Moving The Foul Pole: The Mark-To-Market Scandal

The rule about scandals was set a long time ago. A company or individual can create a scandal. Government rules and regulations are, by definition, scandal-proof. They are sanctioned by the high priests of federal agencies. Questioning their validity or legitimacy is futile.

The SEC and Financial Accounting Standards Board have decided that the rules by which banks and brokers value illiquid securities are a bit too onerous. It was an error for them to have been so stringent in the past. Changing the size of the playing field can fix that, even if it muddles the measurement of asset problems at financial companies.

The SEC and FASB have decided that rules for accounting for bad paper need a "clarification". Put another way, they need to be changed so that management can improve earnings and better cover-up the sins of the past. According to The Wall Street Journal, "The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices." The asylum has been purged of doctors.

There has been pressure from almost every side to move the foul poles which determine how much an asset is impaired. Since many toxic securities do not trade as all, their value exists in theory but not in fact. The new rules allow that theoretical value to be improved. It will also make future quarterly results incompatible with past ones.

One set of rules will have been applied to earnings from 2007 and another slightly altered set of rules may apply to Q4 2008 results. The "fixed" numbers will be hard to match-up with the earlier results.

During any calamity there is great temptation to suspend the circumstances which have caused it, even if doing so is a cheap trick.

Douglas A. McIntyre