Mark to market accounting is a game changer in a game that needs some changing. Issue is though; it's the game that needs changing, and not the rules. While it may become the world's dullest spectator sport, the humble accountant and his slate grey world may deserve greater scrutiny. Watching paint dry — closely — will go a long way towards sorting out the tangled financial web we have weaved.
Accounting practice in the United States has ceased to be the studied art of financial fact it once was, turning accountants into reluctant magicians and unwilling partners in a national fraud. Thick, glossy annual reports are now nothing more than a Potemkin village of fake facades, masking the wretched and dismal condition of once healthy facts, reduced to the fraudulent math of desperate times.
Liars can figure...and figures can lie. A witty old saw that happens to have some truth to it. It is however, neither witty nor old when it comes to the modern deformity called accounting, where lying figurers have made the ancient practice of accounting for ones transactions a thoroughly contact sport.
A thousand fathoms deep below every earth moving financial headline, there lies the practice of accounting, a practice that is bent and twisted in every changing wind, continuously poured from beaker to beaker in a willing attempt at placating every egregious whim of the moment. A complex and mysterious alchemy to most, changes in accounting - however significant - shake the foundations of the semantics of the profession, unbeknownst to an unwitting public who has come to depend on simple words at the expense of the changing meanings beneath them.
The accounting profession polices itself, and does so through a series of administrative boards that makes the rules - and changes them from time to time. In the United States, that body is the Financial Accounting Standards Board, a part of the Securities and Exchange Commission. However, the FASB is subject to pressure from Washington, and has, over time, become a willing accomplice in the great game of pushing the beast forward - keeping the growing economy growing, regardless of the facts. The FASB has been quietly changing the rules of accounting, allowing reporting companies ever increasing leeway in how they report their numbers.
In the United States, there is a long history of changing the math to hide the results. John F Kennedy changed unemployment reporting rules for himself when he legislated the removal of "discouraged workers" from unemployment figures. By removing from view the legions of decent folks simply beaten down by their circumstance, Kennedy was able to provide for his successors a way to underestimate actual levels of unemployment, putting a much rosier picture on an investment in America than actually exists. Current unemployment of about 9% masks the reality that not a generation earlier that number would be 14% — not a small rounding difference at all, where decimal points are whole communities.
Article comments
1 - Joanne Huspek
So this is how we got into this pickle.
I wish every member of Congress would read this.
2 - Bliffle
All true. Too true.
The intention has been to defraud, and yet, few are imprisoned for it.
3 - thevoice
If not for the issuance of FAS157 effective November 15,2007 by the SEC and FASB . This rule requires banks to mark to market instead of mark to model as previously calculated since the inception of FASB. Pre FAS 157 when an investment vehicle trades thinly (such as mortgage backed securities) the underlying holder of the investment is allowed to use its own assumptions on fair value, today it must be valued based on what it can be sold at in the open market. If I'm a bank and expecting to receive future cash flow of $1000 a month over the next 30 years on an loan of 200K for a total payment of 360k, based on todays fair market value and panic in the market the underlying issue has been written down to 40 cents on the dollar or approximately 80k and this is a conservative figure.
In the current market it would not be wise to sell any of the troubled assets based on fair market valuation as there are not enough buyers which drastically reduces the price of the asset. This rule change with the mark to market update should slowly begin to bring back some credibility to this market.
4 - Ruvy
Isn't comment #3 just a long winded way of saying you cannot trust an accountant?
5 - Aetius Romulous
I'm an accountant. I fully understand the history.
What I don't agree with is the altering of rules to fit the occasion, and the clear intent of the change which has virtually nothing to do with the purity of accounting.
M2M is being diddled for no other reason than to solve a problem of the moment. If things ever return to "normal", you can bet all these same people will want a return to M2M because of how it values assets ON THE WAY UP, and the stupendous effect it has on the income statement - and bonuses.
M2 model is indeed a better way to value thinly traded assets, but thinly traded is far different than unregulated and without an bourse. And at an estimated 450 trillion dollars outstanding, these assets were far from thinly traded.
It was never -or should ever - be the case in accounting where a company can regularly change multi-billion dollar loses into multi-billion dollar gains that dramatically alter the picture of the company to investors. Investors can make up their own mind about what that information is worth to them - but they must have the information in order to do so.
Accounting is about the truth, and if a firm openly gambles with shareholder money and takes a beating because of it, that should be reflected in the statements.
My own opinion is that an asset is worth what the market for it will bear. But I'm from Canada, where we have ultra conservative accounting and finance regulation. South of the border, accounting and finance regulation change has become a spectator sport. It's hard to keep up.
And just to step aside for a moment, few people truly understand what a great value Canada is right now, and especially the banking sector. Because we are such a dull, conservative group of socialists, our draconian regulation has protected our banking system from the shit show.
Its good to be Canadian LOL.
6 - Ruvy
Aetius Romulous,
Ah, so you are a Canadian accountant. Please do not view my comments against the so-called "magicians of finance" in America as applying to you, then.
7 - Aetius Romulous
Ruvy;
Worse than that I'm afraid, Jewish Canadian accountant (on my mothers side) LOL.
You are far too much a gentleman that I would take anything personally Ruvy.
8 - Ruvy
Aetius Romulous,
You know, if you want to figure out a workable version of a sustainable economy that doesn't use interest as a grease to make it run, look up the G'maHÃm (short for g'milút Hésed in cities like Toronto or Montréal (or the Jewish suburbs therein) and see if you can figure out something from there.
G'maHÃm are charitable organizations that make interest free loans to Jewish folks. One woman I know who is on the board of governors of one of the G'maHÃm in Jerusalem used to be a banker for the Federal Reserve in the States. We got to discussing business in the States one time, and her eyes got cold and glassy and hard - you know, like a banker?
G'maHÃm in one neighborhood in Jerusalem managed to drive out some of the banks because nobody was borrowing any money from them for interest.
9 - FitzBoodle
This kind of chicanery exemplifies the deceits and frauds that are consciously committed in modern business. They are all frauds, as the INTENT to steal is clearly evident.
For example, it can hardly be argued that ANY participant in a "Credit Default Swap" intended anything other than to deceive any examiner, and cheat absent parties.
Financial swindlers, CEOs, CFOs, bookkeepers, etc., would be going to jail in droves if we really had a justice system.
But we don't have a justice system, not for the rich and powerful.
So we are quickly becoming a criminal society where one is safe as long as the swindle is big enough. Of course, it "trickles down" so that every bank clerk and minor official will soon be swindling. Just like Soviet Russia.