Relax the rules! Override the FASB! No, it's all a Ponzi scheme enabler, it's Enron Style accounting!

What are these people even talking about with mark-to-market accounting methods?

Mark to market accounting simply means assets are valued at the current market prices. Where the controversy comes into play is in those assets which are not easily assessable since there is no actual market upon which to evaluate them.

So, what happened was we had fictional financial models created to evaluate the value for some types of derivatives. This is what the Enron scandal was in part about. There was no separate established market for energy derivatives, thus Enron with their conspirators, made up some over-inflated fiction on these contracts since there was no real world check to determine their true value.

So, the accounting guys, working to get corporate books to adhere to some financial market reality, created FAS 157, which defines how assets must be evaluated.

Enter in the controversy with today's financial crisis. As we now know there is an entire shadow banking system with all sorts of structured finance vehicles, particularly credit default swaps, that were based on bad loans and over-inflated home prices.

The controversy now claims that rule 157 causes artificial losses.

Former FDIC Chaiman Bill Isaac, who handled the S&L crisis, testified to the problems and wants to suspend mark to market, i.e. fair value accounting rules.

In layman's terms Isaac is saying when a sudden financial crash comes along, assets that really are worth something, by taking future and historical value into account, yet during this particularly bad financial time period are worth nothing by mark to market rules.

One argument Isaac implies in his testimony is (my interpretation only!) it is better to play accounting games that expose the truth and force the taxpayers to cough up in order to provide more capital to these institutions who just had to do a bunch of write downs. In other words, do you want to cook the books for a bit or cough up $1 trillion dollars to cover the reality of the situation of insolvency? hmmmm.....

Hey, considering what's going on with the massive bail out money, which midtowng wrote today is a disaster waiting to happen who can argue? (except to never have let many of these derivatives allowed to be created in the first place)

So, there one has the two sides. One side says stops fictional money and evaluations and the other side wants more of an average, or historical evaluation as well as future so in times of panic one doesn't sell the family jewels for nothing.

Which side is right? Good question, both sides have some merit, although from my layman's window, it seems to me derivatives based on fictional mathematics who then obtain fictional accounting to evaluate their value....
well, maybe we would not be having this debate if regulators no longer allowed black box gambling under the guise of structured finance in the first place.

Robert Hertz, chair of the FASB, gave testimony. These are the people who set up accounting rules.

In recent months, there have been calls by certain parties to suspend fair value accounting and, specifically, the application of Statement 157. Some commentators have asserted that the fair value standards promote undesirable “procyclical” behavior by requiring write-downs of financial assets that may be exaggerating losses, further driving down asset values, affecting capital ratios, and tightening the availability of credit, thereby causing a further downward spiral in assets prices.

While sound and transparent reporting can have economic consequences, including potentially leading to procyclical behavior, it is not the role of accounting standard setters or general-purpose external reporting to try to dampen or counter such effects.

Highlighting and exposing the deteriorating financial condition of a financial institution can result in investors deciding to sell their stock in the entity, in lenders refusing to lend to it, to the company trying to shed problem assets, and to regulators and the capital markets recognizing that the institution may be in danger of failing and need additional capital.

Indeed, individuals and families may take such procyclical actions when they see falling values of their homes and their 401(k)s and decide to spend less and to sell investments in order to raise cash in troubled times. But I think few would suggest suspending or modifying the reporting to individual investors of the current values of their investment accounts. Thus, to the extent there are valid concerns with procyclicality, these are more effectively and more appropriately addressed through regulatory mechanisms and via fiscal and monetary policy, than by trying to suppress or alter the financial information reported to investors and the capital markets.

Moreover, in our view, the standards are not the underlying source of the write-downs. Some of the most vocal critics of the standards have come from institutions that subsequently failed and have had to seek financial assistance from or been rescued by the federal government. As discussed in detail below, there is considerable evidence that underlying economic conditions are the fundamental source of those write-downs.

In the words of some investors, “Blaming fair value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick"

What did he just say in a nutshell? He said trying to cook the books is not the answer to fictitious derivatives and over-inflated assets...like subprime mortgages.

During the questioning period, Grayson asked this:

Rep. Grayson - Bad Math & Real Motivations

Interesting corporate timing of these demands, huh?

Even more interesting the FASB has issued new guidance on mark-to-market after this hearing, where corporations can use their judgment more.

I would suggest reading through the testimony Kevin Bailey, Deputy Comptroller of the Currency. It's dry but is recommending the SEC fair value study as the recommended course of action.

I am a mere humble blogger but one thing is clear, just how these accounting rules are changed could assuredly affect transparency, evaluations and even possibly masking the real problem of needing strong regulation on derivatives.

The hearing chair, Representative Kanjorski summed it up best:

Illiquid markets have resulted in great difficulty in valuing sizable assets. Some have therefore complained about fair value accounting and sought to eliminate it. While companies need stability, investors still need accurate information. We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them