The US Financial Accounting Standards Board (US FASB) met on 13 March to discuss the possible adjustment of the valuation criteria Mark-to-Market (MTM or M2M) in illiquid markets such as the current one. In other words, a euphemism for allowing asset valuations to be manipulated to suit the balance sheets banking, which is what really gets under the System’s skin.
For a company, however large and influential it may be, to go into technical default due to a fall in the value of its assets is a sustainable crisis, since, after all, «only»It wipes out jobs. But when a major bank does this, it not only leaves its own employees out of work but also drags down other banks linked to it in this financial house of cards. Furthermore, these failed strategies undermine confidence both within and outside the banking sector, thereby making it impossible for the entire system to continue functioning.
It’s now been a year since we explained in this article the recipe for Paul Craig Roberts to put an end to what was then known as the subprime credit crisis. Simple, yet at the same time as effective and dangerous as we care to believe. Valuing assets at the desired market price virtually solves the problems posed by scenarios such as the current one. On the other hand, if we value them at real market prices, the cascade of bankruptcies is so extensive and affects such vital institutions as those that make up the core of the banking system, which could bring down the capitalist system itself. But beware, This virtual path takes us away from reality, perhaps never to return for generations.
The dangers of departing from real market prices in turbulent times are obvious and very serious. That is why, until now, there has been a reluctance to value assets at a price higher than that indicated by the market. The preference has been to maintain accounting rigour, the principle of prudence and the mark-to-market. The decision has been made to to intervene and/or rescue through massive cash injections to stabilise the balance sheets of those whose collapse would be unacceptable and dangerous. But what happens if the markets continue to fall and the book values M2M of the assets mean that even the bailouts most scandalous in history? Well, it seems we’ll have to review and make some allowances in our assessment criteria: On 10 March, Ben Bernanke he said that Regulatory practices and accounting principles should be reviewed to ensure that they do not lead to excessive volatility in the financial system and the economy. And let us remember that Bernanke was one of those who opposed the suspension of the M2M or MTM criteria, but he is now prepared to «improve them»and to develop new, reasonable methods of asset valuation that mitigate the harmful effects which in turn exacerbate market illiquidity. In short, it is a «No, but maybe yes»which is considering lifting the ban on a one-off basis and in a very controlled manner (let’s hope so).". Wherever a vital bailout cannot reach, the books will be balanced by force.
Is it a good solution? Certainly not. But as we haven’t been in a position to demand anything for a year and a half now, it may once again be a lesser evil, such as the socialisation of losses or the partial nationalisation of the financial system (and, paradoxically, we are not referring to the latest bluster (under Chávez). Such leniency will be a lifeline for many macroeconomic balances that are doomed to collapse unless a miracle occurs. But it means setting out on an extremely dangerous path, albeit one that has been familiar since 1938, when Franklin Delano Roosevelt It suspended the aforementioned valuation criterion. In 2007, the M2M was reinstated in the wake of the Enron scandal, which prioritised transparency over rigour. No one could have imagined that what we have witnessed over the past two years could happen, and that today the M2M could stifle the system. Are not the following also extremely dangerous? bailouts at everyone’s expense?
Here’s a «A history lesson on mark-to-market» from the Financial Times’ Alphaville blog. The most regrettable thing is that the debate over whether or not to maintain the M2M is being exploited for political ends at such a delicate time for the world as this.
Personally, I find it hard to guess how investors will value a company which has been allowed to record its assets on its balance sheets without reflecting their market value. But as we have already said, we may be in such a precarious situation that this might once again be the lesser of two evils. Come to think of it, if we nationalise banks, bail out governments and central banks buy up debt, why on earth should we be shocked if balance sheets do not reflect market prices? After all, there are few absolute truths left in the world as we knew it.
We can see it all, we can accept it all, we can believe it all. But we will never be the same again. There was a ‘before’ and there will be an ‘after’ to this global Great Depression, even though many people are concerned only with whether the stock market charts are more or less severe than the historical charts of the 20th century.