Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
This is his most recent commentary:
Suspending Mark to Market Remains Unlikely
Decreasing transparency has never, and will never, be the answer
MARCH 18, 2009
I will reserve comment about the proposed changes/amendments/guidance regarding FAS 157 until such adjustments are implemented, but I wanted to make a few quick observations regarding FAS 157 and related topics:
To begin with, FAS 157 does not establish the concept of fair value accounting. Companies have been
reporting assets at fair value for years. What FAS 157 did was establish an outline for how companies
should value assets through the Level 1, 2, 3 system with Level 1 assets being the most accurately valued and Level 3 being the least accurate, the so called “mark to model” assets. Suspending that system would, in my mind, unquestionably increase market uncertainty by increasing management input with respect to the valuing of assets. How in the world anyone thinks reducing transparency, which is absolutely what would occur, is a good idea is beyond my understanding. I do not subscribe to the belief that the perceived lack of transparency now, the effect of distressed markets, excuses further reductions in transparency by removing the guidelines, outlines and disclosure requirements as laid out in FAS 157.
Secondly, I also do not subscribe to the belief that somehow these assets are not being priced to their “true” value. While there is certainly some temporary impairment due to market volatility and perhaps some underpricing relative to hold-to-maturity value as we believe it to be today, the fact remains that an asset trading at a significant discount to its true value would attract buyers in larger numbers than we’re seeing. The truth is that these assets are not seeing the interest they otherwise might be for a variety of reasons, not the least of which is that the “true” value of these assets are in contention right now. Could the value be higher than, say, 30 or 40 or 50 cents on the dollar? Sure. But I don’t know that and with high levels of macroeconomic uncertainty hanging over our heads, I believe that many market participants are staying away for fear of incurring losses on these positions.
Thirdly, the argument now being floated is that we need to suspend mark to market accounting to
accomplish two things; to cease the “unnecessary” capital raises by financial institutions, and thus the
dilution of current equity holders, and to cease the improper pricing of assets thanks to forced sales in
distressed markets. I would repeat an earlier assertion I made regarding Japan and their move to allow
banks to hold assets at amortized cost. The change in accounting standards made the Japanese banking
sector look healthier than it actually was. We are all aware that the Japanese took several steps which
lengthened their current malaise and surely the mark to market adjustment played a part.
Who knows where Japan would be today had their government forced their banks to quickly asses their
situation, write down assets, raise fresh capital to plug the holes in the balance sheet and move on. We
know that even today, nearly 20 years after their crisis began, the Japanese banking system remains in
less than healthy condition. We will never know how things would be different but we do have an
opportunity here in the United States to keep mark to market accounting in place and deal with this
situation in a far timelier manner than Japan.
And lastly, I would simply note that the FASB is set up to be an independent agency, free of influence
from outside individuals, specifically Congress. Quite simply, it makes my blood boil when I see
legislators in Washington, the overwhelming majority of which are not accountants and have never
been, commenting on what they think is best for markets from an accounting standpoint. It is
infuriating. To say that the FASB’s interested are not the same as elected officials in Washington is to
say the sky is blue and water is wet. It is obvious to the highest degree. Taking that one step further,
the adjusting/amendment of this rule as a result of political pressures compromises the FASB’s
independence going forward and one must question whether future decisions will be made purely at the
behest of those in Washington. On that note, I would hope to see absolutely nothing come of
Congressman Perlmutter’s bill which would increase the ability of financial regulators to determine
what accounting rules should and should not be followed by financial institutions.
Suspending mark to market accounting is a major topic du jure and any number of analysts and
participants are weighing in on both sides of the equation. But I repeat my belief that reducing market
transparency can only have negative effects on investor confidence and those advocating a complete
suspension of mark to market accounting are confusing to me, to put it lightly. I do concede that
adjustments can be made to the rule which will strengthen its effectiveness while increasing clarity
with respect to distressed markets and forced sales, the entirety of which can only have positive
benefits. But amending and clarifying the rule is a far cry from its suspension and those that advocate
its suspension are a far cry from making sense.