Friday, April 03, 2009

Mark-To-Market Rules Changes - More Bankster & Lobbyist Shenanigans

"What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters." -- Former SEC Chairman Arthur Levitt

I'm sure I don't need to explain the mark-to-market accounting issue since all of us have become accounting experts over the last year with regards to the Wall Street fiasco. In a nutshell mark-to-market is an accounting principle that requires companys to value their assets based on observable data rather than more arbitrary assumptions. You know, like 2+2=4. Observable data tells us 2+2=4 is likely to be true when looking at a corporate balance sheet. Of course, if you question if 2 is really 2, then it becomes more arbitrary. It's pretty much that simple.

Yesterday, the standards board for accounting changed the rules after tremendous pressure from politicians. I'm not an accountant and generally don't care what accounting standards are used were it not for the circumstances under which the rules are now being changed. It is important to note that mark-to-market was implemented because under the old standards the banksters were able to create one hell of a mess that almost brought down the American economy in the 1980s. And, because of the mess in Japan's banking system that started around 1990. So to change the rules today is simply an attempt to brush the current mess under the rug with the action of a pen. But, this time the situation is substantially different. The root cause of this environment isn't a real estate crisis. Nor is it a banking crisis. As I have written time and again, these are symptoms. And much as they may wish to, Congress isn't going to be able to sweep this mess under the rug by politicizing accounting standards.

It's no surprise the U.S. Chamber of Commerce and the American Banker's Association are behind lobbying efforts to change mark-to-market accounting standards. Both of these organizations represent substantial lobbying efforts in Washington. Lobbying efforts that I would argue have contributed greatly to root causes of this crisis. Lobbyists are most often not aligned with the primary rights of the sovereign, representative government, investor transparency or the search for truth.

There is a reason why we have an apolitical accounting standards group. As ridiculous as it may sound, it's the same basic reason we have a Constitution and a Bill of Rights. It is because politicians are not to be trusted. That politicians are now meddling in the affairs of an independent accounting and rules-setting organization on behalf of self-interested lobbyists is extremely disconcerting. Frankly, I would go so far as to say it is morally bankrupt or worse. For those who thought we would achieve some new level of enlightenment in Washington if all we did was change the political party in power, welcome to your new reality.

As Washington meddles in a topic they know nothing about for the intent of political favors and lobbyist contributions, it is important to remember one very important point that absolutely will not be changed by waving of a magical new accounting wand. As we wrote last year, Goldman Sachs, as an example, has tremendously more level three assets than they do capital. Giving Goldman or any other bank the leeway to mark these assets at arbitrary value accomplishes what exactly? Since there is no transparency into what these assets are, could some of these assets be intangible assets? Financial wizardry and derivatives? And that even tangible assets are toxic securitized assets? In other words, banks and their lobbyists don't want us to see what's on their books because we might uncover the truth - that book value isn't really $110 a share in the case of Goldman? And possibly that we should not be pumping trillions of dollars into institutions that really should be shut down? That these mega institutions are being propped up for political reasons rather than for the benefit of the sovereign? Just a few possibilities to consider.

Does this now mean I get to mark my house to any value so as to pay whatever taxes or mortgage payment I wish? Or maybe my car? Or, if I have no income, do I get to mark my credit card balances to a value I feel I will be able to pay? All of these markets are distressed and there is a plausible reason to do so. Is this mark-to-market controversy really any different? Banks now get to fudge their books. Why can't the American people?

Banks may have some legitimate argument that real estate or other tangible assets have somewhat of an arbitrary future value. That an asset's value at maturity may be higher than mark-to-market. In normal times I will grant it could be a legitimate argument. But not in this environment. This isn't the key driver behind this politicization of accounting and auditing standards anyway. It's really about Wall Street's Frankenstein finance. By the way, commercial and residential real estate around the world is already trading down more than 50% in many cases. Corporate bonds are pointing to substantial future bankruptcies around the globe. So, good luck on that arbitrary future value in lieu of mark-to-market. With the accounting rules change we are now living the movie Night of the Living Dead. Meet your new zombie bankster courtesy of politicians.

You might also be interested to know that the Center for Audit Quality or CAQ has issued a statement criticizing the SEC's political involvement in accounting integrity. Basically, the CAQ is a representative voice of corporate audit quality for Certified Public Accountants & corporate auditors. It's governing board is comprised of the chairpeople of every major accounting firm. You get the idea. Society relies on these people to enforce transparent and accurate corporate auditing standards.

I sent an email to a close friend who is the Director of Audit & Sarbanes-Oxley at a major multinational corporation to get an off the record opinion on the politicization of mark-to-market. Conversations between this person and the company's Chief Financial Officer yielded this remark.

"I think that is ridiculous and a classic example of "shooting the messenger". Mark to Market accounting, simply stated, is a requirement that investments (for example, mortgage-backed securities) be stated at their fair market value in an entity's financial statements. If those investments decline in value over time, then they must be written down to the lower value. This is a fundamental concept within financial reporting.

Congress is now getting involved because some constituents don't like the end result. Some are calling for a revision to Mark to Market accounting such that those losses may be deferred in hopes that those investments recover in value someday."

FASB's rule change is more financial engineering that reduces transparency. Has anything really changed in Washington since the Democrats won control? Our economy continues to be one that is financially engineered and its apparent politicians wish to keep it that way. Care to guess the reasons why?

What have we learned from Enron? Apparently nothing. But I think what we are now learning is that reality and truth are from a bygone era. That this crisis will become worse unless the people demand transformational changes. Remember Newton's Third Law. For every action there is an opposite but equal reaction. Or put another way, there is no free lunch. Politicians are playing with fire. And, we the people will suffer because of it because tinkering with accounting standards will have negative and unintended consequences.
posted by TimingLogic at 5:57 PM

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