Market Mysticism

The Republicans have an intriguing solution to the current crises: Let the banks lie about the value of their assets.

Now, it is hardly surprising that a group of politicians would find no problem with lying. Of course, they do not call it “lying”; that would be telling the truth, and liars never do that. Such direct statements would be impolitic, I.e., likely to get you defeated. No, the convoluted language that they use is to replace “mark-to-market” accounting with “mark-to-model” pricing. Some explanation may be in order.
Both sound accounting and common sense tells us that an asset should be carried on the books at its market value (called “mark-to-market.”) However, many of the “assets” that the banks hold are not real assets and hence do not have real value; they are largely derivatives, that is, side bets placed on the movement of some particular market, say interest rates or housing values. Right now, everybody is knows that housing values are in the tank—and are likely to get worse—and both the mortgages and the derivatives are not worth much, and certainly not worth their nominal values.

Since the banks' assets are not worth anything, the banks are insolvent and can't make loans. The Republicans want to allow the banks to use “mark-to-model” to value these assets. What does this mean? The SEC puts it this way:

When significant adjustments are required to available observable inputs [that is, the market price] it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment.

Wow! Let the banks value their assets on “unobservable inputs” and use “significant judgment.” One might note that the observation of the unobservable requires a certain mystical vision which this writer has never experienced, but which seems to be part and parcel of the Republican Religion. Still, it seems strange that a religion which makes a fetish of the market to determine real value now proclaims the insufficiency to the market for that purpose and hence we must rely on mystical visions of unobservable inputs.

Nevertheless, this ingenious plan will allow the banks to state the value of their assets at anything they like. They will all be instantly solvent and able to make loans again. Hence, no bail-out will be required. But now comes the truly mystical part. This is not being offered as a substitute for the bail-out, but as an addition to it! In other words, the banks will get to price their assets anyway they like, and will still get the $700B. This suits Bernanke's plan just fine, since he wants to buy the assets at their “hold-to-maturity” price, a price sure to hand huge losses to the public purse, and huge profits to the private banks.

Of course, mark-to-model will do nothing to alleviate the bank's current problems. They can state their assets at any value they like, but no one will believe them (the Republican Religion is not shared by investors, at least not while they are investing) and no one will lend them the capital to get their books right and start the flow of funds. The only purpose of the Republican plan is to stick it to the public. In the view of Market Mysticism, the Market Knows All, except when the Market Knows Nothing. In the former case, nothing can be done to interfere with the sacred Markets; in the latter case, only the High Priests can interpret the Market.

That's far too much theology for me, and too much faith-based accounting.


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