Steve Schwarzman, the CEO of the private equity giant Blackstone, spoke at the G-20 Business Summit yesterday about how mark-to-market accounting discounts the inherent value present in some assets.
Mark-to-market accounting is basically the cause of the catastrophic collapse of the economy we saw in 2008, he says.
A bold claim!
He knows it too. At the end of his speech, he said: “Just to keep people awake I thought I would put that on the table.”
Here’s Schwarzman’s take down of mark-to-market accounting.
In the United States, we eliminated mark-to-market accounting in 1937, and why did we do that? We completely bankrupted our system before, and for some reason, somebody who liked something called transparency decided to have mark-to-market accounting come back, around the turn of the last century. So it in no way surprises me that we had a catastrophic collapse as a result of implementing mark-to-market accounting.
Because some assets, like Accenture stock for example, which shot down to $.01 during the Flash Crash, shouldn’t be priced mark-to-market, according to the current value you can get for it on the market.
But that’s what happened during the crisis, says Schwarzman, and we’re still doing it.
“When you have an access that goes up and down” and “it’s money good in any case,” he continued, “to have that market, sometimes it’s not a deep market, crash that asset, and destroy the capital of the banking system and create a panic, seems to me to be on its face completely unwise, but we’re still doing it.”
He also said that Basel III places an emphasis on capital requirements, when really:
“The argument is much more interesting regarding how you mark the movement of assets.”
There’s more on what Schwarzman said about capital requirements over at Dealbook >