Mark to Market Magic - and Madness
Posted: Thursday, April 02, 2009
by Aetius Romulous
ScreamBucket
Mark to market accounting is a game changer in a game that needs some changing. Issue is though; it's the game that needs changing, and not the rules. While it may become the world's dullest spectator sport, the humble accountant and his slate grey world may deserve greater scrutiny. Watching paint dry - closely - will go a long way towards sorting out the tangled financial web we have weaved. Accounting practice in the United States has ceased to be the studied art of financial fact it once was, turning accountants into reluctant magicians and unwilling partners in a national fraud. Thick, glossy annual reports are now nothing more than a Potemkin village of fake facades, masking the wretched and dismal condition of once healthy facts, reduced to the fraudulent math of desperate times.
A thousand fathoms deep below every earth moving financial headline, there lies the practice of accounting, a practice that is bent and twisted in every changing wind, continuously poured from beaker to beaker in a willing attempt at placating every egregious whim of the moment. A complex and mysterious alchemy to most, changes in accounting - however significant - shake the foundations of the semantics of the profession, unbeknownst to an unwitting public who has come to depend on simple words at the expense of the changing meanings beneath them.
The accounting profession polices itself, and does so through a series of administrative boards that makes the rules - and changes them from time to time. In the United States, that body is the Financial Accounting Standards Board, a part of the Securities and Exchange Commission. However, the FASB is subject to pressure from Washington, and has, over time, become a willing accomplice in the great game of pushing the beast forward - keeping the growing economy growing, regardless of the facts. The FASB has been quietly changing the rules of accounting, allowing reporting companies ever increasing leeway in how they report their numbers.
In the United States, there is a long history of changing the math to hide the results. John F Kennedy changed unemployment reporting rules for himself when he legislated the removal of "discouraged workers" from unemployment figures. By removing from view the legions of decent folks simply beaten down by their circumstance, Kennedy was able to provide for his successors a way to underestimate actual levels of unemployment, putting a much rosier picture on an investment in America than actually exists. Current unemployment of about 9% masks the reality that not a generation earlier that number would be 14% - not a small rounding difference at all, where decimal points are whole communities.
Lyndon Johnston had social security surpluses taken off the balance sheet and poured into the general coffers to be wasted on Viet Nam, and Richard Nixon removed food and fuel from the core inflation numbers at the apex of his own economic implosion. Core inflation. No food or fuel. Huh?
Unemployment, unfunded entitlements, and inflation - all key numbers that are critical to assessing the health of an economy, and every one of them bad data. And if there is one thing worse than no data...it's bogus data. It turns out then that economic data is malleable, and is shaped by the crisis of the moment, and the objectives of the administration of the time.
In our time, fudging the numbers has become more insidious. Consider FASB rule 157, mark to market accounting. Lifted from the bowels of crushingly dull and eye-glazing book keeping tomes, almost designed to prevent scrutiny by their intrinsic complexity, mark to market accounting is a corner stone of modern, magic accounting.
When accountants are preparing the statements of a publicly traded corporation, the rules governing how certain financial activities are to be recorded are set by the FASB. This ensures that every set of statements from every corporation are the same in format and presentation, allowing one to compare bad apples to bad apples. Breaking these rules is fraud, both for the company and the independent accounting firm that prepares the books. Enron may ring a bell.
FASB Rule 157 states that if a company is carrying an asset on its books, the value of that asset is what it will fetch in the open market. What is your house worth? What somebody will pay you for it. The asset is "marked" to "market" value. Sadly, this simple and obvious logic works against you if your assets are in the toxic class. Once so valuable banks could leverage their inflated assets 32 to 1, now so worthless no market exists at all, mark to market is as unbiased or unmoved as any set of harsh realities can be.
Bending to the same pressure the United States government itself could not resist, the FASB has caved in to the banking house balance sheets, by agreeing to suspend mark to market accounting for their books. Suspending reality itself, troubled banks will now be allowed to inflate their toxic assets up to levels where they are more appealing. Not forever, but just until another arm of the government can organize an effort to then buy up those juicy assets - because they now have value, because they said so.
Other rules govern the results of the mark to market on other parts of the financial statements. In particular, changes in value to your assets must have the amount of the change recorded as an income or loss on the income statement, way up above the end where "net income" is found. If you had a whack of assets that suddenly went toxic overnight, say, the billions they lost in value would have to be recorded as billions of dollars lost, and would have a not inconsequential effect of the net income of the company.
New rules propose that companies no longer have to record that titanic sinking iceberg of a loss on the income statement, allowing instead that it simply melt away in another balance sheet account called "accumulated other comprehensive income". General Electric, before - 13 billion in net loss, after - 17 billion in net income. Magic. Market goes wild, confidence is returned, everything a complete sham. Same as it ever was.
Curious minds have to ask - of what value are Financial Statements anymore when they have been continually debased, and what does net income mean when it can mean anything at all? Curious minds wonder further - just how much trouble are we in with this economic collapse, when even the numbers are twisted to the ends of their best interests and beyond - and they still stink?
Our culture is addicted to bigger. No better than any glue huffing junkie, ours is a society that jones's over growth at any cost. And any cost turns out to be a very large number. Trillions and trillions of dollars worth of vanished, invisible wealth and toxic remains is all we have for our habit. Our leaders - in their infinite wisdom - are mainlining trillions and trillions more, all in an attempt to return to the euphoria of drug-addled progress.
All the rules of nature were bent and broken on our precipitous climb up the curve, the scramble so desperate that numbers add up to nothing. We are bending the rules further, nakedly, brazenly, in a whatever it takes scramble to build yet another false facade. We are fighting to rebuild a dream. Literally, a dream.
The concept that we can play by a set of rules while we are ahead, and another set when we are behind is barking mad. Banking houses gushed profits like blood from a severed artery because mark to market made insanely risky, short term gambling legal and lucrative. Mark to market is the same rule that sucked the life from the monster when the inevitable happened, and it all fell back to earth. Changing the rules now is nothing more than an attempt to bring the Frankenstein back to life again.
It has been said, that diddling mark to market would be a "game changer". That would be an understatement of the kind only accountants could deliver. Dramatically changing a fundamental strut in the accounting edifice would lead to chaos, making all data suspect, and thus worthless. Only the most perceptive of statement readers would have the ability to dig for the truth, find the "Comprehensive Income" line (where they stuff all the nasty crap and shenanigans), and take it all apart. Changing mark to market would make Net Income obsolete.
But, what the hell. The whole process is nuts, the concept incredible to begin with. While we are tying the rope around our neck, swallowing bottles of pills, and pushing a shotgun in our mouths, what would it hurt to stab ourselves in the back at this point? We long ago put our lying eyes from our own heads.
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Top-level comments on this article: (2 total)Informative and entertaining. 'Liars can figure and figures can lie.' Brilliant!
I'll admit - that little ditty is an old accounting bromide. Not mine but I have always loved it LOL.
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