Mark to Market Accounting Bias

I'm not one to toot my own horn but I think it's important that we recognize the issues assoiciated with deregulation and allowing the inmates to run the "ass"ylum (thanks for reminding me Sandra)as we have with commodities, structured obligations, accounting strategies, and general financial recklessness.

I wrote this piece in April of 2008 nearly three years ago and I feel it still needs to be addressed and finally writers and economists like William Issac the former head of the FDIC and author of Senseless Panic are being heard.

I read today that some economists have suggested that we freeze the "mark to market" pricing index that governs the values of securitized obligations for the next 12mos. What they are hoping is that stabilization of the indexes that sell and trade CDO's (sub-prime mtg debt) will help us find financial footing across all sectors. The sentiment seems more of a cash grab than an actual strategy to steady the roiling debt markets we are currently experiencing.

Let's start with the purpose of the "mark to market" financial grading system. As new debt instruments were established over the past 7yrs they didn't have a history of valuation. CDO's, CMO's, etc. were all valued based on market interest instead of market history because they were such new debt tools. Using a "mark to market" approach a daily value was calculated more or less on what people were willing to pay for the securities.

Now that the markets have destabilized and the instruments are being sold at deep discounts many are suggesting it's unfair to try and determine value using the system that brought them all the increases during their run. It seems that the sentiment is that if the mark to market is working overly optimistically then it is reasonable and an accurate assessment of qualified value but if the market is overly pessimistic then the valuations can't be trusted. The double standard is ridiculous.

That these financial minds of our times would make such a patently flawed suggestion and try to pass it off as protectionism is offensive and less than subtle. Clearly the banking and financial industries have only their interests at heart while attempting to spin it as a stabilization tool for the entire economy. Maybe they should've stabilized it during the run up. Maybe Greenspan should've recognized the potential pitfalls and done some preventive maintenance instead of dropping the mess right in Bernankes lap with a smile and a handshake. Not really Greenspan's strong point or philosophy for that matter.

Politicians not surprisingly have begun regurgitating the information that has been spoon fed them from the industry. McCain even recently mentioned the need to consider a stabilizing force in the mark to market evaluations. I'm not convinced if on rebuttal Mr. McCain could even remember his quote not to mention justify it's intent. I guess what angers me is that while profiteering on the backs of individuals on the front end with mortgages that nobody expected they could keep up with as well as back end profits by selling these same mortgages to investors with AAA ratings the industry is now suggesting it shouldn't suffer for their own indiscretions because it may effect the broader market and we just can't afford that. My thoughts, we can't afford not too. It's time for money to be accountable.