One Pill Makes You Nauseous, One Pill Makes You Small

Like the lyrics of the 1967 Jefferson Airplane tune, a reflection of the “drug culture” at the time, bankers have a different addiction – labels that make them feel good… really good. And they are not feelin’ too good right now, so maybe it’s time for A NEW LABEL. If I could tell the subprime homeowner that the house he or she owns (and is in foreclosure) that has been appraised at 70% below the purchase price, but if he or she wanted to, they could use the original value, and then everything would be fine… well, I could, but it wouldn’t be real.

A few years ago, corporate executives searching for the highest possible valuation of their company’s assets – so that they could borrow even more “cheap money” – forced the accounting world to accept a change in the way they carried “assets” on their “books.” They replaced the old notion of book value (the original cost of an asset less what has been written off against it over the years) on their balance sheet with a new, shiny “mark-to-market” accounting system that would carry that same asset on the company’s books at its bona fide appraised value (which in those days was usually a vast multiple of the older “book” value technique – real estate, for example, was really appreciating). Companies were now worth boatloads more than they were before the rule changed. Wow!

They borrowed tons of new money with the new balance sheet values – leverage was king. Corporate America was grinning ear to ear. They were growing fat and happy with all the cool new “assets” they could buy with that borrowed money. Years of hog-snortin’ corporate growth followed.

But then the market collapsed. Leverage was being sucked out of the system, and assets’ fair market values were falling through the basement floor. As asset values fell, these over-leveraged companies found that their revised and shrunken balance sheets were so bad that many were actually in breach of the loan agreements. Banks were demanding instant repayment; companies were filing for bankruptcy in record numbers, which only accelerated the banks’ decline of their own balance sheets as the number of non-performing loans accelerated.

Banks and corporate America screamed, “foul!” The culprit? That terrific mark-to-market accounting system was requiring companies to carry failed or failing assets as… well… er… failed or failing assets. The books had to reflect the current real value of those assets. So these same corporate types and banking who begged for a new system that would allow them to borrow more were now hollerin’ that the mark-to-market valuation system had just gone too far… that it was making a foul-smelling economy even more odiferous. They say when assets aren’t selling, how do we establish value unless we change the rules? A little leeway in hard times is appropriate; changing the rules when it suits you… well.

Bankers are lobbying Congress for a serious revision in accounting rules so that, well, the companies can pick the accounting definition that best suits their current needs. Really. I’m not kidding. You know who you are! They’ve got financial gurus, like Steven Forbes, blaming the mark-to-market system for most of this economic mess. And what’s more amazing is that there are a lot of sympathetic Congressmen and women who think they’re right!

A house subcommittee panel, examining this issue, seems almost bi-polar with statements like this one, from Representative Paul E. Kanjorski, Democrat from Pennsylvania, saying that while the current mark-to-market accounting rule “does provide transparency for investors,” “strict application” of that rule had “exacerbated the ongoing economic crisis.” (NY Times, March 12^th) Yes, Paul, telling the truth does have consequences!

Floyd Norris, writing for the March 12^th New York Times, puts this effort in more realistic terms: “If mark-to-market accounting is to blame for the current financial crisis, then the National Weather Service is to blame for Hurricane Katrina; if it hadn’t told us the hurricane hit New Orleans, the city would never have flooded.” Didn’t you love to play “pretend” when you were a kid? Well, Alice, we’re not kids anymore…………

I’m Peter Dekom, and I approve this message.