RIP Mark-to-Market

The first good news to emerge since the start of the Financial Crisis came out yesterday as the remarkably dumb regulations requiring Mark-to-Market accounting were repealed. Maybe the government can do some good, after all.

Mark-to-Market (MtM) accounting, along with the Sarbanes-Oxley Act (SOX) were the two prime regulatory failures leading to the current crisis. Coupled with public mandated policy to extend mortgages into sub-prime markets through the facilitation of Fanni Mae and Freddie Mac, Mark-to-Market caused, and then accelerated, the financial crisis and lead to the failure of major banking institutions around the globe.

“But I thought it was the greedy bankers that did this?”

Yes, that is what you are being told. Targeting a small group for blame is easier than telling you the truth, that those bankers were working in a system created by gasp Washington.

It is nearly impossible for the current administration to say this becuse they have a vested interest in villifying a secret enemy of those that ‘did’ rather ‘that’ which did, because the ‘that’ is them. Now however, having exausted all other options their only recourse has been to do what works and change some really bad regulations. It took the French and Germans to beat it out of poor Mr. Obama though. 

SOX and MtM came out of the collective rage we indulged in following the collapse of Enron. Rushing to appear relevant, Congress enacted a series of legislative actions that ensured the future crisis we are now living through would occure. Thanks guys.

Could you explain either of these provisions to a friend or relative? No, they are incredibly complicated, and Congress still doesn’t understand them either. I tried in previous posts, but this is what happens when we as a nation let governent over design what they only mildly understand.

The trashing of Mark-to Market could be just what is needed to get banks lending again, which is what this crisis is all about. Banks stopped lending because they didn’t understand the solvency position of their counter parties. MtM caused vast distortions that clouded this situation and then accelerated it radically as various asset classes were un-priceable, thereby requiring banks to book them at $0 value; which of course was stupid. Collapse for many quickly followed.

The real crime is two fold:

  1. It took the Europeans at the G-20 meting to bludgeon America into repealing this foolish rule.
  2. It all came too late for the bankrupt employees at Lehman, and at Bear, and at… oh, the list is too long of the people that have been hurt because of some really bad over regulation.

Oh wait, wasn’t that Barney (“I want a list of names!”) Frank at the podium of the House, demanding both these measures be enacted back in 2002? It couldn’t be him. He couldn’t be responsible for anything, I mean anything bad, right?

Oh come now, that was so long ago, we all forgot…




More from on the Financial Crisis

Congress to America: Drop Dead

Are Americans worthy of being saved?

Comments of the current crisis

Comments of the current crisis – Regulation

Creative destruction, I hope…

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One Comment

  1. Doug
    Posted April 3, 09 at 8:49 am | Permalink

    Before you all flame me, Yes I know that MtM was modified by FASB, an independent standards group. But (again you will not see this in the Times) you’ll find that independent boards are remarkably malleable, especially under international negotiations of their host nations. And I also know that MtM modification was some time in coming. All items that come out of meetings like the G-20 have footprints. No one in the Financial Services Industry thought MtM was a good idea (except,the accounting consultants who billed extra time to implement it) and lobbying for it’s repeal has been going on for years.


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