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When the Numbers Don’t Work Out, Change the Accounting Rules

By: Steve Johnson

2/6/2009 - 40 Comments

That doesn’t sound like good monetary policy to me, but that is exactly what the government in proposing.

Senator Christopher Dodd, the Democratic chairman of the Senate Banking Committee, told reporters on Wednesday that he would consider changing the mark-to-market accounting regulation rules. 

You see the problem is that the banks don’t want to mark their assets at their true value, because for much of their sub-prime and derivative assets the true value is zero.  In the current market condition, the value of trillions of dollars of bank assets is zero because there is no one interesting in buying these assets at any price.

If the banks mark down their assets to their market value (mark-to-market), many of them would be insolvent.  To solve this problem, the same senators who creating the housing bubble by creating the rules that allowed Freddie Mac and Fannie Mae to expand, are now suggesting that we just change the accounting rules.

Their theory is that the banks shouldn’t have to mark down their assets to near zero because some day in the future - the assets will against be worth something.  Enron tried a similar trick when it adjusted its accounting rules to move high risk assets off its books and we all know what happen.

If the banks have trillions of dollars in near-zero assets, than the billions in bailouts are not going to be nearly enough the save them.  Many banks will eventually fail unless the market returns to pre-crash prosperity.

The problem is not the accounting rules, it’s the assets.  The assets are worthless and probably will continue to be worthless even after the recession runs its course.  The hard truth is that many of the US banks are insolvent and the economy will eventually have to deal with that.

Meanwhile, the recession continues to deepen, as US employers slashed 598,000 jobs in January, the deepest cut in payrolls in 34 years as the national unemployment rate shot up to 7.6 percent.

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