Is the the credit crunch just an accounting issue?

House Republicans are blaming the "mark-to-market" rule for our economic ills. Did they know the bailout bill allows the SEC to suspend the practice?


Andrew Leonard
September 30, 2008 2:05AM (UTC)

During the debate Monday morning on the bailout bill, one conservative Republican after another denounced the bill. We don't need $700 billion to fix the problem, they said. Instead, the real solution is the repeal of a specific accounting rule.

The accounting rule, FASB Statement #115, first promulgated in 1993, requires financial institutions to assess their holdings according to whatever price the market currently values them at. This is known as the "mark-to-market" rule. Since right now, no one wants to buy mortgage-backed securities or their derivatives, the assumed market price is very low, thus causing tremendous balance sheet problems for their owners. But according to the Republicans, the "real" value of these assets is much higher, and if the "mark-to-market" rule were dropped, and companies could tot up the assets according to some measure of intrinsic value, voila -- everybody would be in back in black, the credit markets would unfreeze, and the crisis would be over.

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This is, to put it mildly, a highly contentious topic among economists. Daniel Gross wrote a smart piece in Slate in April mocking the idea, while back in February, in the Financial Times, Paul Davies explored some academic research supporting the idea that mark-to-market accounting fueled the credit bubble and the credit bust. I will attempt to learn more.

But in the meantime, I was surprised to learn from Stephen M. Davidoff, writing in the New York Times, that there is a provision in the Emergency Economic Stabilization Act of 2008 that allows the Securities and Exchange Commission to suspend mark-to-market accounting.

Strangely, not one of the Congressional representatives that I saw denouncing the bill and telling us how suspending mark-to-market accounting would fix all that ails the markets took the time to note that permission to do exactly that was in the bill that they killed.

One other note: Davidoff's analysis suggests that the various measures on executive compensation, oversight and taxpayer-equity-in-return-for-assistance are all basically toothless, and yet still concludes that the plan is necessary.

If the bill is passed in this form, the Democrats will claim a victory through these executive and corporate governance provisions as well as the warrant provisions. But Mr. Paulson can decide how much of these warrants to take, and the executive compensation and corporate governance provisions are unlikely to be implemented for any companies. The bill is not much different than the original proposal -- just 107 pages longer. Ultimately, the credit markets are frozen and we need this plan, but the authority provided the Treasury secretary and the potential scope of this program is troubling.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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