Thompson & McCarty, P.C. CPA

Recently a friend asked me about mark to market accounting regulations and what they meant.  I told him that basically it means that companies that have investments in financial instruments must disclose the value of those instruments at market value.  This is a major change in American GAAP and is primarily being driven by the desire to make American Financial Statements comparable to the rest of the worlds.  There is a strong argument that this will also provide more transparency to the Financial Statements but that argument is better left to another discussion.  The bottom line is that it makes it easier to participate in world trade which is highly desirable in today's economy.

Shortly after that brief discussion I became aware that bankers were very opposed to the implementation of the mark to market regulation and even suggested that another oversight board needed to be established.  I chuckled when I first read this and dismissed it.  Then former FDIC chairman William Issac said "Major principles of accounting are much too important to be left solely to accountants," and warning horns went off in my head.  If accountants are not relied on to make accounting regulations then who?  The people being regulated I guess.  The good old honest CEOs and other executives of the world that have been responsible for the largest financial scandals in the history of the world.  For example Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom.

These scandals prompted the government to take control of accounting regulation with the Sarbanes Oxley act which among other things created the PCAOB and created many new useless regulations.  This is now referred to as the golden age of accounting due to the fees generated by accounting firms to assist SEC companies to implement the regulations.  Now the bankers and financial executives are pushing for yet another oversight board because they are not getting sympathy from FASB who answers to the PCAOB.  Folks with this much smoke, we have to have a fire.

Here is the letter that I sent to my friend today with my opinion on what is coming at us like a freight train.  I am putting this up here to document my opinion.

Here is an article that in a broad sense lays out the bankers argument against mark to market regulations.  http://www.webcpa.com/article.cfm?ARTICLEID=29701  What is interesting in this is that the bankers are acting as though they do not understand that it is not accountants that are driving the mark to market model.  

The top executives in these banks understand exactly why mark to market is being pushed for and they just don't want to admit why they are opposed to it.  They know that their investment portfolios are full of investments that have current market values well below their investment and this is a drain on capital.

Furthermore,  there is a reason that they do not want to loan each other money right now.  They have all sold each other derivatives of bad investments that turned losses into profits and subsequently lead to huge bonuses for executives at the banks.  These profits were generated by a Ponzi scheme and mark to market implementation will uncover the truth.  They are waiting and holding their breath to see who gets caught and hammered first.  They certainly don't want to be holding loans from the one that gets caught.

The truly bad deal in all of this is that mark to market is being instituted at a time when real estate values are down and this adversely effects mortgage backed investments substantially.  What they hope to do is delay the mark to market regulations until the real estate market rebounds and then the derivative activities will not look so bad.

This is all my opinion and I have only my instincts to back it up.

Here is a great article about mark to market and the accounting world's take on the institution of these regulations.  http://en.wikipedia.org/wiki/Mark-to-market