Is mark-to-market accounting really the root of all evil?
The Financial Accounting Standards Board (FASB) folded like the Cowardly Lion under pressure from Wall Street and members of Congress who argued that the mark-to-market rule is responsible for exacerbating the current financial crisis. The main complaint was that the rule forced financial institutions to take huge write-downs to reflect the decline in the book value of their assets. But some experts, including Jack Ciesielski of The Analyst's Accounting Observer, say this is nonsense.
"Someone's got to take the fall for the markets falling out of bed and the economic turmoil," he wrote recently on his blog. "No managers of financial institutions have been brave enough to step forward and acknowledge that it was their fault. No regulators have been bold enough to say, well, they weren't bold enough as regulators. So there's only one thing left to do: blame the accountants."
Under the changes approved by FASB, companies will now be able to use "significant" judgment to determine how much hard-to-value assets on their books such as mortgage-backed securities are worth. Bloomberg News notes that the changes may lower write-downs and boost bank's first quarter profit by 20 percent or more. Indeed, the Dow Jones industrial average soared above 8,000 for the first time in two months lead by shares of banks such as Citigroup Inc. (C).
Backers of mark-to-market argued that the method was flawed but was useful to investors trying to determine a bank's potential liabilities.
CFA Institute Director Patrick Finnegan told Reuters that investors -- who some banks are desperately trying to attract to bolster their balance sheets -- will not commit capital to firms that obscure the value of their assets.
Former SEC Chairman Arthur Levitt, co-chair of the bipartisan Investors' Working Group formed to recommend improvements in the regulation of financial markets, is not pleased either.
"The group is deeply concerned about the apparent FASB succumbing to political pressures, which prevent U.S. investors from understanding the true obligations of U.S. financial institutions," Levitt said in an interview with Bloomberg News.