MARK TO MOVEMENT….Yesterday the SEC modified mark-to-market accounting rules. I have a question about this, but it’s not the one you might think it is. First, though, here’s the background.
M2M itself is a simple concept: it means that banks have to value the securities they hold at their actual market price. If those prices plunge, as they have recently, it means the bank’s asset base also plunges. This is obviously bad for banks, so it’s understandable that bankers don’t like M2M.
The alternative is to allow banks to value securities at their face value until they’re sold, or to use sophisticated models to project their value upon maturity. The problem is that this allows banks (and corporations like Enron) huge leeway to cook their books and paper over real losses. Eventually, when the check comes due, everything collapses.
Now, there are legitimate arguments about M2M on both sides. In a panic, for example, the market for some securities can become very thin. How can you mark to a market that barely exists? This is especially a problem with complex modern instruments like CDOs, which are all custom built and might end up with a market price of zero if no one wants your particular CDO at this particular instant of time. (Yesterday’s SEC action was in response to just this situation.)
In the end, I come down on the side of M2M. Yes, it can cause balance sheet volatility in a turbulent market, but overall it’s the most accurate and least exploitable way of truly valuing assets. Allowing model-based games just puts us where Japan was in the 90s, where accounting gimmicks allowed firms to continue to exist like zombies for years even though everyone knew they were really bankrupt. It’s better to write down losses honestly and then deal with the fallout than it is to keep desperately hoping that maybe values will return when things turn up.
That said, here’s my question: why have movement conservatives suddenly made a fetish out of suspending M2M? I know this isn’t unusual: movement wingnuts frequently find obscure topics that they’re convinced hold the key to economic salvation. But of all things, why M2M? Even if you think mandating M2M was a mistake in the first place, you can’t possibly think that suspending it now, after prices have collapsed, would help anything — can you? Sure, it would technically take some pressure off banks to recapitalize, but it would be such an obvious accounting game that it would simply make investors even more paranoid. Any bank that took advantage of a suspension of M2M to pretty up its balance sheet would surely end up instantly on every investor’s permanent shitlist, wouldn’t it?
One of my readers suggested that maybe there was a tax angle to M2M that explained this. In other words, the movement folks didn’t really care about suspending M2M itself, it was just a stealth method to cut taxes. That doesn’t sound right to me (M2M has tax consequences for individuals, but not banks, as far as I know), but maybe I’m missing something. Anyone know?
UPDATE: Just for the record, I should add something. In an email to a friend a few minutes ago I said this: “Despite what I just wrote, I’m hardly dead set against modifying M2M on a temporary basis. If it helps in an emergency, maybe we swallow hard and do it. Just like we’re swallowing the bailout. But the idea that this is somehow a positive good, not a temporary and desperate band aid, seems crazy.”
I’d need to be talked into suspending M2M, of course, and there are other temporary emergency measures that I could be talked into too. But in any case, let’s not fool ourselves into thinking they’re anything other than what they are.