NCPA - National Center for Policy Analysis


March 24, 2009

The most serious example of doing the right thing at the wrong time is overly strict adherence to mark-to-market accounting rules which force firms to revalue their assets to current market prices, such as a stock\'s price at the close of business.  Fortunately, there is historical and international precedent for suspending and reworking these rules.  Congress and the SEC should consider doing so until the economy recovers, says Robert McTeer, a distinguished fellow with the National Center for Policy Analysis. 

According to Milton Friedman, mark-to-market accounting was responsible for many banks failing during the Great Depression.  In fact, President Roosevelt suspended it in 1938.  The practice reappeared in the mid-1970s and was formally reintroduced in the early 1990s.

Mark-to-market had its critics early on, says McTeer:

  • Federal Reserve Board Chairman Alan Greenspan wrote a 4-page, single-spaced letter to the SEC in November 1990, urging them not to apply mark-to-market to commercial banks because their business model is not that of a trader, but involves holding assets on their balance sheet.
  • In 2002, Treasury Secretary Nicolas Brady wrote a similar letter to the SEC.

Earlier this year:

  • Paul Volcker, speaking as chairman of the "Group of 30," a private nonprofit composed of senior representatives from the private and public sectors and academia, released their study of the financial crisis.
  • Recommendation No. 12 on Fair Value Accounting says that fair value accounting principles and standards should be reevaluated with a view to developing more realistic guidelines for dealing with less liquid instruments in distressed markets.

Even the International Accounting Standards Board, the international equivalent of the Financial Accounting Standards Board (FASB) -- the independent institution responsible for writing accounting rules for the Securities and Exchange Commission (SEC) -- allowed European banks to relabel their mortgage-backed securities (MBSs) (which allow investors to collect the underlying mortgage payments and interest) as "held to maturity" in 2008 to avoid marking them to market.   As a result of this change, Deutsche Bank went from a projected loss to a profit, and its stock price increased by 18 percent.

Source: Robert McTeer, "Mark-to-Market Accounting: Shooting Ourselves in the Foot," National Center for Policy Analysis, Brief Analysis No. 648, March 24, 2009.

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