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Truer Values Are Needed at the Banks (The debate over mark-to-market)
I still feel like a teenager. But the face looking back at me in the mirror tells me otherwise. That's my daily mark-to-market.The intensifying debate over mark-to-market accounting is missing the point. The question shouldn't be whether regulators should relax or suspend the practice. It should be whether regulators should encourage banks to expand their use of it. The reason: Credit markets are already marking bank balance sheets to their own view of market values, or walking away in the absence of such information. That isn't going to change if the U.S. or Europe alters the accounting rules. If anything, it might give these investors yet another reason not to invest. What markets really need is more information about who is sitting on what losses. However, many banks and some governments want to row in the opposite direction. The American Bankers Association on Monday released a letter calling on the Securities and Exchange Commission to essentially gut mark-to-market accounting. Internationally, accounting rule makers Monday eased some mark-to-market rules. But it isn't clear whether this will be enough to appease the European Union, which may still move to water down the practice further. The argument against mark-to-market accounting is that it forces banks to use overly pessimistic market prices to value holdings. That triggers losses that deplete capital. Debt investors don't buy that. They believe that the values banks put on their loans, which mostly aren't marked, still don't adequately reflect losses that will result from the housing crisis. Investors have also cast a jaundiced eye on possibly understated losses on the securities that banks do mark to market prices. In other words, investors still think some bank balance sheets are cuckoo. Accounting rules should be used to remedy that situation, not make it worse. Posted by: Zhang Fei 2008-10-15 |
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