Off the Mark: Mark-to-Market Accounting
For all their flaws, banks better at working through bad assets than government.
But yesterday a couple of opinion pieces were particularly fine; their arguments thoughtful and timely. I wanted to draw attention to them. Others will see more merit in different columns and less value in the ones I liked, which is more than fine - it's the spirit of Minyanville. What we must get away from -- and now -- is the hideous grandstanding and pointless finger-pointing on display in Washington yesterday.
Which pieces did I like? Well, yesterday the splendid Holman W. Jenkins Jr. wrote something really good. Mr. Jenkins, who's generally fairly conservative, even benchmarked to the Journal, put forth an exceedingly fair-minded case for "regulatory forbearance," which is a euphemism for allowing banks to stop marking to market, at least for a while.
Mr. Jenkins argues that for all their flaws, banks are better suited to work their way out of difficult assets than the government would be, and that "accounting-induced firesales" should be avoided. Mr. Jenkins is anything but naïve: Read him explain that "Real confidence is organic: not something that can be conjured from Mr. Geithner's promise that Mighty Mouse is here to save the day."
Heading off the obvious criticism that sparing banks the ferocity of current marks would lead immediately to irresponsible risk-taking, Mr. Jenkins notes that:
"Our biggest banks have already been comprehensively guaranteed by the federal government...Regulatory forbearance doesn't make this moral hazard worse; at this point, it simply represents the least-cost approach to finishing the job the government has taken on of holding the banking system's hand while it steps back from the abyss."
I believe massive liquidity and mark-to-market are the bitch sister goddesses of the system. In a perfect world, sure, they're nice thing - saying people should be able to buy and sell with minimal difficulty at transparent prices has all the complexity of saying one believes in motherhood, healthy food and fresh air. The question is whether having these things is always realistic and at what cost they come. The need for liquidity at all times can go against the value of long-term capital formation; the willingness to form a plan that takes years to implement and stick with it.
An absolute commitment to marking to market means putting the system in the hands of a grossly pro-cyclical machine when policy in general attempts to be counter-cyclical. In a system built upon credit, the downward spiral mark-to-market accounting can cause may simply not be tolerable.
Don't get me wrong - there's nothing I despise more than willful misstatement of market values. It's fraudulent, criminal and thoroughly despicable. But that presumes the market can be reasonably defined. When there's evidence that selling is begetting selling -- and one guy's selling not because he thinks an asset is fully priced but because he knows another guy's about to sell -- perhaps some greater thought is needed.
Also, yesterday, Andy Kessler discussed the idea of recapitalizing banks, injecting new equity and distributing the shares to taxpayers based on prior years' IRS bills. He specifically mentions Citigroup (C) and Bank of America (BAC). The newly issued shares, he argues, could be traded, and markets could get to the business of pricing the troubled assets held by the banks this way.
I haven't fully thought through this, but it's a creative idea whose merits might have been discussed at yesterday's congressional hearings. I would have much rather heard the bankers comment on this plan than be asked, one by one, what they made in 2007. Good television won't solve this crisis, and frankly, that wasn't even good television.
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