William Isaac on Mark to Market
By Bob McTeer Filed under Economy, Financial Crisis, Mark-to-Market on March 16, 2009 with 3 comments
During last Thursday's hearings by the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises on market to market accounting, the most impressive verbal and written testimony for my money was William Isaac's. Bill gave me permission to share his testimony with you here.
The contributions from William Isaac and yourself are a stimulus of common sense.
A still overarching problem is a risk management industry that promoted and was enslaved to the MTM virus as it steadily expanded its balance sheet reach over the years.
My own thoughts as presented several weeks ago, with Bill Isaac and yourself among my primary influences:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/02/guest-post-mark-to-market.html
Perhaps my recollection needs correction but after Enron and WorldCom, accountants (and senior executives) did not want to be held liable for errors in valuation. Hence the migration to MTM accounting rules. The “market” did the valuation and executives would not be accused of falsifying their reports or manipulating (“managing”) asset values.
I may be wrong, but it seems to me that the problem with replacing MTM is trying to figure out how to replace it without generating liability for the accountants. Accountants are notoriously risk averse.
If they change the accounting rules to something that is based on another method of valuation, accountants might be blamed for misleading the public (or stockholders) about the value of assets and profitability of a company. As it is now, the “market” is a convenient “independent” judge of value.
Accountants can not be blamed for market variation or volatility so their liability for under or over valuation is low. They just point to the market … and do not have to point to a mistake in their own judgment.
So I guess that observation may lead to a solution to the MTM issue. How about a huge class action lawsuit by some big pension funds against the accountants that are understating the true value of capital and causing a huge market disruption in their financial sector share values? Perhaps if the accountants were to feel the threat of being liable for all the related losses, they could figure out another way to value capital assets.
P.S. Bob, I know this is a little “off the wall” or “out of the box.” (or perhaps just wrong headed) I expect you probably would not allow it to be posted on your blog. But at least you are aware of one person’s perverse logic. Don’t be surprised if this idea appears somewhere else. My ideas are rarely so unique that someone else has not had them.
JustOne approach.
[...] The most knowledgeable and credible advocate for M2M reform is former FDIC Chairman, William Isaac. His testimony is the latest posting on my blog. [William Isaac testimony] [...]