The FASB and the SEC have bent but not broken on this issue.  They have given a little more credence to cash flow and net-present-value analysis, by mentioning it in the same breath as market price analysis.  But this does not give auditors a lot of comfort.

This issue is driven by a need to provide protection for auditors, and to avoid the need to use subjective judgment.  Nobody wants to be the Arthur Anderson of the Enron era.  The FASB and SEC have tipped their hat, and have heard the arguments, but are unwilling to change.

Mark-to-market has created an enormous burden, in terms of cost of capital, volatility, and uncertainty.  If anybody says there is transparency today, in a world with mark-to-market, I don’t know what they are looking at.  Einhorn and Lewis admit that nobody knows what Citibank owns.  Mark-to-market causes less transparency.  A cash flow analysis would require footnoting in a 10Q statement or in corporate financials.  Banks would need to report data such as loan performance rates, whereas today they are using a somewhat arbitrary market value.

The idea that, because an accountant writes a number it is true, is flabbergasting.  We have computers that are three years old and have been depreciated to zero value.  But we use them today, so this is an accounting fallacy. 

We would increase transparency by having full disclosure of all methods of valuing assets, because banks would have to report their underlying assumptions.

In the 1980s and 1990s, approximately 3,000 banks went out of business. There was no mark-to-market accounting.  Mark-to-market can’t hide losses forever.  It keeps the damage in illiquid markets from taking down financial institutions.   Every major money center bank would be bankrupt if mark-to-market accounting was required on their Latin American debt in the 1980s. when it was trading at 10 cents on the dollar.  We did not force them to do that, and they recovered most of their money.  Life went on, and the markets boomed in the 1980s.

The absence of mark-to-market accounting slowed down the process of absorbing these losses.  Mark-to-market accounting today takes 20 years of losses and jams it into 18 months. It is really good for the short sellers, but not for the economy.  This is why we see a lot of support for mark-to-market from short sellers.

The last time mark-to-market accounting was actively used was in the Great Depression.  Then, in 1938, FDR commissioned a panel to study it, and suspended it.  But it took eight years for that to happen.

We could lose thousands of banks with mark-to-market, and have a Great Depression.   Or, we could lose thousands of banks without mark-to-market, as we did in the 1980s and 1990s, and still experience growth.  I challenge anyone to prove that somehow mark-to-market accounting makes things better when the historical evidence clearly shows that it makes things worse.