Steve Schwarzman takes to the op-ed page of the Wall Street Journal this morning to argue that we need to abolish mark to market accounting. His argument boils down to this: when the market disagrees with financial “experts” about valuation, the experts should win. It’s just another version of the kind of risk management that got AIG in trouble: attempting not to count anything that isn’t in the model.
But let’s give Old Crab Claws his say:
“There is now emerging a broad realisation that mark-to-market accounting has exacerbated the current crisis. We are not talking about publicly traded equities with a readily ascertainable value. The problem involves securities held for investment purposes, and those instruments during certain times of the cycle for which there is no readily observable market. These securities and instruments would be fully disclosed to the regulator. However, a financial institution would not be forced to suddenly take huge write downs at artificial, fire-sale prices and thus contribute to financial instability.”
The deeper problem with this idea is that this horse has already left the barn. The investing public has already learned that financial institutions cannot be trusted to properly value assets. Any attempt to go back to allowing financial firms to hold assets at ‘cost’ on their books will fail because the market will just discount balance sheets anyway. Short sellers, however, should probably love Schwarzman’s idea because it may create temporary calculational chaos in the markets that will drive up stocks momentarily before discounting fully kicks in. We see potential for downside gains!
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