[lbo-talk] Mark to Market and Bad Business Practices: Was Re: question for those opposed to the bailout

andie nachgeborenen andie_nachgeborenen at yahoo.com
Sun Oct 5 15:45:07 PDT 2008


I. Am. Not. An. Accountant. I am a former white collar criminal defense lawyer and I teach the subject. I have some familiarity with accountancy principles, including mark-to-market accounting.

I think suspending M-t-M is probably quackery, barn-door-closing after the Enron is gone.

Far as I can tell, M-t-M accounting is perfectly legit accounting method in some circumstances. Essentially it allows a company to book as profit at the time the a deal is made or loss total value of a deal the gains or losses of which have not been fully realized. This is as opposed to the method on which gains or losses are booked when they actually come in. M-t-M was given a bad name by Enron, which literally criminally abused the approach by marking to marking deals where there the income/profit/&loss stream was speculative, indefinitely projected into the future, and dependent on a very large number of random and unforeseeable circumstances -- and, what made it criminal as well as negligent -- on a foreseeably disastrous assumption, that Enron stock would always rise. M-t-M accounting makes perfect sense when you have deals involving assets that have stable and predictable income streams over a short to medium period. That's why the SEC okayed it

as a method in general, accountants accepted it, and regulatory agencies gave it approval on a case by case basis in lots of areas.

The current situation seems to me quite different. There is no reason as far as I know to think that the credit problems we are now facing are due in the main or even in substantial part to M-t-M accounting. Or indeed even on crime, although there is no doubt a lot of crime involved -- there always is.

There was a housing bubble: the market value of real estate rose faster than its actual value given real effective demand. Banks made bad loans, initially in real estate. People overspent with money they could not pay back backed by imaginary collateral based on home interest loans from overvalued houses. This occurred in a context of fundamentalist deregulation driven by the faith the the Free Market will sort things out. As Shag pointed out, the smart money could see this meant trouble several years back, without any reference to accounting practices. The Free Market's way of sorting this sort of thing out is to go through the house with an axe and a chainsaw. It eventually sort of works, much of the time, but what it leaves behind is swathe of destruction and a lot of ruined lives.

So here, when the bubble popped and housing prices fell, people could not pay back their home interest loans or their mortgages, starting a wave of foreclosures, or their credit card bills, starting a crisis in the consumer lending business. On the Street, loss of faith in the financial industry led to spectacular stock price drops, bankruptcies (Lehman), and takeovers ands/or bailouts of troubled companies damaged by fears (Merrill, AIG) -- many of which were only partially rational -- driven by fears that the whole credit system is rotten.

It is, although probably outside the core area of residential real estate and closely linked areas, not as rotten as people think when they go into panic mode. But if the picture I have drawn, which pretty much WSJ/FT/Fed Reserve conventional wisdom, the problem is not fundamentally crime or crooked accounting or even a bad and misleading accounting methods such as -- supposedly -- M-t-M.

Fundamentally what we are dealing with the the aftermath of bad business and personal finance decisions made in the context of deregulation and a bubble. Unless I seriously mistaken, criminal activity of even misleading accounting played only a peripheral and incidental role in the current mess -- and M-t-M accounting isn't even always misleading. It's just that Enron gave it a bad name. But the failures and crimes of Enron, Worldcom, Tyco, etc., now a financial geological era ago (2001!) have nothing at all to do with the current crisis, and didn't even have much to do with the collapse of the tech bubble in 2000.

--- On Sun, 10/5/08, Doug Henwood <dhenwood at panix.com> wrote:


> From: Doug Henwood <dhenwood at panix.com>
> Subject: Re: [lbo-talk] question for those opposed to the bailout
> To: lbo-talk at lbo-talk.org
> Date: Sunday, October 5, 2008, 2:38 PM
> On Oct 4, 2008, at 5:58 PM, Gar Lipow wrote:
>
> > One thing that the left and right seemed to agree on
> is this "Mark to
> > Market" thing. Doug, or someone who knows - is
> this as
> > counterproductive a quack nostrum as it seems? Or is
> there a net
> > benefit for someone besides wall street in letting
> banks inflate their
> > estimates of asset value again? Isn't this kind of
> thing part of how
> > we got into this mess to begin with.
>
> Suspending mark to market is a kind of
> "forbearance" - regulatory
> indulgence that has proven disastrous in the past. The hope
> is that if
> you just look away things will get better on their own, but
> they
> don't. Much of the 1980s was spent treating the
> S&Ls in this matter,
> and it only made the wreck bigger by the end of the decade.
> It was
> amazing to see Reagan's FDIC head Bill Isaac emerge
> from the woodwork
> with a "regulatory capital certificates" version
> of forbearance - and
> the Dem left (e.g. DeFazio) embraced it. Nutty.
>
> Doug
> ___________________________________
> http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk



More information about the lbo-talk mailing list