Sep 30, 2008 @ 04:39 pm
NEW YORK - How can lawmakers make the financial crisis disappear--without a $700 billion taxpayer bailout and all those pesky political ramifications?
Suspend accounting rules that are forcing financial firms to give a fair-market value to their assets even when there's not a buyer in sight. That's one idea being considered to rescue the bailout bill that lawmakers defeated Monday.
Banks wouldn't have to make massive writedowns as housing prices plunge or scramble to raise new capital or even tap taxpayers for a handout.
Problem solved? Not exactly. It's more like sweeping it under the rug.
If we start allowing companies to dump this accounting requirement, it obscures the rules' intentions: To reflect reality--not what something was worth or what someone hopes it would be worth. It's an easy way out that ultimately would carry a huge cost: investor confidence.
Look no further than Japan in the 1990s, when a lack of transparency allowed financial institutions to hide their bad debt. Investors had no idea what was lurking behind the books until it was too late. The result: A massive government intervention and what the Japanese call the "lost decade" of economic stagnation.
Still, some House Republicans and financial industry groups have argued that so called "mark-to-market" rules, also know as fair-value accounting, force banks to report huge paper losses on mortgage-backed securities.
"Suspend Mark-To-Market Now!" is the headline from a commentary on Forbes.com by former House Speaker Newt Gingrich.
Fair-value accounting has been in the spotlight throughout this market meltdown. As the housing market collapsed, it depressed the value of mortgage-related assets on the banks' books. And those declines have been reported to investors each step of the way, because that's what the accounting rules require.
Trade in those mortgage-backed securities has dropped to almost nil, however, making it difficult to place a value on them. Bank leaders have had to rely on financial models or their best guesswork.
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