Nov 17 2009
It Was Mark-to-Market Accounting
This is a guest post from Tim Bastian. Tim is a Manarin investment advisor and an economics instructor at Creighton University.
Every now and then, I like to revisit some of the things that we previously said to our clients, or in this case, anyone who would listen. If you remember back last October when it appeared the entire US economy along with the stock market were going down the tubes, we made some very bold statements about what was causing the meltdown and what could be done immediately to stem the rising tide of panic.
Thanks to the research and writings done by Brian Wesbury, Chief Economist at First Trust, we were very early joiners of a then very small chorus that was singing about the problems created by what is known as “mark-to-market” accounting standards. Here is a link to one of Mr. Wesbury’s excellent articles on this subject.
Officially, this is known as FAS 157. FASB is the Financial Accounting Standards Board. Here’s a brief description of FASB:
Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting. Those standards govern the preparation of financial statements. They are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979). Such standards are important to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. (Source: www.fasb.org)
Between October 2008 and February 2009 several attempts to provide more guidance on FAS 157 failed to bring about any significant changes in the way it was being applied. This prompted Congress to finally call for, and have a hearing on the matter. Prompted by threats of government action, FASB loosened the rule to allow firms to value their assets based on, in my opinion, more realistic assumptions (like using a “mark-to-maturity with a sensible default rate assumption”). Since the announcement of that Congressional hearing, the stock market, as measured by the S&P 500 Index, has increased by a stunning 58%. Here is a short timeline with links to original stories for you to read:
- Rep Kanjorski call for hearing: March 5, 2009
- Federal Reserve Chairman Bernanke calls for MTM changes: March 10, 2009
- Congressional hearing held: March 12, 2009
- FAS 157 New Guidance Issued: April 9, 2009
I have also included a graph below of the S&P 500 to show you the connection between its value (the underlying values of the firms that make up the index) and the changes in FAS 157. Coincidence? I think not.
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