Of course companies are now going to try to sell the idea that mark to market should be axed and it looks like Sargin has bought into it, but we shouldn't axe it. Did we learn nothing from the S&L crisis?
Mark to market provides a reality check. Sure it can create paper losses and this can curtail some business activities. But, and this is important, mark-to-market also provides transparncy and can serve as an early warning sign of bigger troubles.
In the early 1980s when interest rates rose the value of mortgages that S&L owned declined in value. They were stuck holding cheap fixed-rate mortgages. Result: huge losses.
Forcing the S&Ls to mark their mortgages to market would have killed most of these lenders.
The fix? S&Ls were allowed to hide those losses. Plus, in attempt to recoup those losses, S&Ls got the deregulatory right go outside their core mortgage businesses.
Need I tell you how that worked out? S&Ls ballooned their losses with bad bets on everything from risky land development to dicey junk bonds.
Why do you think five U.S. senators – including one named McCain – harshly lobbied regulators in 1987 for Lincoln S&L?
You guessed it, S&L owner Charlie Keating was then complaining about regulators demands he write down the value of risky assets on Lincoln's books.
Lincoln failed in '89 at a taxpayer tab of about $3 billion. And when the S&L mess was all said and done the taxpayer was stuck paying roughly a 150 billion.
Do not kid yourself into thinking that hiding the massive losses on our corporations' books – even those paper ones – is a solution.
Being thrifty is no excuse to let our essential financial institutions basically ignore the currently shoddy condition of their gambits.
Revoking mark-to-market is betting that the same corporate executives who got us into this mess can somehow guide us out – as long as we "buy" them more time by revoking common sense accounting.