To the Editor:
The recent financial crisis has once again brought mark-to-market and its ancillary fair-value accounting to the forefront.
With many advocating its suspension as a means of alleviating the negative impact on financial reporting, others, including those formulating the rescue plan, seem to be treating it as a fait accompli.
Instead of recording and reporting corporate activity, the Financial Accounting Standards Board, through FAS 157, has adopted a standard that produces results. Paradoxically, the current standard, formulated more than 15 years ago, has addressed only the asset side of the balance sheet. Liabilities for banks are recorded at book value (except in footnotes), despite clear evidence that low-cost core demand and savings deposits have verifiable markets.
Thus we have an accounting model purporting to reflect real worth while ignoring critical pricing input on half the data. The other half of the model incorporates a mixed bag of market pricing permeated by subjectively derived fair-value modeling estimates.
Up to now the effect of this suspect accounting methodology has been to misrepresent data for investors and the public, but during the current economic crisis the impact has been to exacerbate declining market trends. Economists have used the term "paradox of deleveraging" to describe this phenomenon.
Thankfully, the new Emergency Economic Stabilization Act of 2008 (in discussion draft format) reflects a provision for studying the impact of mark-to-market by the SEC. Awaiting that study, the federal government, with a sack full of taxpayer cash, stands ready to buy undervalued assets at bargain prices with the hope that market values will increase over time, so that they can be sold at a profit.
Would it not make a lot more sense to allow nonimpaired assets to be written up to book value on the balance sheets of financial entities, so that banking professionals, rather than government operatives, could hold them for optimal future gain?Robert F. Muth
Vice president and principal