Below is an email I sent arguing in favor of mark to market accounting. I really don't think it is the cause for much blame of this.
First, and most importantly, the mark to market accounting has helped the U.S. make the situation much better than it otherwise would be. How? Because of mark to market accounting U.S. banks have been raising over 400 billion in equity over the last year. Grant it we need 4 to 5 times that but compare that to Europe whose accounting is much more opaque, not to market to market and they have been denying they have a problem at all. Besides UBS (who trade in the U.S. and thus follow GAAP) the European were in complete denial and did not raise equity even though I would argue strongly they are in worse shape than us. The European regulators as recent as a week ago Thursday were throwing insults at the U.S. and then over the weekend were forced to scramble and do the American two step bailing out four banks. The equity window is closed for banks and when the window was open only the U.S. banks took advantage of it though reluctantly. Europe didn't because they were able to fool themselves even more than we are able to fool ourselves, not an easy task.
Secondly, the banks are hardly valuing their assets at FV. That goes back to Bridgewaters contention that there are 500 billion in writedowns on the books of banks. That is why banks are trading at statistically cheap valuations. Everyone who actually knows what the marks on the books of banks are know they are BS. Banks also know they are BS which is why they aren't willing to lend to one another. Changing the accounting doesn't change the fundamental solvency issues at all. It just tries to put the man behind the curtain again. So what do you change by changing the accounting rules? I would argue you change almost nothing. Intrinsic value doesn't change so you are making the argument that banks are trading intrinsically below fair market value and I would argue regardless what the accounting rules are that across the board they are trading above intrinsic value. By changing the accounting, it creates more uncertainty, more obscurity, and focuses the attention once again on something that isn't the major problem which in itself is counterproductive. I would be more in favor of lowering the required capital ratios for a set period of time and actually forcing the assets to true market to get to the bottom of the problem versus doing what Japan did and continually try to obscure the problem.
Sure, some of the assets may be trading below fair market value (especially if the gov sets the market) but if a bank can't survive stress in the markets it tells you the problem is to much leverage. If I run a leveraged hedge fund, I can't send my analysis to my broker showing that I think the intrinsic value is X and it is trading at 30% below X and the market has it wrong. The broker is still going to declare a margin call. That is essentially what the market is doing to banks, saying there is a margin call, which is forcing down the leverage of the banks which is the problem in the first place.
I have much much more I could write about but I will save it if we talk about it at some point. Remember it was the banks who lobbied for mark to market accounting in the first place.
From two weeks ago:
"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick." analyst Dane Mott, JPMorgan Chase & Co.,