One of my loyal readers wrote this morning: "I think I agree with you but I'm not sure I understand all the issues you raise well enough to say I'm sure."
Honesty. Not much of that going around but of course I was grateful for the support. I must say it did occur to me to question why the writer would be reading this blog if he (or she) didn't have the facts or knowledge upon which to reach considered decisions. Then I read Floyd Norris in the New York Times this morning and I asked myself, "If you don't have the facts or the knowledge, why are you writing a column?
Mr. Norris, who is the chief financial writer for the Times, weighed in this morning on the subject of mark-to-market accounting with a somewhat passionate defense of the practice and a sarcastic assault on all who would argue that it is a huge hinderance to a solution to the problem before us. He seems to have been smitten with the idea being floated about Washington of the government financing those who would be a buyer of so-called toxic assets from financial institutions which would, in theory, unlock a major obstacle in the way of the increased extension of credit. Mr. Norris seems to believe that the bankers are standing in the way of this concept because in their eyes, "Cheap volatile assets with a huge upside are precisely the kinds of optionlike investments that clever zombie managers are looking for. If they soar, the banks' stock may be worth something..." he writes, quoting Prof. Edward Kane of Boston College. Well, we certainly can't allow THAT to happen, I guess. But, "if we knew which securities each bank owned and where it was valuing them, we...could reach our own conclusions as to values." Wow! Isn't that easy! "The final step would be to get the market for such securities functioning," writes Mr Norris. Damn! why didn't I think of that?!
The birth of this idea having been reported to taken place in the administration, I can just see Larry Summers, a brilliant academic economist proclaiming, "Assume a market..." and things falling right into line. Mr. Norris feels that markets are created in this manner for as he states in his piece as soon as we have accomplished the forgoing all we have to do is find the buyers.
If you wish to follow FASB 157 Mr. Norris it's the market that sets the price with bids an offers being freely made and accepted or rejected , not a forced pricing mechanism (by the by, who is the "WE" in your example) and a fire sale enriching a whole class of vulture funds at the expense of bank equity and debt holders. FASB 157 works only when there is a functioning market...the eccomist's "Poof, let's make a market," doesn't work. We do not have a mechanism by which these assets can be priced in any objective manner, and to do otherwise is to bare the risk of fraud and outrageous political influence, for the mechanism to obtain the pricing to fulfill the prerequisites of any such scheme will be a political one. I would also like to point out Mr. Norris that your claim that financial institutions were already subject to market-to-market treatment is not entirely correct. Certain assets were indeed subject to such treatment but vast categories of other assets were not. For years, a bank's loan portfolio was not subject to mark-to-market treatment; unless impaired, assets were held at par until maturity and not subject to a market test until sold or otherwise disposed. The movement towards securitization (now THERE'S a subject) certainly enhanced the argument for different accounting treatments but one can argue which came first; securitization or the movement to securitize as a result of mark-to-market. This is the General Patton theory of banking: "The object is not to die for your country but to make the other poor dumb son-of-a-bitch die for his!" Don't hold a loan whose value is not under your control. Securitize and sell it! Not your problem any more. Was the requirement to market-to-market an advance, providing greater transparency or something quite different? Let's think about it over the weekend. But for now, someone had best make it go away. Next week, we'll talk solutions
Final comment. The name of Rogin Cohen was floated out last week as possibly the new Dep Sec. of Treasury.. Mr. Cohen, the managing partner of Sullivan & Cromwell had represented the N.Y. Clearing House since the sun first rose in the East and individually, at one time or another, every bank of any size in the world. He is a brilliant lawyer and appeared to me to have been conflicted as all get-out. He was also dead set against any attempt to nationalize any bank. Why he would even consider working for this mob is beyond me. But from the administration's standpoint they would do well to take the advice of the ESPN crew...JUST SHUT UP!
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