Paulson on Mark to Market Accounting

During former Treasury Secretary Paulson’s interview with Larry Kudlow last night, Larry asked him about the role of mark to market accounting in the financial crisis. Secretary Paulson defended mark to market accounting.

However, his context and his examples came from his many years of investment banking at Goldman Sachs where assets are traded daily and, obviously, should be marked daily. Those of us who railed against the rigid application or mark to market accounting, or fair value accounting, during the crisis were talking specifically about commercial banks, not investment banks.

As I’ve written about before, Alan Greenspan argued passionately about the inadvisability of applying mark to market to commercial banks whose business model was to make loans or purchase investment securities to hold. He made his appeal in 1990, and was supported by Treasury Secretary Brady, the Chairman of the FDIC and other top officials at the time. These people, with their staff experts, were not arguing against mark to market for all financial institutions, but for banks. More recently, Paul Volcker and FDIC Chairman, Sheila Bair, have spoken publicly about the destruction of mark to market applied rigidly to banks.

Those of us who wrote about and testified on the issue last year, including former FDIC Chairman Bill Isaac, were careful to distinguish between commercial banks and trading financial institutions. In fact, we conceded that, even at commercial banks, securities held for trading or subject to trading should be marked accordingly.

I bought Secretary Paulson’s new book yesterday, and it looks to be excellent. From the index, I found several brief supporting references to mark to market, but they also came in the context of trading.

For those of you who might be familiar with my ongoing commentary about book prices, the U.S. dollar price of the book is $28.99; the Canadian dollar price is $34.99. The Canadian price is 21 percent higher. That is less than the differential a couple of years ago, but it is still substantial.

Comments (3)

Trackback URL | Comments RSS Feed

  1. EHROSEN says:

    A very important post in terms of the Tipping Point context of Kudlow’s spot on question. Thank you for sharing this with those of us still somewhat scratching our heads about the crisis, and what precipitated it.

  2. JustOne says:

    So much responsibility … so little understanding. How did Paulson ever get that job? Oh I forgot we elected someone who appointed him and a bunch of others that approved the appointment … I think.

    Could it be that there is a broader issue of misunderstanding? Keep fighting for the truth, Bob … it will out (I hope).

    Enjoy It! … Whatever IT is.

  3. Kyle says:

    So then we’re supposed to use the ever popular “mark-to-fantasy” in valuing the trash on their balance sheets?!

    You have further proven that you are either a financial imbecile or a blatant liar.