In a bid to to make the $700 billion bailout palatable to Congressional Republicans, some supporters of the plan are proposing adding a provision that is symptomatic of the very policies that got us in this mess. They want to suspend "mark-to-market" accounting, which insists that assets on a company’s books be pegged to reality.
I can’t believe it. This sort of self-delusional thinking is exactly how the Wall Street schemers and speculators got us into our crisis. In effect Congress would be saying, "Here, take $700 billion in taxpayer money and go back to cooking your books."
Investment houses are folding, banks collapsing and the credit market is freezing up. Why? Because a bunch of fat cats on Wall Street took wild risks on sub-prime mortgages. Those loan portfolios were then sold off in all sorts of complex deals.
When folks — many of whom were lied to — couldn’t meet their mortgage payments the whole system collapsed. A huge part of the problem was the unrealistic value placed on the mortgage loan portfolios and the securities tied to them.
Under sound accounting principles, institutions that bought these securities have had to write down their value. It’s called "mark-to-market." You have to reflect truthfully on your books what the market says the asset is actually worth.
And now Wall Street is facing the reality of that truth. You can’t fix a mess unless you understand it.
Well guess what backers of the $700 billion bailout are trying to add to the bill for tonight’s Senate vote? They would suspend the mark-to-market accounting principle.
In essence companies could value assets at whatever amount they wanted. It’s not mark-to-market; it’s mark-to-make-believe. It’s crazy.
As reported by the Wall Street Journal’s Judith Burns, accountants and consumer advocates are rallying against the insane idea:
"It’s just bad for investors," said Beth Brooke, global vice chair at Ernst & Young LLP, in Washington, D.C. "Suspending mark-to-market accounting, in essence, suspends reality."
The Center for Audit Quality, a Washington, D.C., nonprofit funded by accounting firms, is writing lawmakers to warn them against waiving mark-to-market accounting rules. Big Four accounting firms also plan to join in the lobbying effort, calculating that it is no longer safe to stay neutral.
Accountants won’t be going it alone because consumer groups don’t like the idea of rescinding mark-to-market accounting either.
"It’s absolute idiocy," said Barbara Roper, director of investor protection for the Consumer Federation of America. "Allowing companies to lie to investors and lie to themselves is not the solution to the problem, it is the problem."
I can’t imagine a greater impediment to getting out of a financial mess than allowing the folks who got us there to cook their books anyway that suits them. Before you can solve a crisis you need to accurately understand its dimensions. That’s what accounting is all about.
If the root cause of the problem is that a bunch of hardworking folks can’t pay their mortgages, the solution is to rescue them — not Wall Street. Figure out a way to give the homeowners the money so they can pay. They keep their homes; the money trickles up and the fat cats’ portfolios are no longer worthless.
Their accountants could even use mark-to-market accounting rules to prove it.