Tuesday, March 10, 2009

March Madness and MTM

In remarks at the Council of Foreign Relations earlier today on the subject of Financial Reform to Address Systemic Risk, Fed Chairman Ben Bernanke said: “[W]e should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy.”

Following Bernanke’s remarks, the American Bankers Association issued a statement saying, “ABA agrees completely with Chairman Bernanke that it would be useful to review accounting standards in an effort to reduce their pro-cyclical effects without compromising transparency. We have been advocating such an approach and providing policymakers with suggestions to accomplish this goal for over a year. We urge that policymakers move to quickly implement the necessary changes in order to avoid any more needless destruction of capital." Last week, the ABA recently issued a press release commending 2 congressmen for proposing to create a Federal Accounting Oversight Board

SEC Denies Mark-To-Market Rumors, Says Reuters
Meanwhile, in the run-up to Thursday’s House Financial Services Committee hearing on Mark-to-Market Accounting: Practices and Implications, (names of those testifying have now been posted, it should be interesting!) Rachelle Younglai of Reuters reports, “Ahead of the hearing, dozens of business groups and federal home loan banks expressed their concerns to the top lawmakers on the full House Financial Services Committee. ‘Appropriate changes in mark-to-market accounting should not wait until mid-year or year-end," said the letter addressed to Barney Frank of Massachusetts, the committee's chairman, and Spencer Bachus of Alabama, the committee's top Republican. 'That will only allow the spiral of accounting-driven financial losses to continue," the letter said. The letter, dated March 9, was signed by some of the biggest industry groups, such as the U.S. Chamber of Commerce and the American Bankers Association as well as a number of federal home loan banks.

Younglai reports the above information in her article in Reuters today, “SEC won't seek to suspend mark to market.” Citing an unnamed source, Younglai writes, “Rumors have circulated that the U.S. government was planning a temporary suspension of the accounting rule, which requires financial services companies to value assets at current market prices. The SEC, which oversees and enforces accounting policy, is ‘not planning a suspension’ of mark-to-market, said the source, who was not authorized to speak on the matter and therefore requested anonymity.”

March Madness?
All this talk about mark-to-market (MTM), crystallizing with the upcoming House Financial Services Committee hearing this Thursday, may be the equivalent of the accounting world's version of March Madness. (Sorry, if you were looking for this other March Madness.)

My two cents: (1) Given the level of rumors swirling on the internet and in print relating to mark-to-market (also called ‘fair value’) accounting, such as: Stocks Could Skyrocket After March 12 (CNBC, Friday March 6), The Mark-to-Market Trade – and an Important Clue That Traders Are Picking Up On It (in nuf2bdangrus’ CAPS blog on Motley Fool.com, March 7), and “How To Deal With a 3:00 AM Fear,” in Sunday’s NYT, in which Ben Stein asserts a connection between short sellers, FAS 157, and procyclicality), it would not be surprising if someone at the SEC did feel they had to put a statement out there to squelch any potential arbitrage (or worse) in connection with these rumors. (2) In any event, it may be wise not to bet your entire two cents on unsubstantiated rumors of pundits, pros, or unnamed sources.

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DougBarnert said...

The two views you list are either to "suspend" suspend or "not suspend" fair value accounting. However, there is a tremendous amount of discussion, including the substance of the letter you quoted that suggest there are many other solutions beside those two. The key is for policymakers to agree there is a problem - which Ben Bernanke did yesterday - and that a solution needs to be addressed immediately.@

Edith Orenstein said...

Doug, thanks for your comment, I totally agree with you, and didn't mean to imply there are only two views 'suspend' and 'don't suspend' (although some of the articles I cited like Ben Stein's in Sunday's NYT and other articles may imply that view.)

Personally, as I wrote on March 5 in blog, "I think if people can get past the ‘suspend/don’t suspend’ rhetoric and consider whether ‘application guidance' - or perhaps what some may view as a stronger term - ‘modifications’ of FAS 157 are called for, there may be a heightened likelihood of making progress while still aiming for ‘transparency’ and usefulness."

Thanks again for your comment ,and I heard you ask question of Senator Dodd at the U.S. Chamber's Cap Mkts summit earlier today, which I may include in a future blog post.