Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

The Wall Street Journal reports that FASB will vote soon on a proposal to loosen rules that force banks to value toxic assets at market prices:

The Financial Accounting Standards Board is proposing significant changes to its mark-to-market rules, allowing banks to set their own values for certain hard-to-value troubled mortgages, corporate loans and consumer loans. The new proposal, called FAS 157-e, is scheduled for a vote this Thursday.

The change was meant to assist U.S. banks after bankers complained current mark-to-market accounting rules forced them to undervalue their assets, by setting prices at deeply discounted, fire-sale values.

This is a complex issue, and it’s true that mark-to-market can cause problems during financial panics as firms all start selling assets at once to cover losses, which in turn produces a spiral of plummeting prices, leading to losses, leading to more selling, leading to lower prices.  Rinse and repeat.  Unfortunately, the alternatives are generally worse, allowing banks to value assets using models that can be tweaked so egregiously that they bear only the vaguest relation to reality.  That’s how IndyMac could claim it was “well capitalized” right up until the day it was taken over and shown to be a shell of its claimed self.

My tentative preference is to keep mark-to-market but soften its impact with a system of countercyclical regulatory forbearance.  The whole point of bank capital is to act as a cushion against losses, and in good times a bank might reasonably hold capital equal to, say, 8% of assets.  During a recession, as loans and other assets lose value, that capital is going to get eaten way, but then, that’s the whole point of having it in the first place.  So why force asset sales in order to maintain arbitrary capital ratios when capital erosion is entirely predictable during recessions?  Why not instead require higher capital ratios in good times (which would reduce leverage and slow down credit expansion) and lower capital ratios in bad times (which would reduce fire sales and encourage banks to expand credit)?

Because banks are so good at lying about the quality and value of their assets, we’re better off with a system that gives them as little leeway as possible when it comes to recognizing losses.  We’re should force them to face the music honestly, but then allow a certain amount of capital forbearance during economic downturns.  Mark-to-market isn’t appropriate for every asset, but it’s appropriate for most.  It should be watered down as little as possible.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate