaking before the Council on Foreign relations, The Chairman of the Federal Reserve, while not yet quite ready to abandon mark to market accounting for financial institutions did suggest that the issue should be examined and that it might appropriate to modify the practice in some manner.
The Chairman actually knows better and has been advised as such. Without the suspension of this practice, arguably the most manifestly stupid exercise in recent years, the "crisis" in banking will not only continue but may well become worse.
A bold statement? Consider this: Mark to market accounting exacerbates one of the most foolish beliefs surrounding the current state of affairs, to wit, that the concept of bank capital is meaningful one. Bank capital is a myth: it is probably a myth at all levels of banking but it is certainly a myth at the level where, as everyone now admits, there are banks, "Too big to fail." "Bank Capital" and it's extension, "Capital Adequacy" are Regulator creations designed to assuage the unsuspecting--and unknowing--Public, that someone is actually looking after the condition of banks with an all-knowing eye, with tested and true rules to assure the safety of the Publics' purse. And yet, at least three times in the past 35 years in this country alone, major baking institutions and in certainly one case the entire system has been operated very nicely thank you when by any objective standard there was the insolvency of if not of the system, a goodly number of banks within that system. Within our hemisphere, over those same 35 years the banking systems of Mexico, Brazil, Colombia, Argentina and lesser states have been operated while insolvent countless times--not without interruption to be sure--but with relative success.
Banking depends upon two things: Trust and liquidity. The latter springs (every pun intended) from the former but the absence of either leads to catastrophe. At the level of too big to fail, the loss of either or both of these critical elements can only be corrected by government action, be it passive or aggressive, and in the most critical of time by government intervention. We find ourselves at this point in our history.
I think there is very little point in debating what went wrong or who was at fault or whether deregulation was the catalyst. Historians can debate that. But we find ourselves in "interesting times" as the Chinese would probably put it with unfortunately the need for clear, pointed and intelligent direction need from regulators and governments (the plural is deliberate). The response has been weak, at first, muddled and foolish and under the present Obama administration, to this point, dismal. Overlying the scene of financial wreckage are politicians anxious to deflect any blame for the past and determined to insert their control wherever possible without the slightest understanding of the nature of the problem or the possible result of their actions. Regulators unsupported and to this point apparently not up to the task and a Federal Reserve which appears to be underutilized and--reading between the lines--un-listened to despite being staffed (especially in the case of the New York Fed) by individuals who have seen and lived through similar scenarios in previous lives.
Faced with this chamber of horrors, solutions are being sought in a regulatory maze and actually works against the achieving of the desired result and first among them is the afore-mentioned concept of mark to market, imposed on the financial and corporate communities in 2007 in the form of FASB 157. Throughout history little good has emerged from either California (save my wife) and the accounting profession but FASB 157 has proven, given the circumstances in which we find ourselves, to be particularly annoying. Admittedly, this rule came about as a result of the demand for greater "transparency" as a result of the Enron debacle, requiring all corporations to revalue their assets on a regular basis using what is essentially a "willing buyer" test in the marketplace. One might well ask what mindless dodo would require financial assets, many of which have a designed life of 30 years or more to be valued in essentially a spot market as though held in a trading book and one would probably have a dearth of volunteers stepping forward, but the situation becomes even more incredulous when one considers the fact that FASB 157 expressly calls for the existence of a market (yes, yes there are silly exceptions). Seemingly without any regard to history, and recent history at that, the framers managed to overlook the fact that at time markets disappear as occurred just 10 years before resulting in the global crisis of 1997 centering around LTCM. And here we sit, marketing to market God knows how many assets in a market that doesn't exist, resulting in the loss of capital in financial institutions which is being replenished by taxpayer funds designed to be lost again in three months time. Does anyone see something wrong with this picture?
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