Who is in Charge?

Bob McTeer suggests that we have turned all authority over to the highly-principled accountants.

Accountants take pride in their professionalism, and it just wouldn't
look right for them to modify an accounting rule just to save the
financial sector and the economy

In Bob's nightmare, his assets all go to zero and his house is sold, even though he has done nothing.  Here is his assessment:

"Speaking of that, I read on the plane that the Federal Reserve,
probably the most conservative institution in America, if not the
world, has been pulling out all the stops-taking unprecedented steps-to
get the country through this national emergency. And I understand the
Treasury has also taken extraordinary, unprecedented steps to save the
economy. Am I right?"

"You are right."

"And I believe there is a provision in the Emergency Powers Act, or
some such law, that gives the President the right to suspend even the
Bill of Rights in a national emergency. Am I right about that too?

"I believe so."

"So the Bill of Rights may be suspended in a national emergency, but not mark to market accounting?"

"It would appear so."

If only those in the Obama Administration would pay some attention, we might end the death spiral and get on the road to recovery.

When we get around to analyzing lines of authority and oversight, eventually someone will ask why we allowed the accountants to rule the world.  FASB is not an elected body, and has highly indirect oversight.  This should be a prominent feature of hearings on SEC appointments — more important than Madoff.

The accounting  mission – informing people about the holdings of public corporations — could be accomplished without destroying the regulatory capital of every financial institution..

Or else we could commit trillions of TARP funds in a never-ending quest.  Those looking for a market catalyst need merely to watch for a sign that any public official in power gets this message.

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  • Lord January 16, 2009  

    A more favorable possibility might be to keep the accounting but relax the regulatory compliance standards. Accountants happy, banks happy.

  • Jeffrey Levin January 16, 2009  

    You did a piece the other day defending the BLS stats guys. Well – i am here now to defend the accountants. Everyone seems to want to blame mark-to accounting for the problems. If no mark-to, then all the problems go away.
    The real problem isn’t mark-to. Where is the commentary on firms who were using 45 to 1 leverage, using funding in the form of overnight repos no less to acquire these assets. No mention of that problem here – only the accountants. But these were long-term assets is the argument i hear over and over. Yet everyone seems to gloss over that if they were long-term assets, why were they funded using 7 day commercial paper?
    Image a world in which no mark-to had been in place. What was the difference between 1987 and 1991 for S&L’s. The S&L’s were just as insolvent in 1987 as they were in 1991. There was none – it just took us longer to realize it.
    Here is my last argument – If these assets that were the subject of the marks are such wonderful assets – assets that should never have been written down even though they are all showed as available for sale WHY ARE YOU NOT BUYING THEM IN YOUR PERSONAL PORTFOLIO AND RECCOMENDING THEM TO EVERYONE ONE OF YOUR PORTFOLIOS. THESE ASSETS ARE ALL AVAILABLE FOR SALE – WHY HAVEN’T YOU SCOOPED THEM UP?
    If you really believe what you are saying in these articles, put your money where your mouth is and show us that you are reccomending them to all your clients
    Kind Regards
    Jeffrey Levin

  • Jeff Miller January 17, 2009  

    Jeffrey – Your comments are always interesting and helpful. You have stated quite effectively some of the major arguments made by M2M proponents, as has David Merkel. I also have some good emails. I am going to try to pull these arguments together and address as an article, rather than a reply.
    As to the “gotcha” question (that I am also seeing pop up on CNBC), I am indeed looking for the best ways to invest in these securities. It is not as easy as your question implies, especially for those who are not accredited investors.
    Thanks again for taking the time for a thoughtful comment.