House of Sticks: Accounting with a Twist

April 4, 2014

Are you familiar with the term “mark-to-market” accounting? Okay…. mosey back into Google and look it up. This term represents where some economists want to place blame for the financial crises we have endured since the Great Depression. Some gurus say mark-to-market accounting was responsible for many bank failures in the 1930s. FDR suspended the unpopular accounting method in 1938, and this method remained dormant until 2007. Proponents of its continued repeal state that the U.S. had no major financial crises between 1938 and 2007. Coincidence? So FASB 157 gets MTM reinstated in 2007, and all hell breaks loose in 2008. Coincidence? Do we have the right, as citizens and/or shareholders, to know the actual value of an investment at the end of a normal reporting period or should we be complacent and accept “face value” or “fair value” valuations until further notice? I’m afraid it’s not about us.

It’s an interesting argument because, in 2008, so many tangible assets/investments ensnarled by derivatives had underlying historical values much greater than their crisis valuations. Suspending current accounting measures would “buy time” for the financial institution to work out solutions. How much time? Months? Years? Ongoing five years later? Yep!
Not having to write down assets became as important as thrusting derivatives onto the backs of the taxpayer. Banks’ ratings were saved, and the public remained its usual, clueless self. The latest improved bank stress test results are a direct reflection of the suspension of mark-to-market accounting and the shifting of derivatives to the taxpayer.

Now go back into Google and look up the FED articles about the results of last month’s test. Several huge institutions were forced to resubmit their capital plans. What a coincidence. These institutions were some of the top acquirers of short term cumulative loans during the 16 trillion dollar secret bailout of 2007-10. Another dot connected.

So….some economists blame government for relaxing Glass-Steagall. Other economists blame government for not suspending mark-to-market accounting in time to save the entire financial system. Did the entire financial system deserve to be saved? Should we not be concerned with the multi trillion dollar speculations of these corporations? After all, it’s just a part of doing business.

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