Fisher Investments Editorial Staff
Politics, US Economy, Market Risks

Hitting the Mark-to-Market

By, 01/28/2011

Story Highlights

  • The congressionally appointed Financial Crisis Inquiry Commission finally released the findings of its investigation into the causes of the 2008 financial crisis, but something was noticeably absent—the actual cause.
  • The FASB announced it will not pursue expansion of fair value accounting principles to bank loans—allowing banks to continue using amortized cost methods.
  • The FASB's actions could represent the kind of introspection you don't typically find in a bureaucratic rule-making body.

Between another snowstorm, the release of studies mandated by the Dodd-Frank law, and the President's State of the Union address, it's been a busy week in Washington. And on Thursday, the excitement continued—the congressionally appointed Financial Crisis Inquiry Commission (FCIC) finally released the findings of its investigation into the causes of the 2008 financial crisis. Eighteen months in the making, the 600-page report concluded the crisis was "avoidable."  Thanks. In scattershot style, the FCIC panel blamed everyone from Wall Street to Fannie Mae and Freddie Mac to Beltway regulators.   

Despite its hefty size, the report offers little new information or revelations about the crisis. The commission's best attempt certainly makes for a nice narrative, but a root cause is noticeably absent. Outside of the dissenting statements (embedded nearly 500 pages into the report), the Financial Accounting Standards Board's (FASB) rule 157 on the fair value aspect of mark-to-market accounting (aka, FAS 157)—a key component of the financial crisis in our view—is only sparsely discussed in the FCIC report. (Click here for more on MarketMinder's views on mark-to-market accounting and FAS 157.)

Greatly overlooked, and likely with little awareness of the ironic timing, the FASB has "tentatively" decided to back off a proposed expansion of fair value principles. (Pardon us while we yell, "Hooray!") The proposed change would have expanded mark-to-market accounting to cover all bank loans. (We're unsure what metrics the FASB measured in considering FAS 157 a success to be emulated—but we digress). Instead, FASB's decision this week will create three categories requiring different accounting methods reflecting the differences in how firms manage the assets. Of note, long-term illiquid loans banks plan to hold to maturity will not be required to be measured at fair value. Instead, they will continue to be measured at amortized cost—sensibly adjusting their values over time to account for purchase premiums or discounts, or repaid principal. The announcement was long-awaited, welcome news to many—and a seemingly sizable shift in direction.

Nothing is set in stone yet. But in our view, this could represent the kind of introspection you don't typically find in a bureaucratic rule-making body. (We wish a similar thought could have occurred to them regarding FAS 157 in, say, January 2008. But we'll take it.) The decision seems to indicate the FASB is becoming more aware that fair value accounting for everything related to banking is fine theory, but potentially poor practice.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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