Rigid mark-to-market accounting rules may have triggered the current financial crisis by artificially undervaluing mortgages and securities (making financial institutions appear insolvent). Even the very government officials who have advocated those rules now hint that they will disregard them in valuing the government’s own mortgages, in administering any bailout! (This inconsistency undermines arguments for the bailout).
The SEC today made federal accounting rules a bit less rigid by allowing methods other than mark-to-market accounting in appropriate conditions. Thus, when mortgages have not defaulted, financial institutions need no longer treat them as worthless, even when no active market exists for the security based on those mortgages.
Hopefully, Congress will leave the SEC’s decision to reform accounting rules intact, or, better yet, push for further reform. The Congress’s Republican Study Committee has advocated a similar, but more far-reaching, reform. Similarly, Senator McCain welcomed the SEC’s decision, and apparently has advocated the reform it adopted since March.
Others supporting reform of mark-to-market accounting rules include former FDIC Chairman William Isaac, the Wall Street Journal, Jeff Miller, Holman Jenkins, and Newt Gingrich, to name just a few supporters.
Ideally, the SEC would also consider reforming other accounting rules that are burdening the economy without benefiting investors or financial institutions, such as regulations that dramatically expanded the reach of the Sarbanes-Oxley Act. A prime example would be the economically-devastating PCAOB rules on company’s “internal controls,” which cost the economy $35 billion per year, while focusing managers’ attention on trivia like which employee has access to which computer password. Those regulations were used by subprime mortgage lender Countrywide Financial to divert attention from its risky lending practices, earning it a reputation as a paragon of regulatory compliance despite its financial recklessness.
Speaking of the SEC, John McCain recently proposed appointing Andrew Cuomo to be chairman of the SEC. What an unbelievably bad choice! Earlier, we wrote about how Cuomo, as Clinton’s HUD secretary, helped cause the mortgage crisis by imposing “affordable housing” mandates that artificially created markets for risky mortgage loans to people with low incomes and little savings.