Forget Fantasy football, let's have some Fantasy Accounting!
I have been covering some touchy topics lately, therefore, I decided to put in my 2 cents on the mark-to-market fiasco.
The matter is very complex, however, I will only cover the surface of the subject.
Congress
First, I don't think Congress is the right people to be dealing with the issue. Most of them have never been an accountant before and don't know what they are talking about [for most part]. My feelings are similar to that of Barry Ritholtz from The Big Picture. Here is an excerpt:
" I would simply note that the FASB is set up to be an independent agency, free of influence from outside individuals, specifically Congress. Quite simply, it makes my blood boil when I see legislators in Washington, the overwhelming majority of which are not accountants and have never been, commenting on what they think is best for markets from an accounting standpoint. It is infuriating. To say that the FASB's interested are not the same as elected officials in Washington is to say the sky is blue and water is wet. "
In sum, the decision of whether to adjust the current mark-to-market accounting or suspend it should come from someone other than Congress.
Out of all the "talent" in the US Financial Industry, you pick the Senators and House Representatives to fix your accounting problems? Give me a break.
Less transparency = More confidence ?
What's the alternative? That's what it really boils down to. You give up mark-to-market to implement... "mark-to-model"? I hope it's not your OWN PROPRIETARY model and that everyone has their own little model to value their assets. Otherwise, that would turn into chaos.
Suspending mark-to-market would increase market uncertainty because assets would not be valued in a standard manner. Given that a big problem of the current crisis is the high level of uncertainty, why would you want to increase that even more?
So, I already don't know what's in the balance sheet of these banks. Now you add the fact that they may all be priced in a different manner, why would I ever invest (in a sane mind) in such an institution? How would that add confidence to creditors who are lending money to these institutions?
In general, it feels to me that suspending mark-to-market would only ADD uncertainty and reduce transparency.
"Fair Value"
There is this whole talk in Wall Street that these "toxic" assets are not trading at their "fair value".
However, if that was the case, assets at such HUGE DISCOUNTS would attract investors and thus lift the price somewhat...or maybe even to its "fair value". Not the case, right?
I know there are macroeconomic factors [including a liquidity factor] working in the background, however, it seems to come down to the fact that investors believe there will be a lot of losses associated with these "toxic" assets. This translates into low prices, which is what we see. Investors believe that these assets are not worth their "yield-to-maturity" values because a lot of them WON'T see that maturity time because of defaults in the underlying assets.
Why is it so hard for Wall Street to admit that they made the wrong bet and that some of their toys (a.k.a. "toxic assets") are just not worth the retail price?
Final Thoughts
In sum, I believe we should not SUSPEND mark-to-market accounting, but that there is room for some adjustments. There can be some kind of mechanism that takes into consideration factors such as liquidity and distressed markets. I'm not your pro accountant and don't have the right solution, but I do know that Fantasy Accounting is definitely not the way to go. And as you can see in this post, I also have a lot of questions.
Cheers.
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