DON'T DO RIGHT AT THE WRONG TIME
July 7, 2008
Strictly adhering to "mark to market" accounting rules (recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value) would be an example of doing the right thing at the wrong time, says Bob McTeer, a distinguished fellow with the National Center for Policy Analysis and a former president of the Federal Reserve Bank of Dallas.
- Most of the write-downs of securities that are creating capital shortages in financial institutions don't result from actual losses, or even expected losses.
- They result from having to mark down assets, many or most of which could easily be held to maturity and redeemed at par.
- This includes securities issued or guaranteed by Fannie and Freddie and other investment-grade securities, especially those graded triple A.
Holders of mortgage-backed securities point out that marking them to market is currently impossible because there is no market. Moreover, identifying those that can easily be held to maturity, and classifying them as such, makes more sense than marking them down to levels that never need to be realized. Book losses if and when they are realized -- not before. Eliminating unnecessary mark-to-market losses would go far toward resolving the current crisis, says McTeer.
According to William Isaac, former chairman of the Federal Deposit Insurance Corporation:
- Mark to market is overdone and is pro-cyclical, since regulators limit the ability of banks to reserve during good times, but insist on increased reserves during bad times.
- Even some supporters of mark to market acknowledge that it was not intended for over-the-counter, hard-to-value assets.
Source: Bob McTeer, "Don't Do Right at the Wrong Time," Wall Street Journal, July 5, 2008.
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